Legislature(2013 - 2014)BARNES 124

03/28/2013 06:00 PM RESOURCES

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06:07:10 PM Start
06:07:29 PM SB21
09:13:22 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
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Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
               SB  21-OIL AND GAS PRODUCTION TAX                                                                            
6:07:29 PM                                                                                                                    
CO-CHAIR FEIGE  announced that the  only order of business  is CS                                                               
FOR SENATE BILL NO. 21(FIN) am(efd  fld), "An Act relating to the                                                               
interest rate applicable to certain  amounts due for fees, taxes,                                                               
and payments  made and  property delivered  to the  Department of                                                               
Revenue; providing  a tax credit  against the  corporation income                                                               
tax  for qualified  oil and  gas  service industry  expenditures;                                                               
relating to the oil and gas  production tax rate; relating to gas                                                               
used in  the state; relating  to monthly installment  payments of                                                               
the  oil  and  gas  production  tax;  relating  to  oil  and  gas                                                               
production  tax  credits  for certain  losses  and  expenditures;                                                               
relating  to  oil and  gas  production  tax credit  certificates;                                                               
relating  to nontransferable  tax  credits  based on  production;                                                               
relating to the  oil and gas tax credit fund;  relating to annual                                                               
statements by  producers and explorers; establishing  the Oil and                                                               
Gas   Competitiveness  Review   Board;   and  making   conforming                                                               
6:07:55 PM                                                                                                                    
DAN  SULLIVAN,  Commissioner,  Department  of  Natural  Resources                                                               
(DNR),   began  the   administration's  PowerPoint   presentation                                                               
entitled, "Oil  Tax Reform - Arresting  TAPS Throughput Decline".                                                               
He said  an argument  being heard  in debates  on the  tax reform                                                               
proposal  is  that  Alaska  does  not have  much  of  a  problem,                                                               
business is  booming, the tax  system is working,  and employment                                                               
and capital expenditures are up [slide  3].  He and Department of                                                               
Revenue Commissioner Bryan Butcher  have been relentlessly trying                                                               
to get new  investment and new production in Alaska  and he would                                                               
like to  believe that "business  is booming  and all is  well" in                                                               
the state.   Unfortunately,  he and  Commissioner Butcher  do not                                                               
believe  that is  the  case, particularly  when  focusing on  the                                                               
metrics  of  production  and what  is  happening  throughout  the                                                               
United States  and the world.   When those comparisons  are made,                                                               
it is very clear Alaska has a system that needs to be fixed.                                                                    
6:10:40 PM                                                                                                                    
COMMISSIONER SULLIVAN declared the  unequivocal good news is that                                                               
Alaska still has a massive  resource base that is well recognized                                                               
around the world  [slide 4].  The  state is also one  of the most                                                               
relatively unexplored  and is  on the cusp,  he believes,  of big                                                               
potential for  unconventional resources.   Alaska has  a resource                                                               
base that can  keep the state's economy,  government revenue, and                                                               
citizens with good jobs healthy and strong for decades to come.                                                                 
COMMISSIONER  SULLIVAN recounted  that  a  question asked  during                                                               
work on  the governor's bill  was whether other  declining basins                                                               
have  been  turned  around.    The answer  is  pretty  much  that                                                               
everybody, at these  high sustained prices in the  U.S. and other                                                               
countries,  is  turning  around their  declines,  with  the  very                                                               
depressing exception of  the state of Alaska.   Drawing attention                                                               
to slide  5, he  pointed out  that as prices  start to  spike and                                                               
stay at sustained  high levels, basins like  North Dakota, Texas,                                                               
and Alberta  have flattened  out their  declines and  then turned                                                               
around to increased production.   The one exception is Alaska and                                                               
[the administration] believes the  reason is because Alaska's tax                                                               
system does not provide incentive  for companies to invest at the                                                               
higher prices in terms of profits, but it does everywhere else.                                                                 
6:13:21 PM                                                                                                                    
BRYAN  BUTCHER,   Commissioner,  Department  of   Revenue  (DOR),                                                               
addressed the argument that it is  all about shale and not really                                                               
Alaska's  tax  system.   He  allowed  that, currently,  shale  is                                                               
certainly contributing  to a tremendous increase  in North Dakota                                                               
and  Texas.   However, he  pointed out,  Texas flattened  out and                                                               
began to turn  around with just conventional crude oil.   Slide 5                                                               
makes sense  in that it  shows prices rising,  production rising,                                                               
because things  became more  economic at  oil prices  of $80-$100                                                               
than they  were at prices of  $40-$50.  What does  not make sense                                                               
is that  over the  last few  years the  Alaska North  Slope (ANS)                                                               
price  has   been  $5-$20  more   per  barrel  than   West  Texas                                                               
Intermediate (WTI) prices.  However,  one would think the last of                                                               
the jurisdictions  to continue to  see a decline would  be Alaska                                                               
since the other jurisdictions are tied to the WTI.                                                                              
6:14:22 PM                                                                                                                    
COMMISSIONER SULLIVAN stressed slide 5  is not good news.  People                                                               
claiming that things  are going well and business  is booming are                                                               
not focused on  this slide, which [the  administration] thinks is                                                               
the most  important metric  to focus  on -  production.   He said                                                               
slides  6-10 provide  a snapshot  of what  is happening  in other                                                               
states  by year  at different  prices.   They  depict a  positive                                                               
story in  that they show older  basins can be turned  around, but                                                               
they are  negative when  looking at  Alaska.   In the  year 2007-                                                               
2008, [five  states were in  decline], but by year  2011-2012 and                                                               
prices  having  gone  up  [Alaska  is the  only  state  still  in                                                               
decline].   Every  basin in  the  country has  turned around  its                                                               
production decline, except Alaska.                                                                                              
COMMISSIONER BUTCHER  interjected that what makes  slide 10 odder                                                               
is that Alaska  has more resources than any of  the other states.                                                               
Between  2011 and  2012, the  one  state out  of all  of the  oil                                                               
producing states that  did not see an increase  in production was                                                               
the state with the most resources.                                                                                              
6:16:11 PM                                                                                                                    
COMMISSIONER SULLIVAN noted  slide 11 is from  Econ One Research,                                                               
Inc., and it tells the  same story regarding production declines.                                                               
He explained that 2003 is the  base year in the slide, equalizing                                                               
the different  levels of production.   [From 2003 to  2012], U.S.                                                               
production dips  a little bit,  flattens out, and  then increases                                                               
significantly,  and  a  similar  production  pattern  occurs  for                                                               
countries  in  the  Organisation for  Economic  Co-operation  and                                                               
Development  (OECD).   Alaska, however,  is  producing at  nearly                                                               
half of what it was producing just  10 years ago.  Alaska has the                                                               
resources  to turn  it around  and [the  administration] believes                                                               
that the  people who think business  is booming in the  state are                                                               
very misguided.                                                                                                                 
COMMISSIONER SULLIVAN  said claims are heard  that investment [in                                                               
Alaska] is at an all-time high  [slide 12].  But of importance is                                                               
investment  relative  to  what?    The world,  and  the  U.S.  in                                                               
particular,  are going  through probably  the biggest  investment                                                               
boom ever  seen.  There is  capital that wants to  be deployed in                                                               
hydrocarbon-producing  basins.   The International  Energy Agency                                                               
(IEA) has  predicted that by  2020 the  U.S. will be  the biggest                                                               
producer of  oil and gas  in the world.   That is great  news for                                                               
the U.S., it should be great  news for Alaska.  Global investment                                                               
in  oil and  gas in  2012 was  $600 billion  and for  2013 it  is                                                               
projected to  be $650 billion.   In  2012, Alaska got  about one-                                                               
half  of 1  percent of  that, despite  being one  of the  world's                                                               
great hydrocarbon  basins.  That is  bad news for Alaska.   Slide                                                               
13 is another way of telling  the investment story [for the years                                                               
2003-2012],  he  continued.   Dramatic  increases  in  investment                                                               
occurred in  the U.S. and  globally during this time  period, but                                                               
investment in  Alaska increased a  little bit and  then flattened                                                               
out.   Alaska  is on  the  sidelines with  the global  investment                                                               
boom.  Alaska is the anchor in the U.S. energy renaissance.                                                                     
6:19:30 PM                                                                                                                    
COMMISSIONER  SULLIVAN posited  that  all  of the  aforementioned                                                               
begs the  question of whether  the current tax system  is working                                                               
for Alaskans  [slide 14].   He  emphasized "for  Alaskans," given                                                               
there is a lot of talk about  "big oil."  From the perspective of                                                               
[the administration]  this whole  debate is  about the  future of                                                               
Alaskans,  he said.    Slide 15,  prepared  by the  legislature's                                                               
consultant, [PFC  Energy], answers the questions  in an important                                                               
way.   At an oil price  of $100, Alaska's government  take is one                                                               
of the  highest in  the world.   This is  combined with  the high                                                               
cost  of doing  business  in Alaska  due  to remoteness,  extreme                                                               
arctic climate,  and limited exploration  seasons.   Between high                                                               
government  take and  high costs,  Alaska has  been uncompetitive                                                               
relative  to  other  areas  despite a  global  economic  boom  in                                                               
investment and production.                                                                                                      
6:21:23 PM                                                                                                                    
COMMISSIONER  SULLIVAN  maintained  the  current  system  is  not                                                               
working for Alaskans  in another way [slide 16].   He said a term                                                               
used  during  the  debates  is  "giveaway,"  and  it  is  usually                                                               
mentioned in regard  to what might happen in  the future relative                                                               
to  prices,  production,  or  investment.   He  argued  the  real                                                               
giveaways  have already  happened  - money  that  is already  not                                                               
circulating  in  terms  of  tax  revenue  collected  or  economic                                                               
activity circulating  through the economy.   Between fiscal years                                                               
2008 and 2014, the production  tax collected under Alaska's Clear                                                               
and  Equitable  Share (ACES)  will  decline  by an  estimated  $3                                                               
billion despite the  dramatic increase in oil prices;  that is $3                                                               
billion in unrestricted  general fund revenue that  will be gone.                                                               
Today,  about  14.6 million  barrels  a  year fewer  are  flowing                                                               
through the Trans-Alaska Pipeline System  (TAPS) than a year ago.                                                               
At  $100 per  barrel,  that is  about $1.5  billion  that is  not                                                               
circulating through the economy this year.   That is a very clear                                                               
giveaway, he asserted, because it is gone.                                                                                      
6:23:33 PM                                                                                                                    
COMMISSIONER SULLIVAN said much of  the focus has been on current                                                               
producers and current production,  but another issue is companies                                                               
that might be  considering investing in Alaska [slide  17].  Part                                                               
IV of the administration's comprehensive  strategy to reverse the                                                               
TAPS throughput  decline is to  pitch to companies of  all sizes,                                                               
including private  equity companies  and investment banks.   Over                                                               
the last few years the  administration has been trying to recruit                                                               
as many  companies as  possible to come,  invest, and  produce in                                                               
Alaska.   In  addition  to the  high cost  of  doing business  in                                                               
Alaska, a concern heard almost every  time a pitch is made is the                                                               
tax  rates, particularly  progressivity.   He recalled  testimony                                                               
before the  committee by Brooks  Range Petroleum  Corporation [on                                                               
3/27/13] about the many investors  the company approached and how                                                               
hard it was  to get investment dollars.  While  it is unknown who                                                               
has  been looking  at  Alaska  and is  not  here  because of  the                                                               
current tax  system, the  system is very  well known  because the                                                               
administration is asked about it all the time.                                                                                  
6:25:26 PM                                                                                                                    
COMMISSIONER  SULLIVAN stated  Alaska's ultimate  new entrant  is                                                               
Repsol E & P  USA Inc. [slide 18].  Regarding  people who are not                                                               
interested in tax reform and who  say there is no problem because                                                               
Repsol came to Alaska under  the current ACES regime, he reported                                                               
that  what the  administration hears  from Repsol  is similar  to                                                               
what it  is hearing from  other companies:  great  resource base;                                                               
very  interested;  high  costs,   particularly  the  tax  regime.                                                               
[Citing Repsol's 3/6/13 letter to  the Senate Finance Committee],                                                               
he said  Repsol came to  Alaska after it  saw that the  state was                                                               
serious  about tax  reform.   Thus, Repsol  has a  different view                                                               
about ACES  than the people  who think  there is no  problem with                                                               
ACES.  Repsol  is the exact kind of  company [the administration]                                                               
wants in Alaska - big, can  provide more competition on the North                                                               
Slope, and very  interested in finding and  producing new fields.                                                               
Repsol sees tax  reform as critical and if Repsol  finds oil, the                                                               
action on tax reform is going  to be very important as to whether                                                               
Repsol moves into production.                                                                                                   
COMMISSIONER SULLIVAN  pointed out  that production is  the focus                                                               
of the governor's bill and what  elements need to be fixed, while                                                               
ACES  incentivizes  spending  [slide  19].    Production  is  the                                                               
correct place  for this  bill to be  focused, not  just spending,                                                               
but on what is needed - production and rigs [slide 20].                                                                         
6:28:09 PM                                                                                                                    
COMMISSIONER BUTCHER drew attention to  slide 21, saying it shows                                                               
what a company currently producing in  Alaska would have to do to                                                               
qualify for $100 million in credits  from the state.  Under ACES,                                                               
the  company would  need  to  spend $500  million  in capital  to                                                               
qualify  for  $100  million   in  qualified  capital  expenditure                                                               
credits.   Under  CSSB  21(FIN) am(efd  fld),  that same  company                                                               
would  have to  produce 20  million barrels  to qualify  for $100                                                               
million  in credit  from  the $5  per barrel  credit.   From  the                                                               
state's perspective,  it is much  better to pay out  $100 million                                                               
in credits  for 20 million  barrels of  oil produced than  to pay                                                               
out $100  million in credits  for $500 million spent  on anything                                                               
that  qualifies as  capital spending,  not just  specifically for                                                               
new development and new production  of oil.  He further specified                                                               
that the  gross value reduction  is limited to  new participating                                                               
areas either  inside or outside  a legacy  unit; thus, it  is for                                                               
oil that is not currently being produced.                                                                                       
6:29:33 PM                                                                                                                    
COMMISSIONER  SULLIVAN concluded  the  presentation by  stressing                                                               
that  Alaska's status  quo of  continued decline,  when everybody                                                               
else is  turning around their  declines, is an  unacceptable path                                                               
for the state.  With tax  reform that is focused on incentivizing                                                               
production,  Alaska can  do the  same thing  as the  others.   He                                                               
noted   the  Alaska   Native  Claims   Settlement  Act   Regional                                                               
Association  is calling  for  increased production  as  a way  of                                                               
benefitting  all Alaskans.   This  bill  is about  the future  of                                                               
Alaska's citizens.                                                                                                              
6:30:59 PM                                                                                                                    
REPRESENTATIVE  SEATON, regarding  the  prospect of  a gas  sales                                                               
agreement and  fiscal certainty,  noted the three  producers have                                                               
insisted  they   want  35  years.     He  inquired   whether  the                                                               
administration is ready  to do a gas sales  agreement with fiscal                                                               
certainty so that  the fiscal system would be locked  in for both                                                               
oil and gas for 20 or 25 years.                                                                                                 
COMMISSIONER BUTCHER  replied the  administration is not  at this                                                               
time looking at  an extended period of locking something  in.  On                                                               
the oil  side, it  needs to be  seen whether it  works and  if it                                                               
does not he thinks pretty much  everybody is in agreement that it                                                               
will be changed.  Gas is  something that will occur down the road                                                               
and  [the administration]  has not  gotten  to the  point in  the                                                               
process that  those conversations  will occur.   Determining what                                                               
can be done constitutionally in  terms of giving fiscal certainty                                                               
over a long time period is a very complicated issue.                                                                            
6:32:41 PM                                                                                                                    
REPRESENTATIVE SEATON commented  there would be no  need to worry                                                               
if that  was the case.   However,  since the Alaska  Stranded Gas                                                               
Development Act, and  every time there has been talk  about a gas                                                               
sales  agreement, the  three producers  have  been very  specific                                                               
that  that  is only  going  to  take  place  if there  is  fiscal                                                               
certainty over a long  period of time.  He said  he wants to make                                                               
sure the  administration is not looking  at this the same  way he                                                               
thinks the producers are, which is  that it is going to be locked                                                               
in for a very  long period of time.  While it is  nice to say the                                                               
state will  change it if it  is not working, fiscal  certainty by                                                               
itself says that if the tax  rate is changed there is a guarantee                                                               
that money  will be taken out  of the treasury to  reimburse them                                                               
for any increase in tax costs.   It would give much more security                                                               
if  it was  known "that  the administration  was going  to oppose                                                               
fiscal certainty in  a gas sales agreement and not  lock in a tax                                                               
regime that is not automatically compensating in itself."                                                                       
COMMISSIONER BUTCHER  responded "that  is certainly  not anything                                                               
that has been  discussed by the administration" that  he is aware                                                               
of.  At  the moment it is  premature and is not  something that a                                                               
tremendous amount of time is being spent on.                                                                                    
COMMISSIONER SULLIVAN  added durability is one  of the governor's                                                               
four  principles  in terms  of  oil  production.   If  the  state                                                               
changes its tax regime every couple  years it is not good for the                                                               
investment  climate  in  Alaska.   The  other  regimes  discussed                                                               
today, like Texas  and the Gulf of Mexico, have  been durable and                                                               
[the administration] thinks that helps incentivize investment.                                                                  
6:35:26 PM                                                                                                                    
COMMISSIONER  SULLIVAN,  responding  to  Co-Chair  Saddler  about                                                               
slide 4, explained that the  broadest definition for hydrocarbons                                                               
is the U.S. Geological Survey's  estimates of what is technically                                                               
recoverable but  undiscovered, which  is estimated at  40 billion                                                               
barrels  [of conventional  oil for  Alaska's North  Slope].   The                                                               
figure of  3.7 billion barrels  is for known  reserves [remaining                                                               
on  the North  Slope], which  is the  most narrow  definition and                                                               
most exact.                                                                                                                     
CO-CHAIR FEIGE  asked whether it  is the difference  between "P1"                                                               
and "P3" reserves. [P1 = proved, P2 = probable, P3 = possible]                                                                  
COMMISSIONER SULLIVAN answered it is beyond "P3."                                                                               
6:37:07 PM                                                                                                                    
REPRESENTATIVE SEATON,  regarding a  durable system that  may get                                                               
locked in  for a  long period  of time,  related it  is projected                                                               
that  the in-field  producing areas  are  where quick  turnaround                                                               
could come from when people talk  about three years.  He inquired                                                               
whether  it would  be advisable  to have  some criteria  built in                                                               
around production.   For example,  if a  company were to  cut its                                                               
specific rate  of decline by  50 percent  it would receive  a per                                                               
barrel credit of $7  instead of $5, or if a  company did not meet                                                               
that requirement its  per-barrel credit would be  reduced from $5                                                               
to $2.  He  said it seems there needs to be some  hook in the tax                                                               
system  that  gives more  advantage  or  disadvantage for  actual                                                               
production.   He  further asked  whether  the administration  has                                                               
thought about doing anything that actually requires production.                                                                 
COMMISSIONER BUTCHER replied  it was looked at, but  did not make                                                               
sense for  two reasons.   First, a  simple tax structure  that is                                                               
easier  to   understand  has  value.     Second,  many  different                                                               
variables play  roles in what a  decline has been for  a company,                                                               
what a decline has been for a field.   For example, in Field A it                                                               
makes sense economically  for the company to spend a  lot to stem                                                               
the decline  to, say,  2 percent  over a period  of time,  but in                                                               
Field B a company  has a 7 percent decline and  does not spend as                                                               
much.    By  incentivizing  the  rate of  decline  you  would  be                                                               
rewarding  the  company in  Field  B  that  might not  have  been                                                               
putting the  work into stemming  the decline that the  company in                                                               
Field A would be.  Issues  like that are what play into variables                                                               
that result in unintended consequences.                                                                                         
6:39:38 PM                                                                                                                    
REPRESENTATIVE SEATON  posited it  sounds like  it is  being said                                                               
the state is not going to  reward production because the tax base                                                               
is company-wide,  not field-wide.  It  is not hard for  the three                                                               
big producers  on the  North Slope to  figure out  their company-                                                               
wide decline rate.   If it does not matter  whether the companies                                                               
stem  their declines,  then it  is  exactly the  opposite of  the                                                               
administration saying that  it wants to focus on  production.  He                                                               
encouraged  the administration  to think  more about  building in                                                               
some  lever for  the producing  companies  so there  is focus  on                                                               
production and  not just on  a tax decrease.   If a  tax decrease                                                               
does not yield additional production,  he said, the state has not                                                               
accomplished its goal.                                                                                                          
COMMISSIONER SULLIVAN responded the  administration has been very                                                               
focused  on the  current system  that has  paid out  enormous tax                                                               
credits and cash payments and  does not require any commitment to                                                               
production  at all,  which is  one  of the  flaws of  ACES.   The                                                               
governor's  bill and  CSSB 21(FIN)  am(efd fld)  make that  nexus                                                               
between tax benefits  and production much tighter.   A nexus does                                                               
not exist under ACES  and is one of the problems  with ACES.  The                                                               
administration is addressing  Representative Seaton's concern, he                                                               
said.    Right now,  companies  that  have received  hundreds  of                                                               
millions  in cash  from the  state could  pack up  and walk  away                                                               
without having produced  one drop of oil.   The well-intentioned,                                                               
but   flawed  system   under   ACES  is   one   reason  why   the                                                               
administration  is  focusing  on  production  in  this  bill  and                                                               
companies  get  the  benefits  of   tax  credits  when  they  are                                                               
producing, unlike the current system.                                                                                           
6:43:11 PM                                                                                                                    
CO-CHAIR FEIGE  clarified the  gross value  reduction is  for new                                                               
participating areas and  new units, so it is for  oil that is not                                                               
being produced now.                                                                                                             
COMMISSIONER SULLIVAN  concurred the  reduction is  received when                                                               
new oil is produced.                                                                                                            
REPRESENTATIVE  SEATON  argued the  $5  per  barrel would  go  on                                                               
whether it is old or new  production; if a company stays where it                                                               
is and keeps declining,  it gets $5 a barrel.   If the purpose of                                                               
the bill  is to ensure  the state  gets new production,  it seems                                                               
that  building in  a single  lever that  if a  company slows  its                                                               
decline by  over 50  percent within  three years,  it will  get a                                                               
bump.  If  a company does not accelerate its  production, then it                                                               
would get a penalty.  That is simple  and gives a goal.  He urged                                                               
the administration  to look at  that idea more  carefully because                                                               
he  agrees the  state wants  to incentivize  production, but  the                                                               
worry is about the state not getting to that point.                                                                             
CO-CHAIR FEIGE  said he does  not know why the  administration is                                                               
being  blamed,  given the  bill  is  in  its third  committee  of                                                               
referral and is the now the legislature's bill.                                                                                 
6:44:50 PM                                                                                                                    
REPRESENTATIVE TARR  recalled that yesterday the  small explorers                                                               
testified the credits  were essential to their  coming to Alaska.                                                               
Had those  credits not been  in place, the Mustang  project would                                                               
probably still have gone forward,  but would have been delayed by                                                               
a few years.   Thus, the next project that is  going to bring new                                                               
oil is  because of  the tax credit  system in ACES.   Two  of the                                                               
producers  testifying yesterday  said  they  scratch their  heads                                                               
whenever they  hear that  the [ACES] credits  are not  leading to                                                               
new  oil because  new exploration  and drilling  is exactly  what                                                               
these credits are being used for.   She asked why these companies                                                               
are  saying  something  that   completely  contradicts  what  the                                                               
administration is saying.                                                                                                       
COMMISSIONER  SULLIVAN answered  the companies  are not  lying to                                                               
the committee,  but if they packed  up today they would  walk out                                                               
with a lot of cash in their  hands that they got from tax credits                                                               
from the State of Alaska that did not relate to any production.                                                                 
6:46:02 PM                                                                                                                    
REPRESENTATIVE  TARR  asked   whether  Commissioner  Sullivan  is                                                               
suggesting the state might encounter  a situation where companies                                                               
come to Alaska,  spend hundreds of millions of  dollars, and then                                                               
just pack up and leave.                                                                                                         
COMMISSIONER SULLIVAN replied he is  suggesting it is strongly in                                                               
the  state's interest  to make  the nexus  between tax  benefits,                                                               
whether they are  reductions or credits, strongly  tied to actual                                                               
production.  That  is what the administration is trying  to do in                                                               
this bill and that is what ACES does not do.                                                                                    
COMMISSIONER BUTCHER  added nothing  is being  done with  most of                                                               
the credits  in the  state's tax  code.   There is  no suggestion                                                               
that the small producer tax credit  or the explorer tax credit be                                                               
eliminated.   This  bill speaks  specifically to  eliminating the                                                               
qualified capital  expenditures, which  is the 20  percent credit                                                               
that currently-producing  companies receive.  This  is the credit                                                               
that the  administration is  saying has no  data showing  that it                                                               
has led to new production.                                                                                                      
6:47:06 PM                                                                                                                    
REPRESENTATIVE  TARR understood  the  small  producer credit  and                                                               
exploration credit will be eliminated  in 2016 under CSSB 21(FIN)                                                               
am(efd fld).   She  said she  is concerned  about what  the small                                                               
explorers said  regarding the need  for legacy  field development                                                               
and new  exploration and  drilling work  happening simultaneously                                                               
because this  bill seems to  seriously disadvantage that  kind of                                                               
work,  as  explained by  the  companies  doing  that work.    She                                                               
posited the state will miss a  big part of the opportunity to get                                                               
new oil if that is not considered.                                                                                              
COMMISSIONER BUTCHER responded 2016 is  in current law; it is not                                                               
being  made shorter.   If  it is  not extended  further, it  will                                                               
remain 2016.   Previous versions of  the bill had it  extended to                                                               
2022,   which  is   something  [the   administration]  would   be                                                               
interested  in discussing  with  the committee  if the  committee                                                               
wants to go in that direction.                                                                                                  
CO-CHAIR  FEIGE told  Representative Tarr  he would  entertain an                                                               
amendment to that effect.                                                                                                       
6:48:13 PM                                                                                                                    
CO-CHAIR  SADDLER  asked  what Alaska's  other  options  are  for                                                               
revenue from natural resources or  other sources, if no action is                                                               
taken and this production decline continues.                                                                                    
COMMISSIONER BUTCHER  answered as has  been seen in the  last few                                                               
years, and what has made this  such a critical issue to deal with                                                               
today, is that  the state is losing tens of  thousands of barrels                                                               
a  day, so  the price  of  oil must  keep  going up  to keep  the                                                               
state's  level of  revenue up.   Fortunately  for the  state, the                                                               
price has gone up over the last  few years, but that is not going                                                               
to continue.   If the decline  continues at its current  rate and                                                               
Alaska continues losing barrels of oil,  the gap would have to be                                                               
made up by  many of the things that were  discussed at the [March                                                               
2001] Fiscal Policy Caucus, which  includes statewide income tax,                                                               
statewide  sales tax,  and the  Permanent Fund.   Currently,  the                                                               
state has  ample reserves to bridge  the gap between where  it is                                                               
today  and when  new production  will occur,  assuming this  bill                                                               
passes  and new  production  does  in fact  happen.   In  further                                                               
response, Commissioner  Butcher said  it is  the administration's                                                               
view that decline in Alaska is  continuing to occur at these high                                                               
prices while  not appearing  to be happening  anywhere else.   If                                                               
Alaska does not become more  competitive, there no reason why the                                                               
decline would  turn around since it  has yet to happen  [at these                                                               
high prices].                                                                                                                   
6:50:17 PM                                                                                                                    
CO-CHAIR FEIGE  qualified he  is not  advocating this,  but asked                                                               
how much  oil revenue could  be replaced by implementing  a state                                                               
sales tax and state income tax.                                                                                                 
COMMISSIONER BUTCHER replied  he does not have  those numbers off                                                               
the top of  his head, but said  it is absolutely the  case if the                                                               
point  being made  is that  it is  a relatively  small amount  of                                                               
money compared to the oil revenue.   He said if Alaska had no oil                                                               
revenue, like most of the lower  48 states, there would be no way                                                               
the state's small  population of residents could be  taxed to the                                                               
level needed to pay for the current budget.                                                                                     
6:51:08 PM                                                                                                                    
CO-CHAIR SADDLER  inquired what  the risk would  be if  the state                                                               
let ACES  ride for  another couple  of years to  see if  it turns                                                               
around and is going to work.                                                                                                    
COMMISSIONER  BUTCHER  responded  decline would  continue  to  be                                                               
seen, which is  troubling because the North Slope is  a much more                                                               
severe  climate and  much more  expensive place  to do  business.                                                               
Places like  Texas and  Louisiana can explore  for oil,  find it,                                                               
and  get  to a  point  of  production  in  18 months,  while  the                                                               
historical average  in Alaska  is about  10 years.   It is  not a                                                               
situation where the  state can sit around for a  couple of years,                                                               
realize  things  are  not  getting any  better,  and  then  start                                                               
turning  the wheels.    These wheels  need to  start  as soon  as                                                               
possible because  it is  going to  take a while  to get  on line,                                                               
particularly for the newer fields outside the legacy areas.                                                                     
COMMISSIONER SULLIVAN  said another  issue is that  as throughput                                                               
declines, TAPS tariff rates increase,  which becomes an inhibitor                                                               
to  new entrants.    Getting  new entrants  is  critical and  the                                                               
administration has been working hard  on this.  New explorers and                                                               
new plays  are needed,  such as  shale oil plays.   If  Alaska is                                                               
made more  competitive, the resource  base and the  interest from                                                               
companies  of  all  sizes  is   high,  as  far  as  getting  that                                                               
production turnaround that is needed so badly.                                                                                  
6:53:28 PM                                                                                                                    
REPRESENTATIVE  TUCK expressed  his concern  about the  statement                                                               
that the credits do not lead  to production.  The small companies                                                               
testified last night  that they are scratching their  heads as to                                                               
why this statement was made.   He said he is also concerned about                                                               
the  statement that  these explorers  are profiting  off Alaska's                                                               
tax credits  and will cut loose  and take their money  out of the                                                               
state.   The administration  just showed  a slide  indicating the                                                               
state is  giving these  companies 20  percent in  capital credit,                                                               
meaning they have  to invest quite a bit, and  he does think they                                                               
are investing  to try to  get that 20  percent from the  State of                                                               
Alaska so  they can cut  loose and leave.   He has  problems with                                                               
these statements  because these  small companies are  serious and                                                               
want  to get  to production  on the  North Slope;  the state  has                                                               
invested  in them  and partnered  with them.   In  December 2011,                                                               
Pedro van Meurs  compared Alaska with 120 other  places that also                                                               
have  shallow water  oil  and  concluded that  Alaska  is in  the                                                               
ballpark.   Alaska  has a  lot of  frontend loading  which is  so                                                               
attractive  that  the Department  of  Natural  Resources is  even                                                               
placing advertisements  about it.   It takes  7-15 years  to make                                                               
new oil  happen, so  it is  a combination  of trying  to maximize                                                               
what  the state  has right  now with  its current  production and                                                               
partnering  with  industry  to   ensure  long-term  oil.    North                                                               
Dakota's new  production is  unconventional production,  and this                                                               
new  production is  applying  new technologies  due  to high  oil                                                               
prices.    They are  able  to  quickly  get  into the  shale  and                                                               
fracture it  to start  bringing wells, a  luxury Alaska  does not                                                               
have.    Alaska  recognizes  the high  cost  of  exploration  and                                                               
development and  the limited  facilities in the  state.   Much of                                                               
the current  investment is in  facilities because  the facilities                                                               
are needed to be able to drill.   He maintained the state is on a                                                               
hope and a  prayer if it relies on the  type of economic policies                                                               
that just lower taxes and do nothing more than that.                                                                            
6:57:34 PM                                                                                                                    
COMMISSIONER BUTCHER  said the  administration is  not suggesting                                                               
that the small  producer credit or exploration  credit be reduced                                                               
or eliminated.   The 20  percent being looked at  for elimination                                                               
is for companies  that are currently producing.   The folks being                                                               
heard  from are  not benefitting  from the  credit that  would be                                                               
eliminated  because  they  are  not  currently  producing.    The                                                               
percentage received  in state credits is  considerably higher for                                                               
the  exploration companies  referenced by  Commissioner Sullivan.                                                               
Depending on  what they are  doing, what they take  advantage of,                                                               
and  where they  are, the  State of  Alaska reimburses  a company                                                               
anywhere from 40 to 60 percent of what it spends.                                                                               
6:58:40 PM                                                                                                                    
COMMISSIONER  SULLIVAN  added  he  does not  think  he  said  the                                                               
administration  wants the  small producers  and new  explorers to                                                               
leave the  state.  To  the contrary, the administration  has been                                                               
working very  hard recruiting some  and helping some of  the ones                                                               
that have testified before the committee.   The focus has been to                                                               
get them  and more of  them up to  Alaska.  The  advertisement is                                                               
part  of  the recruiting  effort;  it  was highlighting  what  is                                                               
currently in the law that is  attractive; it did not include that                                                               
at $120  the government take  in Alaska  is close to  80 percent.                                                               
Based on his  talks with different companies, he  allowed they do                                                               
have  different  views  depending  on where  they  are  in  their                                                               
finances  and strategies,  but  the general  view  is that  there                                                               
needs to  be a balance of  having some limitations on  credits up                                                               
front and a  reduction in the progressivity,  which the companies                                                               
clearly see  as the most  uncompetitive long-term  capital return                                                               
element of investing in Alaska, particularly at high prices.                                                                    
7:00:27 PM                                                                                                                    
CO-CHAIR FEIGE  asked whether the ad  mentioned by Representative                                                               
Tuck has generated any interest.                                                                                                
COMMISSIONER SULLIVAN  answered it is  always hard to tell.   The                                                               
administration sees  companies and  goes back  to see  them after                                                               
being told to "take a  hike," so the administration is relentless                                                               
on this.  It is a long-term  horizon with this industry as far as                                                               
things becoming positive from one year to the next.                                                                             
CO-CHAIR FEIGE surmised  that even though the  40 percent support                                                               
for exploration wells is being  advertised, it is not necessarily                                                               
generating a lot of exploration.                                                                                                
COMMISSIONER SULLIVAN replied  he would say the  state needs more                                                               
7:01:37 PM                                                                                                                    
REPRESENTATIVE P. WILSON observed from  slide 20 that Alaska only                                                               
has 8  [active] rigs compared to  830 in Texas, 183  in Oklahoma,                                                               
and 174  in North Dakota.   That tells  her Alaska is  in trouble                                                               
and she is  concerned about it.  The Fiscal  Policy Committee she                                                               
was on  looked at income  tax, sales tax,  even a school  tax, to                                                               
try to bring in income.  A  3 percent sales tax was nothing given                                                               
the number  of people in  the state, and  the cost of  setting up                                                               
the  bureaucracy  to put  the  tax  in  place made  it  pathetic.                                                               
Alaska is in a mess and something different must be done.                                                                       
7:03:30 PM                                                                                                                    
REPRESENTATIVE  JOHNSON noted  production  is  increasing in  the                                                               
U.S. and understood the current ANS  West Coast price is $109 and                                                               
the West Texas Intermediate (WTI) price is $90.                                                                                 
COMMISSIONER BUTCHER responded the WTI  is a little higher, about                                                               
a $12 difference the two prices.                                                                                                
7:04:05 PM                                                                                                                    
REPRESENTATIVE  JOHNSON  opined Alaska  has  been  saved by  high                                                               
prices; if prices were at $80  per barrel Alaska would be in very                                                               
bad shape.   He inquired  how much  longer the ANS  price premium                                                               
can be expected.                                                                                                                
COMMISSIONER BUTCHER answered this has  been looked at with great                                                               
interest  because it  used  to be  the  WTI was  $1  to a  barrel                                                               
premium to  ANS and  that has  flipped.   Experts brought  in for                                                               
[DOR's]  forecasting session  had thought  that as  more pipeline                                                               
capacity  came on  line in  the Lower  48 near  the gulf  the WTI                                                               
would come  up a  lot more  than the  ANS would  drop, eventually                                                               
shrinking the ANS premium of $20 to  more or less what it used to                                                               
be.   The experts  thought this  because ANS  and Brent  are both                                                               
within a  dollar or  two of  each other and  the real  outlier is                                                               
WTI.   Over the calendar  year of  2011 into 2012  the difference                                                               
did shrink from $20 to $4 or $5  and it appeared to be doing what                                                               
everyone thought it  was going to do, but then  it turned around,                                                               
going back up into the high teens  and now back down to $12.  The                                                               
U.S. is starting to outperform  Saudi Arabia and there is concern                                                               
that it  is going  to affect the  price of oil  because a  lot of                                                               
states, such  as North  Dakota, filled  the pipelines,  then they                                                               
filled the railcars, and now they  are trucking to the West Coast                                                               
where they get more for their  oil; the added expense of trucking                                                               
is  made up  by this  premium.   Canada  is looking  at the  same                                                               
thing.  The price per barrel  in Canada is in the fifties because                                                               
the first oil in  is getting sold in the gulf.   The further away                                                               
from  the gulf,  such as  North Dakota,  the price  is $10  or so                                                               
under WTI, and once into Alberta  it is dire straits.  Alberta is                                                               
looking at  whether to build a  pipeline to the East  Coast or to                                                               
the West Coast.  Many factors are  in play largely due to the low                                                               
price of WTI compared to ANS.                                                                                                   
7:07:07 PM                                                                                                                    
REPRESENTATIVE  JOHNSON  said  Alaska  is blessed  to  have  that                                                               
premium because  the state  would be  in severe  deficit spending                                                               
with the continued decline in production.   The WTI and ANS could                                                               
become comparable  very quickly - that  does not mean the  WTI is                                                               
coming up,  the ANS  could go  down in  a matter  of months.   If                                                               
today's price  was $90 a  barrel, Alaska's revenue  picture would                                                               
look  considerably different  than what  DOR forecasted.   Alaska                                                               
cannot  forever  depend on  price  to  save itself,  Alaska  must                                                               
depend on volume.                                                                                                               
COMMISSIONER BUTCHER  replied it  is a frightening  exercise when                                                               
playing with the production and the  price.  There have only been                                                               
a handful of years in history  in which the price has been higher                                                               
than $90 a barrel.   If the price of oil over  a fiscal year were                                                               
to drop  to $85, Alaska would  be in billions of  dollars deficit                                                               
for its current  budget.  That is how  precarious Alaska's budget                                                               
situation is given its declining production.                                                                                    
7:08:38 PM                                                                                                                    
REPRESENTATIVE  JOHNSON inquired  how many  millions less  to the                                                               
treasury for each $1 drop in oil price.                                                                                         
COMMISSIONER BUTCHER responded he will  get back to the committee                                                               
because the  figure changes  each year.   Responding  further, he                                                               
confirmed the dollar amount less depends on the oil volume.                                                                     
7:09:18 PM                                                                                                                    
REPRESENTATIVE TUCK,  regarding slide  20 and  the low  number of                                                               
drilling rigs in  Alaska, said much of that has  to do with being                                                               
unable to  park the rigs  on the back  of a  truck as is  done in                                                               
many places.   Having worked  on modules  on the North  Slope, he                                                               
knows  the drilling  rigs are  extensive rather  than small  ones                                                               
that can  be moved around.   It would be nice  to have additional                                                               
active rigs - Repsol has  had an aggressive drilling schedule but                                                               
there  are not  enough drilling  rigs  or drillers  on the  North                                                               
Slope due to the amount of activity that is taking place.                                                                       
7:09:54 PM                                                                                                                    
REPRESENTATIVE TUCK,  moving to slide  15, posited that  if there                                                               
is a direct  correlation between tax regimes  and investments, it                                                               
could be  said that  Syria, Pakistan,  and Bolivia  probably have                                                               
very  low  investments  [due  to  high  government  take],  while                                                               
Ireland, Peru, and  New Zealand [with low  government take] would                                                               
probably have more investment.                                                                                                  
CO-CHAIR FEIGE asked whether there is any oil in Ireland.                                                                       
REPRESENTATIVE TARR said that is the point.                                                                                     
COMMISSIONER  BUTCHER  answered  slide  15 was  prepared  by  the                                                               
legislature's consultant,  so the administration had  no input as                                                               
to what countries or states were included in the slide.                                                                         
COMMISSIONER SULLIVAN  added that slide  15 is a snapshot  of one                                                               
critical element of  competitiveness, others being infrastructure                                                               
and  climate.   A  positive  for Alaska,  however,  is its  small                                                               
resource risk  - most companies think  that when they come  up to                                                               
Alaska  to   look  for  oil  they   will  find  it.     When  the                                                               
administration   talks  to   companies,   [government  take]   is                                                               
something heard from them almost across the board.                                                                              
7:11:53 PM                                                                                                                    
REPRESENTATIVE TUCK asked whether at  $85 per barrel Alaska would                                                               
be better off under SB 21 because  it would not be losing so many                                                               
COMMISSIONER  BUTCHER replied  he  cannot speak  to CSSB  21(FIN)                                                               
am(efd fld),  but he said  Alaska would  be better off  under the                                                               
original SB  21.  Would  the state  be better off  billions more?                                                               
No, but  the point he  was trying to  make is that  as production                                                               
declines by tens  of thousands of barrels a year,  no bill or tax                                                               
structure is  going to save  that.   It must be  more development                                                               
and ultimately more production because  that one factor that will                                                               
turn it around and be of  more benefit to the treasury.  Alaska's                                                               
reliance on high prices really gives the administration pause.                                                                  
7:13:10 PM                                                                                                                    
REPRESENTATIVE TARR  related that  according to a  slide prepared                                                               
by  the administration's  consultant, Econ  One, more  people are                                                               
working on  the North Slope now  than in 1990.   She inquired why                                                               
so many people would be working if nothing is happening.                                                                        
COMMISSIONER BUTCHER responded  it can be seen on  the slide that                                                               
the increase in  employment began before ACES, which  shows it is                                                               
an aging infrastructure.   The increase continued  the year after                                                               
ACES passed and then flattened out.   If looking at Alaska in and                                                               
of itself, it  looks like the state gained a  little bit and then                                                               
flattened out.   But in  other oil producing  jurisdictions, such                                                               
as North Dakota and Alberta,  labor numbers are going through the                                                               
roof -  tens of thousands of  jobs - and those  places are having                                                               
trouble keeping people in high school  and college.  A flat labor                                                               
force in a world of tremendous  growth is not a positive piece of                                                               
the state puzzle from the administration's perspective.                                                                         
COMMISSIONER  SULLIVAN  added  it goes  to  the  administration's                                                               
original comments  that the statistics being  cited as indicating                                                               
things are  going great are  not being  looked at in  the overall                                                               
picture of the industry in the  U.S. and the world.  Comparing it                                                               
to other  jurisdictions is  critical and  keeping an  emphasis on                                                               
production is what most of the administration's focus has been.                                                                 
7:16:06 PM                                                                                                                    
REPRESENTATIVE TARR conceded Alaska's  marginal rate ranks at the                                                               
bottom,  but said  Alaska's various  credits are  in the  top ten                                                               
rankings  and  those  credits  are considered  to  have  high  or                                                               
moderate-to-high  economic impacts.   Alaska  is more  attractive                                                               
when looking at the whole  package; progressivity and the credits                                                               
were a balance in putting  the package together and incentivizing                                                               
the behavior that  was wanted.  Similarly, she  posited, the bill                                                               
being contemplated  now needs  to be considered  as a  package in                                                               
regard to attractiveness.                                                                                                       
COMMISSIONER BUTCHER  concurred there  are things that  make ACES                                                               
attractive; for  example, no other  state pays for  40-60 percent                                                               
of a  company's costs.   However, things  are breaking  down when                                                               
the transition  is made  from the  work on the  front end  to the                                                               
work on  the production end  because those companies  are looking                                                               
at the tax rates.   Alaska is the only oil-producing jurisdiction                                                               
still in decline.   He agreed that that is what  was trying to be                                                               
achieved with ACES, but said  it is obvious to the administration                                                               
that it has not been achieved and is not working.                                                                               
7:18:17 PM                                                                                                                    
REPRESENTATIVE  SEATON   drew  attention  to  slide   21,  noting                                                               
Commissioner Butcher had said the  20 percent capital expenditure                                                               
credit  did not  apply  to small  oil fields.    He surmised  the                                                               
commissioner  wants  to  correct  that to  ensure  there  is  not                                                               
misrepresentation.   He understood from  slide 21 that  the gross                                                               
value  reduction  (GVR) is  limited  to  new participating  areas                                                               
whether inside or  outside a legacy unit.  He  said he is pleased                                                               
if that is the administration's  position because it is something                                                               
that can be determined fairly clearly.                                                                                          
COMMISSIONER BUTCHER deferred to  Michael Pawlowski to answer the                                                               
question, but said  everything is looked at in terms  of having a                                                               
balance.   He explained  slide 21  is not a  listing of  what the                                                               
administration supports  but is  merely pointing  out what  is in                                                               
CSSB  21(FIN) am(efd  fld) compared  to  ACES.   He concurred  he                                                               
misspoke  if  he said  the  capital  expenditure credit  did  not                                                               
qualify for smaller  fields with smaller companies.   He said the                                                               
credit can be  used against a company's  tax liability regardless                                                               
of the size of the field.                                                                                                       
REPRESENTATIVE  SEATON stated  the [gross  value reduction]/gross                                                               
revenue  exclusion (GVR/GRE)  makes it  simple and  clear and  he                                                               
hopes the administration will be  supporting that as the standard                                                               
instead  of  using  something  that is  unclear  and  subject  to                                                               
administrative determination, which will be challenged.                                                                         
7:21:13 PM                                                                                                                    
CO-CHAIR SADDLER  related it  has been  heard that  Alaska should                                                               
demand  guaranteed production  before adjusting  its current  tax                                                               
rate.   He asked  what elements  are in  current state  laws that                                                               
guarantee current levels of any level of production.                                                                            
COMMISSIONER BUTCHER  answered those  do not  exist and  said his                                                               
opinion is  that the state  is never going to  get any kind  of a                                                               
guarantee from  a company,  given all the  variables that  go on,                                                               
such as an  oil spill that costs the company  billions of dollars                                                               
or a better  opportunity someplace else.  To ask  for a guarantee                                                               
is almost to say the state does  not want to change the law so it                                                               
is going  to set  up a hurdle  that is probably  not going  to be                                                               
attained.   Does it  need to  be heard  from companies  that [the                                                               
bill]  is material  and do  legislators need  to be  convinced by                                                               
what they  say?   Sure.   However, he cannot  imagine a  board of                                                               
directors  that would  agree to  expect a  guarantee that  if the                                                               
company does this  the state will do that when  the companies are                                                               
looking worldwide at opportunities at today's high oil prices.                                                                  
COMMISSIONER  SULLIVAN interjected  that  the status  quo is  not                                                               
working and  it is  going to be  more [of what  is seen  on slide                                                               
10], and that should be a very big concern for everyone.                                                                        
7:24:02 PM                                                                                                                    
REPRESENTATIVE TARR noted  a concern is how the  third element of                                                               
the GVR/GRE would be defined.   As the bill is currently written,                                                               
the GVR/GRE  is at the discretion  of the DNR commissioner.   She                                                               
asked how the  department would meter and  measure the production                                                               
and  what  areas  might  qualify.     She  paraphrased  from  the                                                               
provision on  page 21 of  the bill,  beginning on line  25, which                                                               
reads as follows:                                                                                                               
      (3) the oil or gas is produced from a well that has                                                                       
      been accurately metered and measured by the operator                                                                      
     to  the  satisfaction  of  the  commissioner,  and  the                                                                    
     producer  demonstrates  to   the  department  that  the                                                                    
     metered  well  drains  a  reservoir  or  portion  of  a                                                                    
     reservoir that the Department  of Natural Resources has                                                                    
     certified  was not  contributing  to production  before                                                                    
     January 1,  2013, and the producer  demonstrates to the                                                                    
     department that the volume of  oil or gas produced from                                                                    
     the   well  was   subject  to   certification  by   the                                                                    
     Department of Natural Resources.                                                                                           
7:25:38 PM                                                                                                                    
WILLIAM C.  BARRON, Director, Division  of Oil &  Gas, Department                                                               
of Natural  Resources (DNR), responded to  Representative Tarr by                                                               
displaying  slide 13  from DNR  Deputy Commissioner  Joe Balash's                                                               
3/22/13 PowerPoint  presentation to the committee.   He explained                                                               
the slide  depicts a "bubble map"  of the Kuparuk River  Unit, in                                                               
which the  oil that has been  produced is represented on  the map                                                               
in one color  and the size of each bubble  represents the volumes                                                               
of oil produced  from each well.  This simplified  type of map is                                                               
used as an aid in reservoir  management in terms of where oil has                                                               
been produced.   The blue bubbles are water injection.   As water                                                               
is  injected  and  sweeps  the  oil  from  the  injector  to  the                                                               
producer, a defined pattern can be  seen, which is a very classic                                                               
water flow  pattern and is  actually a  world class pattern.   In                                                               
the  southwest   and  southcentral-east  edges  are   areas  that                                                               
currently exist  within the participating area  (PA) that clearly                                                               
do not  have wells and, where  there are wells, the  magnitude of                                                               
the bubbles  indicate that  those are  very low  producing wells.                                                               
The same exists  in the gap between the PA  boundary and the unit                                                               
boundary.  Those are the  areas that, under the current proposal,                                                               
the companies could bring to  the division and demonstrate to the                                                               
division's satisfaction that they  are not currently contributing                                                               
even though  they are part of  the PA.  Demonstration  is through                                                               
three dimensional reservoir modeling,  such as streamline models,                                                               
pressure waves, water  fronts, and oil migration  patterns.  When                                                               
a PA  is originally  created, the  boundaries are  established as                                                               
generously  as  possible,  given   these  are  giant  fields  and                                                               
protection must  be provided to  all parties so those  parties on                                                               
the fringe  of a  field will not  be harmed by  not being  in the                                                               
center part -  so, trying to establish areas  and establish tract                                                               
factors that  allow smaller players  or players on the  fringe to                                                               
also participate in  the production and the cost.   The companies                                                               
would  have  to prove  that  those  areas are  not  contributing.                                                               
Those would  be areas that  the division  would say is  really an                                                               
acceleration of existing  proven reserves.  Is it new  oil?  Yes,                                                               
it  is new  production.   But it  is not  new oil  that would  be                                                               
necessarily bookable  because it  is already  booked in  the U.S.                                                               
Securities  and  Exchange  Commission  (SEC)  definitions.    The                                                               
division  struggles a  bit with  that because  that would  be the                                                               
hardest form  of the oil or  the area to prove  definitively that                                                               
it is  not contributing.  In  theory and in spirit  the companies                                                               
should be moving  forward toward that development  in the natural                                                               
course of development of field.                                                                                                 
7:29:11 PM                                                                                                                    
MR.  BARRON  moved   to  slide  14  from   Mr.  Balash's  3/22/13                                                               
presentation,  saying that  in 2012  ConocoPhillips Alaska,  Inc.                                                               
drilled  the  Sharks  Tooth  Well.     Even  though  the  company                                                               
classified  it  through  the  Alaska  Oil  and  Gas  Conservation                                                               
Commission (AOGCC)  as an  exploratory well  and had  a discovery                                                               
according to  the benchmarks, it  is actually discovery  within a                                                               
PA, so it is  kind of an oxymoron.  That  being said, that really                                                               
kind of  showed that, yes,  the PA  was of the  appropriate size.                                                               
In  the proposed  statute, that  specific area  would be  an area                                                               
that the company could carve out,  show that it was not currently                                                               
contributing,   and  then   proceed  with   drilling  operations,                                                               
facility  installations,  hookup,  and  modules  to  bring  those                                                               
facilities on as  new oil or accelerated oil through  a PA - much                                                               
more difficult  for the company  to definitively prove than  a PA                                                               
expansion or a new PA.  In  the hierarchy of new oil or expansion                                                               
of product, clearly the simple one  is new units and within those                                                               
new units clearly  new PAs.  The stepwise procedure  is to form a                                                               
unit and then build  out the PAs in strata.   The next step would                                                               
be expansion  of PAs, where  the size of the  PA is looked  at or                                                               
what can be  proven geologically or through  engineering with the                                                               
exploration and  delineation wells.   There  are many  times that                                                               
wells can  actually be  drilled side-by-side  that really  do not                                                               
communicate, especially  when it is  thin or lenticular  or sands                                                               
that are part of a braided  stream that meander through the area.                                                               
Those could  be either new  PAs or a  new PA expansion,  since it                                                               
could be said that they are  in close participation areas and are                                                               
contributing  with  each other.    As  a  company fills  out  its                                                               
drilling program it can  begin to expand its PAs and  a PA can be                                                               
expanded in a couple of ways.   The division's preference is that                                                               
a  PA be  expanded  by drilling  rather  than geologic  modeling.                                                               
Geologic models  are good,  but they are  fraught with  error and                                                               
uncertainty that can only be proven by drilling.                                                                                
7:31:44 PM                                                                                                                    
MR. BARRON continued, explaining that  a company has its original                                                               
units, PAs within those new units,  as well as new PAs within old                                                               
units, which happens quite often.   How PAs come in over time was                                                               
shown in  the 3/22/13  presentation, he noted.   There  are still                                                               
potential PAs within Kuparuk, between  Kuparuk and Coleville, and                                                               
maybe  within  Prudhoe.   So,  there  are  the  PAs, and  the  PA                                                               
expansions are off  of that.  This is really  the next hybrid and                                                               
it  will  be more  difficult  to  show  that this  production  is                                                               
already  in   a  PA   but  not  contributing.     It   is  doable                                                               
mathematically and scientifically,  but the division's preference                                                               
is  for the  companies to  come  in and  absolutely convince  the                                                               
division that it is not contributing, a high hurdle to jump.                                                                    
MR.  BARRON addressed  metering,  noting industry's  conventional                                                               
standard is to  meter wells on a monthly basis  and the aggregate                                                               
of their production at that drill  site is based on an allocation                                                               
process  that is  approved by  AOGCC.   It is  doable to  install                                                               
multi-phase meters  on every well,  but it  is expensive.   It is                                                               
doable to install  new facilities, and have a  test separator for                                                               
every  well,  but  probably  not  very  efficient  and  not  very                                                               
operationally  friendly, so  companies  would  probably shy  away                                                               
from  that.   Multi-flow,  multi-phase meters  are fairly  common                                                               
these days and reasonably accurate,  plus or minus 8-9 percent on                                                               
total fluid.   Those vary with  difference of water cut  and vary                                                               
with difference  of gas  to oil  ratios and  liquid ratios.   The                                                               
more gas,  typically the  less accurate they  are.   The metering                                                               
could be individually by well or  in aggregate.  In Sharks Tooth,                                                               
for example,  if a  new pad  was set and  drilling went  out from                                                               
that pad,  then that area could  be isolated off and  metered and                                                               
monitored independently of the rest of the Kuparuk fields.                                                                      
7:34:37 PM                                                                                                                    
REPRESENTATIVE JOHNSON inquired about the cost of a meter.                                                                      
MR. BARRON estimated at least  $10,000 and maybe $100,000 for the                                                               
facilities themselves.   In further response, he said  he is sure                                                               
his estimate is not low and  said a multi-phase meter is probably                                                               
in the ballpark of $10,000.  He offered to find out exactly.                                                                    
REPRESENTATIVE JOHNSON asked how  many people know the technology                                                               
for repairing these meters.                                                                                                     
MR. BARRON replied  the University of Alaska  Anchorage (UAA) and                                                               
University  of  Alaska Fairbanks  (UAF)  have  good programs  for                                                               
training the  state's high school  graduates and college  kids as                                                               
technical people for  the oil field.   Instrument technicians are                                                               
capable of doing this kind  of calibration every day.  Responding                                                               
further, he said it is one thing  if it is only Alaskans that are                                                               
being looked at for doing this  work, but in the greater world of                                                               
the oil industry instrument technicians  is an up and coming part                                                               
of the business.  Years  ago instrument technicians worked solely                                                               
with pneumatics,  gas and  air pressure  equipment, but  now they                                                               
have  gone to  small  wires.   It  is  basically  a migration  of                                                               
technologies,  and   small  wire  personnel  are   now  regularly                                                               
available.   Many companies have  very good training  programs to                                                               
support that and many are building from the ground up.                                                                          
7:37:11 PM                                                                                                                    
CO-CHAIR FEIGE  inquired how oil  is typically measured as  it is                                                               
transacted between the companies and the state.                                                                                 
MR. BARRON posed  a scenario of a  drill site with a  group of 20                                                               
wells, explaining every  well must have its  own individual test.                                                               
Each  well goes  through a  test separator  or has  a multi-phase                                                               
meter  on  it,  depending  upon  what  is  needed  for  reservoir                                                               
management purposes.   Currently,  AOGCC requires a  monthly well                                                               
test,  which  can  be  certified  and  corroborated  through  the                                                               
company.  Once that well is out of  test it is put into a bulk or                                                               
group separator, which  is where everything goes if it  is not in                                                               
test.  It  is a simple system  - just valves on a  header to move                                                               
the oil  around.  That oil  is then shipped from  that drill site                                                               
to a  flow station  or gathering  center for  further processing.                                                               
That is typically where most of  the gas is knocked off and water                                                               
extracted, and  that is metered  at every step  of the way  - not                                                               
for allocation purposes, but for leak  detection.  As the oil and                                                               
fluids migrate from  a drill site to a gathering  center and then                                                               
from a gathering center to Pump 1,  all of that is metered so the                                                               
oil companies  can look for  leaks.  Discrepancy of  the incoming                                                               
and outgoing meters  is what sends the alarm for  leaks.  At that                                                               
point is  where the transaction  occurs between the  industry and                                                               
to the  pipeline.  For  the state, the  well test is  the earmark                                                               
that  [the  division]  works from  through  AOGCC  for  reservoir                                                               
management, production allocations, and royalties.                                                                              
MR. BARRON, responding further to  Co-Chair Feige, said a revenue                                                               
transaction is a rollup based  on production from the well itself                                                               
from that  well test.   The companies  have to identify  from the                                                               
well test what  each well has contributed to that  drill site and                                                               
then  that  is  where  the  royalties  and  revenues  come  from,                                                               
corroborated by all the meters along the way.                                                                                   
7:40:14 PM                                                                                                                    
REPRESENTATIVE SEATON commented he was  pleased when he saw slide                                                               
21  and it  appeared  that the  administration  was favoring  new                                                               
participating  areas.   He asked  about the  number of  personnel                                                               
that would be required by the  division or whether it would be in                                                               
conjunction  with AOGCC  for handling  the acceleration  within a                                                               
participating area, the claims, the data, and appeals.                                                                          
MR. BARRON responded  that it is a hard question  to answer.  The                                                               
burden of proof  still needs to be on  the industry/companies for                                                               
all of that, even the PA  expansions.  The division has the staff                                                               
that can  look at the  information and make the  determination as                                                               
to whether  it is in  fact contributing based upon  the technical                                                               
presentation.   If the division  is inadequately staffed,  it can                                                               
gather  consultants.    The  AOGCC is  more  involved  with  well                                                               
metering, well  allocation processes,  and well inspection.   The                                                               
AOGCC  is also  involved  with any  federal,  Native, or  private                                                               
leases;  the  division  is  blind  to those  because  it  has  no                                                               
jurisdictional claim  over anything other  than state lands.   He                                                               
would say,  at this point, that  the division would not  need any                                                               
additional staff  to do this piece,  but might have to  reach out                                                               
periodically  for consultant  services, which  would be  budgeted                                                               
for.  It  is hard to say  right now, he continued,  given how the                                                               
PAs  are built  and  how many  of  them would  have  the kind  of                                                               
demonstration that is had at Sharks Tooth.                                                                                      
7:42:52 PM                                                                                                                    
REPRESENTATIVE SEATON  posited that  with the 20  percent GVR/GRE                                                               
there will be  a real impetus to forward every  possible well for                                                               
consideration and proof.  Another  consideration is shale oil, he                                                               
said.   He  asked whether  every shale  oil well  is going  to be                                                               
considered a new PA for the purposes of this determination.                                                                     
MR.  BARRON, regarding  every well  for the  GVR/GRE, noted  that                                                               
wells clearly  within the pattern  would be very difficult  for a                                                               
company to say is new oil.  Regarding  shale, he said it is a bit                                                               
of a conundrum that everyone is  trying to get their arms around.                                                               
The  division does  not currently  see overall  justification for                                                               
forming broad units  for shale because part of  the definition of                                                               
the reason  for having a  unit is  for the correlative  rights of                                                               
players.   A single well  can only really contribute  unto itself                                                               
and not  have any  interference or  contribution from  outside of                                                               
its drainage  area because of  the tightness of shales,  so every                                                               
one of those  would be maybe its  own unit.  He said  he does not                                                               
know that  he would call  it a PA.   Under this  definition every                                                               
shale well would arguably be new oil.                                                                                           
7:44:47 PM                                                                                                                    
REPRESENTATIVE  SEATON related  that  on  a recent  [legislative]                                                               
field trip,  ConocoPhillips had a  coiled tube drilling  unit and                                                               
was  using seismic  to  look at  fault blocks.    He posited  the                                                               
company will propose  that each fault block and well  - and there                                                               
are  going to  be eight  wells  - is  new  oil.   The company  is                                                               
drilling in  existing well bores,  but it  is going out  to other                                                               
areas beyond to accelerate the flow  and that is his concern when                                                               
talking  about within  existing participating  areas.   A company                                                               
would be  presuming every one  of those as being  an acceleration                                                               
of a  PA or accessing something  that was not being  produced and                                                               
he sees a lot of proposals  coming to the division on that basis.                                                               
He inquired whether, instead of  doing an enhanced oil project in                                                               
a well, a  company might do something else so  that 20 percent of                                                               
the revenue can be excluded.                                                                                                    
7:46:24 PM                                                                                                                    
MR. BARRON answered that, typically,  the company is using multi-                                                               
lateral  and  coiled  tube  drilling   to  look  at  its  current                                                               
reservoir  model and  the bubble  map and  trying do  augment its                                                               
current  enhanced oil  recovery (EOR)  projects.   Through infill                                                               
drilling, increasing  sweep efficiencies, modeling,  and pressure                                                               
results,  the company  is finding  areas that  are not  currently                                                               
being  swept.   It is  infield  work.   Each one  of those  would                                                               
clearly  not be  new oil.   If  the proposed  program was  put in                                                               
place,  the  company would  have  to  come  to the  division  and                                                               
originally  prove it  through reservoir  modeling.   He proffered                                                               
the division would also ask as  part of the stipulation that once                                                               
drilling  is  commenced  a  series of  very  extensive  tests  be                                                               
conducted  to show  to the  division that  it had  not previously                                                               
been  contributing.   For example,  if an  area was  drilled into                                                               
that was said  not to be contributing and the  pressure was found                                                               
depleted,   the   division  would   say   it   is  obviously   in                                                               
communication  and has  been contributing  in some  degree.   So,                                                               
there would probably have to  be a two-stage test associated with                                                               
reservoirs or  new oil within  existing PAs.   This is  the piece                                                               
that is the most difficult to get one's arms around.                                                                            
7:48:38 PM                                                                                                                    
MR. BARRON, continuing his answer, said  he does not know that he                                                               
would  support the  idea that  there would  be a  lot coming  in.                                                               
When looking  at a field  like Kuparuk  or Prudhoe that  has been                                                               
extensively delineated and developed, he  would not expect to see                                                               
many isolated  fault blocks that  are not in some  form currently                                                               
producing or  contributing to  production -  it would  be unique.                                                               
Areas that are on the fringe,  the fringe oil, the PA expansions,                                                               
he would  offer, would be quite  likely.  Originally some  of the                                                               
PAs  were  designed and  established  with  20  and 30  foot  pay                                                               
cutoffs, today  the limit would probably  be a 10 foot  or 5 foot                                                               
cutoff.   Some of these PAs  could easily be expanded  by lateral                                                               
drilling into thinner and thinner  zones.  Those would be clearly                                                               
new oil and  the company would have to show  the division what it                                                               
was going to do and how the company is going to do it.                                                                          
7:49:53 PM                                                                                                                    
CO-CHAIR  SADDLER  requested  clarification  about  whether  most                                                               
fault blocks are currently contributing production.                                                                             
MR. BARRON replied it is a  generalized statement.  Each field in                                                               
each area would have to be  looked at to make that determination,                                                               
which is why it  is so critical the burden of  proof be placed on                                                               
the  oil company  itself.   The areas  that Pioneer  and ENI  are                                                               
developing  are uniquely  different than  the areas  of Coleville                                                               
River,  or Kuparuk,  or Prudhoe,  or Badami.   Each  is a  unique                                                               
reservoir system and reservoir management  system, which is why a                                                               
blanket statement that  all fault blocks are  contributing is not                                                               
fair  or  reasonable.   When  answering  Representative  Seaton's                                                               
question, he  was trying to  discuss fields that  are extensively                                                               
developed,  like  Kuparuk  or  Prudhoe.    In  his  opinion,  the                                                               
likelihood  of  such  fields  having   new  areas  that  are  not                                                               
currently contributing,  with the exception of  the fringe, would                                                               
be on the lower side rather than the higher side.                                                                               
7:51:08 PM                                                                                                                    
CO-CHAIR  SADDLER understood  Mr. Barron  to be  saying that  the                                                               
third category  of GVR/GRE determination  is unlikely  to produce                                                               
much oil qualified as new oil under this current definition.                                                                    
MR. BARRON  responded that  would be a  reasonable way  to phrase                                                               
it, but  qualified his comment is  speculative and he put  it out                                                               
there just as  a speculative comment.  Much of  it will depend on                                                               
how aggressive  the companies are.   The conundrum needing  to be                                                               
solved here  is that this is  oil that is already  within the PA.                                                               
The first hurdle to get past  in the division's dialogue with the                                                               
industry is that this is  oil the company has already established                                                               
within the PA and should  already be in the company's development                                                               
scheme.   The company would have  to explain to the  division why                                                               
this oil  is not in  the development scheme  and where it  was in                                                               
the company's original planning;  for example, whether there were                                                               
geologic  or  engineering  factors   that  precluded  doing  this                                                               
7:52:24 PM                                                                                                                    
CO-CHAIR  SADDLER   surmised  a  company  making   an  investment                                                               
decision would not know whether the  oil would qualify as new oil                                                               
under the GVR/GRE definition when  running its economic modeling.                                                               
He inquired whether the GVR/GRE would be easy to factor.                                                                        
MR. BARRON  said the answer  is "probably  yes."  When  a company                                                               
looks at the  natural step out from  the center to the  edge of a                                                               
field, it  will have  a reasonable  idea of  what that  timing is                                                               
going to  look like.   The further  away from  infrastructure the                                                               
higher is the cost, which is why  the fringe areas tend to be the                                                               
last to be  developed.  It is his experience  that most companies                                                               
will run  a series  of economics  with tax  credits, or  with the                                                               
GVR/GRE, included and excluded and  will find that balance of how                                                               
and  when and  what the  difference between  the two  are -  this                                                               
series of economics  is run anyway.  The real  question is if the                                                               
company  runs  it and  it  is  not economic  and  yet  it is  not                                                               
contributing.  His  question to the company would then  be, If it                                                               
is not  contributing and not going  to be done, why  not collapse                                                               
the PA?   If  the end result  is collapsing the  PA to  where the                                                               
company is going  to have its producing boundaries,  then that is                                                               
a business call that the company should make.                                                                                   
7:54:20 PM                                                                                                                    
CO-CHAIR SADDLER asked whether there  is any benefit to a company                                                               
to collapse its PA.                                                                                                             
MR. BARRON answered "not necessarily."                                                                                          
CO-CHAIR SADDLER inquired whether  there are any costs associated                                                               
with that.                                                                                                                      
MR. BARRON replied the only cost  is making sure the interests of                                                               
all parties  are protected  in terms of  another player  and that                                                               
that player  is in  tune with  what is being  done and  come back                                                               
through  with  tract  allocation factors  and  rejig  financials.                                                               
Again, it is a burden on the industry.                                                                                          
7:54:55 PM                                                                                                                    
CO-CHAIR FEIGE invited the DNR deputy commissioner to comment.                                                                  
JOE  BALASH, Deputy  Commissioner,  Office  of the  Commissioner,                                                               
Department of Natural Resources (DNR),  added the awkward part of                                                               
this is  going to be when  companies come in the  door looking to                                                               
have part  of an existing PA  qualify for the GVR/GRE  because it                                                               
is not  contributing to  production.  Probably  one of  the first                                                               
questions the  department will ask  is, "Well,  why is it  in the                                                               
PA?"  The likelihood is that  the company thought it was going to                                                               
contribute at one point or another  and it turned out that it did                                                               
not because of  something unforeseen.  In looking  at the broader                                                               
boundaries of  a PA and  where the wells  are and which  ones are                                                               
producing and  contributing, the question  is, "At what  point is                                                               
there too much  of a cushion there?"  At  what point should those                                                               
PAs be  a little more actively  managed and trimmed back  so that                                                               
if  through an  expansion  of the  PA, there  is  a really  clear                                                               
delineation and  understanding of what  will be done,  what would                                                               
be contributing  to production.   He said the  previous iteration                                                               
of  this language  had something  that the  department was  quite                                                               
comfortable  with  in  terms  of  the  cascade  that  Mr.  Barron                                                               
referenced earlier - units, new  PAs, expansions of PAs, and then                                                               
this, which could be nicknamed a sub-PA.                                                                                        
7:56:54 PM                                                                                                                    
REPRESENTATIVE SEATON  read from  [slide 13] of  AOGA's [3/27/13]                                                               
presentation which  states:  "CSSB  21 attempts to expand  GRE to                                                               
80-90 [percent]  of the potential  development on North  Slope in                                                               
legacy  fields."   Thus, he  said, AOGA's  perception of  what is                                                               
going to  qualify for the GVR/GRE  is much broader than  what DNR                                                               
seems to  be talking  about and  seems to be  at odds  with DNR's                                                               
perception.   He also recalled  AOGA talking about  the companies                                                               
not knowing  if something qualifies  for the GVR/GRE  until after                                                               
the investment is made so they  will be unable to use the GVR/GRE                                                               
as a  factor for  determining investment.   He  further commented                                                               
that 80-90 percent  is quite a bit in  any accelerated production                                                               
out of the legacy fields.                                                                                                       
MR. BARRON responded  he did not see AOGA's  presentation, but in                                                               
looking at the slide he  clearly cannot identify where 80 percent                                                               
of   Kuparuk  would   satisfy  the   GVR/GRE  of   not  currently                                                               
contributing to production.  There  is a disconnect if 80 percent                                                               
is AOGA's  understanding, he  said.  The  entire intent  that DNR                                                               
would be  presenting is that if  a company thinks an  area is not                                                               
currently contributing, then prove it,  and that is the threshold                                                               
that the company would have to climb.                                                                                           
CO-CHAIR FEIGE pointed  out ConocoPhillips Alaska, Inc.  is not a                                                               
member of AOGA.                                                                                                                 
REPRESENTATIVE  SEATON  said  he  is just  talking  about  AOGA's                                                               
presentation on the legacy fields.                                                                                              
7:59:43 PM                                                                                                                    
CO-CHAIR FEIGE asked  whether it is technically  possible for the                                                               
state to give a company  assurance before it makes its investment                                                               
decision  that that  "shape  in the  ground"  will actually  fall                                                               
within this particular GVR/GRE.                                                                                                 
MR. BARRON  answered "not definitively"  and said that is  why as                                                               
part  of the  process,  probably through  regulations, DNR  would                                                               
stipulate a multi-step process:   1) identify the sub-PA area and                                                               
prove it  as best as possible,  and then 2) drilling  and testing                                                               
to  confirm the  company's reservoir  modeling or  justification.                                                               
The threshold the state would take is  if at step 2 it was proven                                                               
that it  was previously  contributing it  would be  excluded from                                                               
the GVR/GRE.  Thus, a  company would not know definitively before                                                               
it  makes  the investment,  but  the  company would  probably  be                                                               
running dual economics to determine whether it is economic.                                                                     
CO-CHAIR FEIGE,  assuming that that  "shape in the  ground" falls                                                               
in a GVR/GRE,  inquired whether the oil coming out  of the ground                                                               
could be accurately  measured in an economical  and practical way                                                               
to sufficiently satisfy DOR.                                                                                                    
MR. BARRON  confirmed it  would be  to the  standards of  DOR for                                                               
that  department's  purposes,  but  in  conjunction  with  AOGCC.                                                               
Through  interaction between  AOGCC, DNR,  and DOR,  programs and                                                               
protocols could be established that  would satisfy all parties in                                                               
terms of accurate measurement of those areas.                                                                                   
8:02:25 PM                                                                                                                    
REPRESENTATIVE TARR, noting the  fiscal note was prepared quickly                                                               
after CSSB 21(FIN)  am(efd fld) passed the  Senate, asked whether                                                               
the  bill's  estimated  fiscal  impact  is  accurate,  given  the                                                               
uncertainty and evaluation that has  taken place since that time.                                                               
For example, the fiscal impact  for fiscal year 2015 is estimated                                                               
at $25-$175 million.                                                                                                            
MR.  BALASH  replied that  today  Oooguruk  and Nikaitchuq  would                                                               
qualify for  this category  within the  GVR/GRE, and  hopefully a                                                               
couple  more  units would  as  time  goes  on.   He  offered  his                                                               
understanding  that   DOR  took  a  conservative   approach  when                                                               
estimating  the potential  applicability of  the third  category.                                                               
He posited  DNR would push that  estimate to the lower  end if it                                                               
was making the  estimate, but said DOR wants to  provide a broad,                                                               
but reasonable, estimate for the  legislature as it considers the                                                               
impact of the provision.                                                                                                        
8:04:11 PM                                                                                                                    
REPRESENTATIVE  SEATON   requested  Mr.  Balash  to   provide  an                                                               
estimate of  the fiscal  impact should 80-90  percent of  new oil                                                               
produced from  the legacy  fields qualify  for that  provision of                                                               
the GVR/GRE,  as anticipated by  the industry.   Legislators need                                                               
to know what it would be  using industry's numbers as well as the                                                               
state's conservative numbers, he said.                                                                                          
MR. BALASH  deferred to  DOR to  put that together.   He  said he                                                               
thinks  the 80-90  percent figure  is  just in  reference to  the                                                               
percent of oil  that is out there in the  fields, not necessarily                                                               
inferring  that  80-90 percent  of  the  production is  going  to                                                               
qualify for the GVR/GRE.                                                                                                        
CO-CHAIR FEIGE reread the AOGA  statement cited by Representative                                                               
Seaton, emphasizing 80-90 percent of "potential" development.                                                                   
8:05:59 PM                                                                                                                    
REPRESENTATIVE  TARR  inquired  how   DNR  is  incorporating  the                                                               
natural decline curve  of 10-12 percent into  the overall picture                                                               
of decline.  For example, ConocoPhillips  has said it can get the                                                               
decline curve to 3 percent.                                                                                                     
MR. BALASH  responded a  substantial amount  of work  on declines                                                               
and decline curves has been done by  the Division of Oil & Gas in                                                               
conjunction  with DOR  for purposes  of  revising the  production                                                               
forecast methodology.  He offered  that, rather than slog through                                                               
another  presentation,  DNR   prepare  materials  for  forwarding                                                               
through the  co-chairs' offices.   Because  natural decline  is a                                                               
term of art,  he urged that thought be given  to what the decline                                                               
would be if no additional work  was done.  A tremendous amount of                                                               
work  continues to  be  done in  legacy fields  -  new wells  are                                                               
continually drilled to  bring on additional rate  or reserves and                                                               
DNR thinks  much more  could and  should be done.   In  the whole                                                               
scheme of  things, what is trying  to be done is  get the state's                                                               
base tax system  to a point where those things  will happen, that                                                               
a GVR/GRE is  not needed for doing the normal  course of business                                                               
and activity  in those  legacy fields.   Fundamentally,  the base                                                               
system needs to drive the  investment behavior, not the bells and                                                               
whistles.   The  bells and  whistles -  the GVR/GRE  - is  really                                                               
something that is  intended to help bring on new  reserves in new                                                               
units in outlying  areas or reserves that are not  currently in a                                                               
participating  area (PA).   Since  PAs  should be  booked, it  is                                                               
known  that  Alaska  has approximately  3.3  billion  barrels  in                                                               
proven  reserves and  it is  estimated that  in just  the onshore                                                               
central  North Slope  area there  is  over 3  billion barrels  in                                                               
undiscovered  economically  recoverable  oil at  today's  prices.                                                               
Finding  those  accumulations  will  start  to  add  to  Alaska's                                                               
reserve base because one of the  most important things in the oil                                                               
business is  the bottom  line number  of how  many reserves.   If                                                               
that number  is going  down it  means going  out of  business and                                                               
Alaska's number  is going down.   The  GVR/GRE is a  mechanism to                                                               
encourage companies  to put more  reserves on the books,  more of                                                               
Alaskans' reserves, on Alaska's books.                                                                                          
8:10:44 PM                                                                                                                    
CO-CHAIR FEIGE  observed the third  category of GVR/GRE  uses the                                                               
term "accurately measured  and metered".  He asked  whether it is                                                               
possible to  satisfy DOR's  requirements for  accurately metering                                                               
that oil to determine how much is new oil.                                                                                      
COMMISSIONER  BUTCHER  replied  the  short  answer  is  yes,  DOR                                                               
believes  it would  be  able to  do  that.   He  deferred to  Mr.                                                               
Pawlowski for providing more detail in this regard.                                                                             
8:11:52 PM                                                                                                                    
REPRESENTATIVE  SEATON  inquired  whether   oil  coming  from  an                                                               
existing  well bore  that  is tapping  new  areas through  coiled                                                               
tubing can  be accurately  metered to determine  how much  of the                                                               
production is new oil.                                                                                                          
MICHAEL PAWLOWSKI, Oil & Gas  Development Project Manager, Office                                                               
of  the Commissioner,  Department of  Revenue (DOR),  answered it                                                               
certainly  poses a  challenge and  will require  collaboration by                                                               
the  three   departments  to  develop  the   standards  for  that                                                               
particular measurement.   The other  body's intent  in developing                                                               
the provision was to expand  the realm of possible application of                                                               
the  GVR/GRE  to  target  as much  potential  new  production  as                                                               
possible.  It is certainly difficult  and there is a higher level                                                               
of  threshold  that  needs  to   be  met  for  the  commissioner.                                                               
Individual  wells could  pose a  problem,  while aggregating  the                                                               
wells  into  a multi-well  development  is  much easier.    Those                                                               
things  would be  defined by  the departmental  collaboration and                                                               
regulatory process.                                                                                                             
8:13:30 PM                                                                                                                    
CO-CHAIR  SADDLER   asked  whether  the   determinations  through                                                               
collaboration  of the  departments would  be on  a de  novo basis                                                               
every  time there  was an  application  or would  there be,  over                                                               
time, the development of a precedent.                                                                                           
MR. PAWLOWSKI  replied the intent  of the departments  in working                                                               
with  the other  body in  developing this  language was  that the                                                               
maximum of clarity  be put before industry so  that the processes                                                               
and procedures are  known at the time.   The intent is  to put as                                                               
much  clarity   up  front  as   possible,  while   retaining  the                                                               
flexibility as described  by DNR to make  those determinations in                                                               
the state's interests.                                                                                                          
CO-CHAIR  SADDLER, while  understanding  that every  circumstance                                                               
cannot be  foreseen, inquired whether that  standard would evolve                                                               
as applied and the back and forth happened.                                                                                     
MR. PAWLOWSKI  responded DOR's understanding is  that development                                                               
of the  metering and  measuring, the basic  counting, would  be a                                                               
standard that  would be  reached and  be fairly  fixed.   He said                                                               
DOR's teams  are concerned with  how many barrels are  coming out                                                               
of a particular  development and once the  standard is developed,                                                               
it is the standard.                                                                                                             
CO-CHAIR SADDLER asked  whether this system is used  in other tax                                                               
regimes to identify new oil.                                                                                                    
MR.  PAWLOWSKI answered  he does  not know  and suggested  asking                                                               
DNR.   It is known that  other jurisdictions look at  things on a                                                               
well-by-well  basis, he  said.   In Alaska's  system, royalty  is                                                               
allocated back  to the wells on  a lease basis.   To provide that                                                               
type  of  clarity  will require  development  of  an  appropriate                                                               
standard through a collaborative process with industry.                                                                         
8:15:52 PM                                                                                                                    
REPRESENTATIVE   TARR  observed   this  provision   would  become                                                               
effective  1/1/14 and  posited that,  due to  the elimination  of                                                               
progressivity,  this would  be done  on an  annual basis,  so the                                                               
state  would not  know  if  it had  missed  the  ballpark in  its                                                               
estimates for the GVR/GRE.                                                                                                      
MR. PAWLOWSKI  clarified the elimination of  progressivity is not                                                               
affecting the  monthly payment  of tax or  the annual  true-up of                                                               
tax at the end of the  year.  The repeal of progressivity affects                                                               
Alaska's tax rate such that  under the proposed bill Alaska's tax                                                               
rate would  remain at the fixed  rate of 35 percent,  while under                                                               
the current regime of ACES it varies wildly from month to month.                                                                
REPRESENTATIVE  TARR inquired  when  the state  will  be able  to                                                               
audit how the GVR/GRE is applied.                                                                                               
MR. PAWLOWSKI  replied it would  be in  the normal course  of the                                                               
auditing process.                                                                                                               
8:17:06 PM                                                                                                                    
REPRESENTATIVE  TARR  understood   that  currently  the  auditing                                                               
process is still looking at 2007.                                                                                               
MR. PAWLOWSKI  confirmed DOR is still  looking at 2007.   Part of                                                               
that continuation is  that changes in the system  have an effect.                                                               
He pointed out  changes have also been made at  the federal level                                                               
that  have re-opened  some  portions of  some  of those  returns.                                                               
Returns get  amended as retroactive changes  apply, he explained.                                                               
In addition, the  state has changed regulations  in a retroactive                                                               
manner, interest penalties  being an example.  Going  back to the                                                               
question of audits,  he allowed it will certainly  take time, but                                                               
should  accelerate   a  little  once  DOR's   [new]  tax  revenue                                                               
management  system  is  implemented,  and the  process  of  going                                                               
through the production profits tax (PPT) to ACES is completed.                                                                  
REPRESENTATIVE TARR  requested DOR to provide  the committee with                                                               
a walk through on the timing of that.                                                                                           
8:19:25 PM                                                                                                                    
The committee took an at-ease from 8:19 p.m. to 8:26 p.m.                                                                       
8:26:23 PM                                                                                                                    
REPRESENTATIVE  SEATON recounted  how  [last week]  he asked  the                                                               
consultants whether a  system could be designed where  there is a                                                               
trust account  under which tax  is calculated  as it is  and also                                                               
calculated  in the  new  amount  and then  there  is a  revolving                                                               
amount that would  be held over and if the  producer did not meet                                                               
benchmarks of production within so  many years that portion would                                                               
be lost and  revert to the state.  The  consultants answered that                                                               
they could not figure  out a way to do that  without having a lot                                                               
of  interferences.   Earlier tonight  with Commissioner  Sullivan                                                               
and Commissioner Butcher  he put forth the idea  that if Alaska's                                                               
tax regime is changed there is  a way for ensuring that the state                                                               
gets the increased  production it is looking for.   Now, he said,                                                               
he is  wondering whether the consultants  can look at the  $5 per                                                               
barrel credit and  suggest some benchmarks such that  if in three                                                               
years, given it is the  legacy producers being talked about here,                                                               
an  individual  company does  not  cut  its  decline rate  by  50                                                               
percent  the credit  would be  reduced to  $2, but  if a  company                                                               
meets or  exceeds that  50 percent reduction  in the  decline the                                                               
credit would rise to $7.  This  way there would actually be a tie                                                               
to  increasing  production.   He  requested  the  consultants  to                                                               
discuss having the credit on this type of basis.                                                                                
8:29:43 PM                                                                                                                    
REPRESENTATIVE  SEATON,  at  the  request  of  Co-Chair  Saddler,                                                               
restated his question.  The bill  includes a $5 per barrel credit                                                               
for every  barrel that is  produced, he  said.  The  intention in                                                               
this tax regime  is to incentivize increased  production, yet the                                                               
$5 credit  will still be  given even if production  is declining.                                                               
He asked whether  benchmarks could be built into  the system such                                                               
that if the  production benchmarks are exceeded  the credit would                                                               
be more than  $5 per barrel and if a  reasonable benchmark is not                                                               
met  within three  years, given  this would  apply to  the legacy                                                               
fields, then the credit would be reduced by $3 per barrel.                                                                      
8:30:55 PM                                                                                                                    
ROGER  MARKS,  Economist,  Logsdon &  Associates,  consultant  to                                                               
Legislative  Budget  and  Audit  Committee,  responded  by  first                                                               
noting that  the reason everyone  is here is the  perception that                                                               
Alaska's  tax system  is not  competitive and,  because of  that,                                                               
people  are  dissatisfied  with  the  amount  of  production  and                                                               
investment.   The  goal is  to make  the tax  system competitive.                                                               
Producers are  not investing  in Alaska  simply because  they can                                                               
make more money  putting money in other places where  they do not                                                               
have  to pay  as much  tax.   Producers will  perceive a  risk if                                                               
benchmarks are  put out,  he advised.   The future  is uncertain,                                                               
there are many  things over which producers have  no control, and                                                               
there is the  risk that if they  invest and then do  not make the                                                               
benchmarks then  the oil produced  is penalized by high  tax just                                                               
like it  is today.   Uncertainties include external  events, such                                                               
as  a drop  in oil  prices or  the situation  like ConocoPhillips                                                               
where  it took  more than  five years  to get  a permit  from the                                                               
Environmental Protection Agency (EPA) to  put a bridge across the                                                               
Coleville  River.   There are  situations  where investments  are                                                               
very lumpy - a company could go  along for a while not doing much                                                               
and then  suddenly a  big investment  raises its  production, but                                                               
then it has the same decline but  from a higher rate.  At Prudhoe                                                               
Bay there  are three major  working interest owners;  their other                                                               
interests  in  different  fields  vary  and  investment  for  one                                                               
producer may  help that producer's  overall decline rate  for one                                                               
field but not another.  Working  interest owners in a given field                                                               
might have  vastly different  interests in  where they  put their                                                               
investments.   For these  reasons, when the  question was  put to                                                               
him last week, he could not see  a meaningful way to come up with                                                               
any benchmarks that would not  scare producers into doing no more                                                               
investing than what they are  now just because of the uncertainty                                                               
that they might be left with what  they have now.  He deferred to                                                               
the other consultants for their opinions.                                                                                       
8:34:07 PM                                                                                                                    
REPRESENTATIVE SEATON  said he wants to  make sure it is  not his                                                               
question about a trust account that  is being talked about by Mr.                                                               
Marks.   He  said  he has  set  that question  aside  and is  now                                                               
talking about  having benchmarks  on that  $5 per  barrel credit.                                                               
He chose  three years because that  is the time period  stated by                                                               
producers for the legacy fields.                                                                                                
MR. MARKS  replied he sees  coming up  with a benchmark  for that                                                               
sort of  mechanism no less  challenging.  He suggested  the other                                                               
two consultants,  Mr. Mayer and  Mr. Pulliam, be asked  for their                                                               
perspectives on the question.                                                                                                   
8:35:48 PM                                                                                                                    
JANAK MAYER,  Manager, Upstream and  Gas, PFC  Energy, consultant                                                               
to the  legislature, stated  there is a  carrot aspect  and stick                                                               
aspect to what  is being posited by Representative Seaton  - if a                                                               
producer  meets its  benchmark  it gets  an  improved dollar  per                                                               
barrel credit and  if it fails the dollar per  credit is reduced.                                                               
He said he  is less concerned about the carrot  aspect than he is                                                               
about  the stick  aspect.    How a  producer  sees  it will  vary                                                               
depending upon cost  assumptions and whether it is  one year that                                                               
is being looked  at or across the project lifecycle.   The bill's                                                               
current  structure of  a  35 percent  rate and  a  $5 per  barrel                                                               
credit is  a tax  increase.   The 35  percent rate  and a  $2 per                                                               
barrel credit would be a  fairly substantial tax increase at lots                                                               
of prices.   Therefore, he advised,  the idea that if  a producer                                                               
fails to meet a benchmark and  the state's response to that is to                                                               
raise the producer's taxes even  further at most price levels, is                                                               
probably not  going to be  a strong  move to build  confidence in                                                               
future investment in the North Slope.                                                                                           
8:37:21 PM                                                                                                                    
BARRY PULLIAM, Economist & Managing  Director, Econ One Research,                                                               
Inc., consultant to the administration,  concurred with Mr. Marks                                                               
and Mr. Mayer.  Mechanically, such  a thing could be designed, he                                                               
said, but the challenge would be  to get those carrots and sticks                                                               
at the right place.  Designing  a good, competitive system at the                                                               
base level  is what is being  sought; the bells and  whistles are                                                               
not what should  be had as the  main feature of the  system.  The                                                               
bill's current rate and per  barrel credit operate in conjunction                                                               
with  each other,  both  to  provide a  credit  that  is tied  to                                                               
barrels and  as an important way  to get the right  tax rate over                                                               
the price range.   Should the committee go down  the road that is                                                               
being posited, he  would urge there be nothing  punitive, such as                                                               
lowering the  credit to  $2 if  a benchmark  is not  met, because                                                               
going  punitive does  not send  a  good signal  at all.   The  35                                                               
percent rate and  $5 credit is designed to get  Alaska to a point                                                               
that is  competitive and that  should attract.  If  the committee                                                               
is going  to do  something, although  he does  not know  he would                                                               
encourage  that, he  would suggest  looking at  the carrot  side,                                                               
such as  offering a higher incentive  to get to a  certain level;                                                               
for example,  raise the $5 credit  to $7, provided the  state can                                                               
do that fiscally.                                                                                                               
8:40:05 PM                                                                                                                    
REPRESENTATIVE  JOHNSON asked  whether  a  company would,  should                                                               
such  a system  be  adopted,  do its  modeling  using the  stick,                                                               
possibly taking away the attractiveness of the project.                                                                         
MR. PULLIAM responded  that that would become  their stress test,                                                               
the project would have to meet the worst case scenario.                                                                         
8:40:42 PM                                                                                                                    
REPRESENTATIVE TUCK  understood Representative  Seaton's proposal                                                               
to be that  the credit is $5  per barrel and if  the benchmark is                                                               
exceeded the  credit would be  more and  if the benchmark  is not                                                               
met then the credit would be less.   He posited that this is less                                                               
of a carrot rather than being a stick.                                                                                          
MR. MAYER answered  the problem is that concurrent  with this the                                                               
base rate  is increased  from 25  percent to  35 percent,  and 35                                                               
percent with a  $2 credit is a substantial tax  increase at quite                                                               
a wide  range of prices compared  to the current tax  under ACES.                                                               
So, what  is essentially being said  is that if a  producer fails                                                               
to meet  the state's performance  benchmark the  producer's taxes                                                               
will be raised even further above where they are today.                                                                         
8:41:34 PM                                                                                                                    
CO-CHAIR  FEIGE   understood  the  problem  with   a  performance                                                               
benchmark in  a field  with shared ownership  is that  a producer                                                               
would have to depend on its  partners to come through to make all                                                               
that happen.                                                                                                                    
MR.  MARKS replied  correct.   Each company  will have  different                                                               
working  interests   in  each  field  and   will  therefore  have                                                               
different  incentives  to  put investment  in  different  fields,                                                               
which would create a misalignment within the units.                                                                             
MR.  PULLIAM added  that, while  not the  mechanism described  by                                                               
Representative Seaton,  there is a  carrot to add  barrels, which                                                               
comes in the  form of the GVR/GRE.  The  GVR/GRE is an additional                                                               
benefit over  and above the [$5  credit].  If producers  can find                                                               
new barrels  to add, they will  have the benefit of  the GVR/GRE,                                                               
which is, basically, an additional credit.                                                                                      
8:42:56 PM                                                                                                                    
REPRESENTATIVE  JOHNSON, tying  the  aforementioned question  and                                                               
the GVR/GRE together, noted producers  will do their base case on                                                               
"the stick" and will not know  about the GVR/GRE until they drill                                                               
the well, jump  through hoops, and prove it.   He therefore asked                                                               
what value is it when it comes to project economics.                                                                            
MR. PULLIAM  responded it is known  with respect to the  new unit                                                               
and new  participating area (PA).   For the others,  he concurred                                                               
there  is more  of a  hurdle.   As described  by Mr.  Barron, the                                                               
intent would be  to have to have those barrels  proved up and the                                                               
ultimate  proof would  involve at  least  making some  investment                                                               
because the  producer would have  to drill and do  some appraisal                                                               
to satisfy DNR  that this does indeed meet the  requirements.  He                                                               
said his  sense is that  the majority  of the investment  for the                                                               
full development would probably then take place after that.                                                                     
8:44:26 PM                                                                                                                    
REPRESENTATIVE  JOHNSON  posed a  scenario  of  a producer  doing                                                               
project economics  for oil that may  or may not be  there, and if                                                               
the project qualifies it is a good  project.  But, if it does not                                                               
qualify it is not a good project, so why drill that first hole.                                                                 
MR.  MAYER  explained that  that  same  circumstance of  decision                                                               
making uncertainty applies to almost  any risk-taking activity in                                                               
the  upstream sector.   An  initial exploration  well is  drilled                                                               
with a  strong chance of drilling  a dry hole, an  appraisal well                                                               
is drilled to  delineate a field with the  possibility the result                                                               
will not  be as big  as was thought.   He allowed there  could be                                                               
further work  to do in defining  this aspect of the  GVR/GRE, and                                                               
trying to  create better certainty  as to how exactly  it applies                                                               
and what that  process would be.  As described  by DNR, there may                                                               
be some  investment required in terms  of drilling a well  in the                                                               
same way  as when  drilling a  well to  delineate and  appraise a                                                               
known  prospect;  that is  not  the  same  as an  ultimate  final                                                               
investment decision on an entire development of that area.                                                                      
8:45:45 PM                                                                                                                    
REPRESENTATIVE JOHNSON  said attracting  new development  is what                                                               
is being looked at and he is  one of those people who believe the                                                               
next Prudhoe  Bay is Prudhoe Bay  and that drilling must  be done                                                               
in the  legacy fields.  The  GVR/GRE may or may  not make certain                                                               
areas profitable  within an existing PA,  and while clarification                                                               
of the GVR/GRE  is needed, he is  wondering the value of  it.  He                                                               
agreed with  Representative Seaton  that putting  new oil  in the                                                               
pipeline should  be able to be  done within three years  and that                                                               
that oil  will come from the  legacy fields.  He  wants Alaska to                                                               
be real attractive, not in the  middle of attractive.  He said he                                                               
thinks any  oil from  a new  hole in  the ground  should qualify,                                                               
although he recognizes he is probably  alone in that thought.  He                                                               
said he would like to work on  cleaning up the GVR/GRE so that it                                                               
is  a  more attractive  investment  matrix  on paper  before  the                                                               
producer has to go through  the investment process.  He requested                                                               
the opinion of Mr. Marks in this regard.                                                                                        
MR. MARKS  replied it is what  the committee wants.   He said his                                                               
understanding  of the  existing  North Slope  reservoirs is  that                                                               
there  are hundreds  of isolated  fault  blocks or  stratigraphic                                                               
traps  that  have  weak  communication   with  the  rest  of  the                                                               
reservoir that  really need  to be  drilled directly  to produce.                                                               
His impression  from Mr. Barron's  comments this evening  is that                                                               
very few of  those would qualify for the GVR/GRE  or there is the                                                               
possibility  that  very  few  would   qualify,  as  the  bill  is                                                               
currently written.  Doing reconnaissance  work means drilling the                                                               
well, which  is the main  cost.  If  indeed these targets  may be                                                               
contributing to existing  production, but not in  a material way,                                                               
maybe it  would be possible  to re-craft the language  to address                                                               
those kinds of targets, if that is what the committee wants.                                                                    
8:49:02 PM                                                                                                                    
REPRESENTATIVE  JOHNSON  expressed  his  concern  that  the  weak                                                               
connection  mentioned by  Mr. Marks  would disqualify  that well.                                                               
He  further argued  that while  weak  pressure means  the oil  is                                                               
going somewhere,  it may not be  going to the well  that is being                                                               
drilled.   He would  like to  explore [re-crafting  the language]                                                               
because increased production needs to  happen in three years, not                                                               
seven, and will need to come  from the legacy fields which may be                                                               
excluded under the current language.   He said he will be looking                                                               
to the consultants and the co-chairs for help in this regard.                                                                   
8:50:20 PM                                                                                                                    
CO-CHAIR  SADDLER  said  he  would be  open  to  suggestions  for                                                               
clarifying the GVR/GRE  if it is determined to be  the best tool.                                                               
He, like industry, would feel  more comfortable with more clarity                                                               
as to  how the  language before the  committee would  actually be                                                               
applied.   He inquired whether the  GVR/GRE is the best  tool, or                                                               
should  there be  something  else,  if the  goal  is  to have  an                                                               
element of Alaska's tax encourage development of new oil.                                                                       
MR. MARKS  responded the  whole point is  to be  competitive with                                                               
other  jurisdictions  that  have  the  same  general  risk/reward                                                               
balance.   The  first step  is  to figure  out the  jurisdictions                                                               
Alaska is  competing with, what  the government take is  in those                                                               
jurisdictions, and  where does Alaska  want to land as  a target.                                                               
A number of tools  can then be used to get to  that target.  When                                                               
he  was looking  at  the  competition while  the  bill was  being                                                               
developed, his  judgment was that  a government take of  about 62                                                               
percent across  a broad spectrum  of prices would  be competitive                                                               
with Alaska's  peer group.  The  consensus was to have  as flat a                                                               
rate  as  possible  through  a spectrum  of  prices  because  the                                                               
international landscape is  fairly flat.  The question  is how to                                                               
achieve that  take.   The main thing  is the target  of 62  or 64                                                               
percent,  regardless of  the method  used for  getting there.   A                                                               
challenge with Alaska's tax system is  that it has high tax rates                                                               
at low  prices due  to the  royalty, which  is regressive.   This                                                               
needs to be  offset, especially when costs are high.   The $5 per                                                               
barrel credit and the  GVR/GRE are used to get as  flat a rate as                                                               
possible at low prices and across the spectrum.                                                                                 
8:54:06 PM                                                                                                                    
MR.  MARKS,  continuing  his  answer,  noted  that  targeted  tax                                                               
credits are a tool not being  used [in this bill], but that could                                                               
be.  Targeted tax credits  have advantages and disadvantages, and                                                               
the  disadvantages were  discussed today  by the  administration.                                                               
At low prices credits provide a lot  of cash, and he has no doubt                                                               
[that under ACES] they  have incentivized development, especially                                                               
at the  new small fields.   However,  there is some  concern that                                                               
they have  been used  for maintenance  items rather  than getting                                                               
new oil  and that is why  tax credits could be  used for targeted                                                               
things  that   are  conducive  to   producing  oil   rather  than                                                               
maintenance; for example, air fields  and dining halls are needed                                                               
to produce oil  but they are not directly  involved in producing.                                                               
An  advantage  of credits  is  that  they provide  an  incentive,                                                               
especially since they  are received on the front  end and provide                                                               
a  net  present value  boost  as  well;  a company  can  actually                                                               
decrease  its tax  rate by  investing.   If concerned  about cash                                                               
flow or cash flow at low  prices, something could be set up where                                                               
credits cannot exceed  "X percent" of gross value  or "X percent"                                                               
of production tax value.                                                                                                        
MR.  MARKS  said  another  advantage  of  a  credit  is  that  it                                                               
recognizes  a   company's  actual   economics  and   provides  an                                                               
automatic offsetting  mechanism, whereas  the GVR/GRE and  $5 per                                                               
barrel credit are  one-size-fits-all.  There is  a broad spectrum                                                               
of costs  on the  North Slope  - one development  might be  $10 a                                                               
barrel in  capital cost and another  might be upwards of  $30.  A                                                               
$5 per  barrel credit means  much different  for a $10  cost than                                                               
for a  $30 cost, and anything  based on gross does  not recognize                                                               
actual costs  at all.   Because a  credit recognizes  a company's                                                               
actual economics, a development  having higher costs will receive                                                               
a higher  credit and,  automatically, the  higher costs  with the                                                               
higher credit will bring the company's  taxes down more at a time                                                               
when more help  is needed.  With lower costs  and a lower credit,                                                               
a company's tax will  be brought down less at a  time when not as                                                               
much  help is  needed.   Thus, credits  are a  tool other  than a                                                               
GVR/GRE.  The  main thing is to  figure out what take  to get and                                                               
get  there; regardless  of which  mechanism is  used for  getting                                                               
there, it is the same amount of money.                                                                                          
8:57:40 PM                                                                                                                    
REPRESENTATIVE TARR  noted a  government take  of 62  percent has                                                               
been suggested by the other two consultants as well Mr. Marks.                                                                  
MR. MARKS  referred to  his [3/4/13]  presentation to  the Senate                                                               
Finance Committee to  provide an answer.  He  explained Alaska is                                                               
not competing  with every  other jurisdiction  in the  world, and                                                               
slides  5-7 are  his assessment  of the  jurisdictions comprising                                                               
Alaska's  peer  group because  they  have  a risk/reward  balance                                                               
similar  to Alaska.     He  said it  has  been demonstrated  that                                                               
producers  will pay  more where  the reward  is greater  and less                                                               
where the  reward is less.   The peer  group must be  ascribed to                                                               
figure out what the competition is  and the group he came up with                                                               
is similar to the one that Mr.  Mayer came up with.  In comparing                                                               
Alaska to its  peer group at per barrel prices  of $110, $70, and                                                               
$160,  his judgment  is  that  [a government  take]  of about  62                                                               
percent  across all  prices  would be  competitive.   At  current                                                               
prices of  $110, the United  Kingdom and  North Dakota are  at 62                                                               
percent.  Other people could look  at these numbers and land at a                                                               
different target, he  allowed, but this is his  judgment for what                                                               
would be a reasonable target.                                                                                                   
8:59:55 PM                                                                                                                    
REPRESENTATIVE TARR surmised a big  problem in the development of                                                               
ACES was that modeling  was not done above the price  of $90.  In                                                               
regard  to a  government take  of 62  percent, she  asked whether                                                               
adjusting  progressivity   at  higher  prices,  along   with  the                                                               
credits, could be a system that would work as a package.                                                                        
MR. MARKS answered  there are pros and cons to  progressivity.  A                                                               
pro is that progressivity means low  take at low prices, not just                                                               
getting  high take  at high  prices.   So,  a progressive  system                                                               
protects the producer's  interest at low prices  and protects the                                                               
state's interest at  high prices.  The challenge is  that it must                                                               
be balanced  and not too aggressive.   Because of the  royalty it                                                               
is very  hard to  design something  that protects  the producer's                                                               
interest  at  low prices  in  a  balanced  way that  gets  upside                                                               
potential  with progressivity.   In  looking at  the competition,                                                               
only one  or two  other jurisdictions have  progressivity.   At a                                                               
price of  $200, the state would  be making lots of  money whether                                                               
under progressivity  or the proposed Senate  bill.  Progressivity                                                               
creates   the  impression   that   there  may   be  some   fiscal                                                               
instability.   In  many countries  in the  world where  investors                                                               
perceive  fiscal   instability,  they  will  actually   prefer  a                                                               
progressive system  so they know  what the  deal is if  prices go                                                               
up.  "One could picture  investors looking at their economics and                                                               
looking at what  happens in the high price world  and they say in                                                               
Alaska if  it gets  to $200 a  barrel we do  not think  this will                                                               
hold  so we  do not  know  what the  situation is,  which is  not                                                               
good."   Progressivity only works if  it is balanced on  both the                                                               
high and  low ends.   It would  be difficult to  design something                                                               
that  is truly  balanced  on  the low  side  given  how much  the                                                               
royalty takes as a percentage of net at low prices.                                                                             
9:03:27 PM                                                                                                                    
REPRESENTATIVE TARR  posited that on  the low price end  it could                                                               
be controlled by  not having the progressive  feature apply until                                                               
a certain price.                                                                                                                
MR. MARKS drew  attention to slide 13 of  his 3/4/13 presentation                                                               
to the  Senate Finance Committee  and explained that  the royalty                                                               
is based on gross value.   Because royalty is based on the gross,                                                               
it is the  same whether the field's  costs are high or  low.  For                                                               
example, at a price of $70,  the royalty itself takes 100 percent                                                               
of the net value of the oil.   This challenge at low price is why                                                               
designing a balanced progressive system may be difficult.                                                                       
9:04:57 PM                                                                                                                    
CO-CHAIR  SADDLER, returning  to  slide 5  of the  aforementioned                                                               
presentation, inquired  how static  the government takes  are for                                                               
Alaska's peer group.                                                                                                            
MR. MARKS replied  most of the jurisdictions are  tax and royalty                                                               
systems;  so, because  of royalty,  they are  slightly regressive                                                               
like  Alaska is.   They  have higher  takes at  lower prices  and                                                               
lower takes at higher prices.                                                                                                   
9:05:55 PM                                                                                                                    
CO-CHAIR SADDLER  qualified that his  question is not  just about                                                               
royalty  and  re-stated  the  question   by  asking  whether,  in                                                               
general,  the trend  globally has  been toward  higher government                                                               
takes or has oscillated over the decades.                                                                                       
MR. MARKS responded that, generally,  some jurisdictions will try                                                               
raising rates when prices spike.   For example, Alberta, which is                                                               
mostly a  royalty jurisdiction, raised its  royalty significantly                                                               
in 2007.  As opposed to  Alaska where producers cannot move their                                                               
investments very much,  many of the producers  in Alberta reacted                                                               
by  putting their  rigs on  their  pickup trucks  and driving  to                                                               
British  Columbia and  Saskatchewan, so  production plummeted  in                                                               
Alberta.   In 2010 Alberta  dropped the  royalty and it  all came                                                               
back.   In  general,  when prices  go higher  there  is a  slight                                                               
movement for  higher takes,  but the  take seen  now for  many of                                                               
these jurisdictions is what was seen when oil was $60 a barrel.                                                                 
9:07:30 PM                                                                                                                    
MR.  MAYER added  it  varies enormously  by  the timeframe  being                                                               
considered  and the  sorts of  countries being  considered.   The                                                               
1960s had  a period of  substantial increases in  government take                                                               
over a  wide range of countries  when a number of  recently post-                                                               
colonial countries  found themselves with low  levels of royalty.                                                               
A number of particularly big  national resource holders looked to                                                               
production sharing contracts  that would give them  a much bigger                                                               
share  of  the  upside,  rather than  having  regressive  royalty                                                               
systems.   A second  price shock  was the Arab  oil embargo.   If                                                               
this conversation were  taking place five years ago,  a number of                                                               
regimes could  have been identified  that in the  previous decade                                                               
had raised government take, particularly  as prices were starting                                                               
to rise.   Probably the biggest thing in the  last five years, as                                                               
a strong  counter to  that trend,  is that  high oil  prices have                                                               
brought  renewed  production  from  a range  of  sources  in  the                                                               
Organisation  for Economic  Co-operation  and Development  (OECD)                                                               
that all have relatively speaking  low levels of government take.                                                               
The logical competition for Alaska is  no longer as it might have                                                               
been  five to  ten years  ago -  major producers  with production                                                               
sharing contracts.  It is now  the Lower 48 and other places with                                                               
substantially lower levels of government  take, and that has been                                                               
a very strong moderating influence in the opposite direction.                                                                   
9:09:14 PM                                                                                                                    
CO-CHAIR SADDLER  recalled DNR's  earlier suggestion that  it was                                                               
appropriate for  operators on the  North Slope to  keep shuffling                                                               
through their  PAs and to  discard areas that were  not producing                                                               
to  keep  them  narrowly  defined.     He  asked  whether  it  is                                                               
reasonable  to   require  old  companies  to   go  through  their                                                               
participating agreements  and filter out  the areas they  are not                                                               
actually producing from.                                                                                                        
MR. MARKS answered  he thinks it would  be prudent administrative                                                               
practice on  the part of  DNR to weed out  areas of PAs  that are                                                               
not being  produced.  In  further response,  he said it  would be                                                               
possible that DNR would want to  offer those for lease to someone                                                               
else who  might see  something different  there, given  the state                                                               
makes money from lease sales.                                                                                                   
CO-CHAIR SADDLER  inquired whether there  is a mechanism  for the                                                               
state  to   offer  area  inside   a  unit  that  is   a  putative                                                               
participating area to lease to somebody else.                                                                                   
MR. MARKS  replied the  leases are surface  acreage so  he cannot                                                               
see how that would work.                                                                                                        
CO-CHAIR SADDLER  understood Mr. Marks  to have said it  would be                                                               
appropriate  to release  the non-producing  area so  it could  be                                                               
leased to somebody else.                                                                                                        
MR. MARKS responded correct, if the  area was not being used.  In                                                               
further response, he  said the state will not be  able to release                                                               
it around  the land area  so he cannot see  how it could  be done                                                               
within a unit because the same land would be involved.                                                                          
9:11:33 PM                                                                                                                    
REPRESENTATIVE SEATON returned  to slide 13 of  Mr. Mark's 3/4/13                                                               
presentation to  the Senate Finance  Committee and  addressed the                                                               
point made by Mr.  Marks that at the price of  $70 per barrel the                                                               
royalty  would  eat up  all  the  profit.   He  inquired  whether                                                               
producers were losing  money during the years prior  to 2005 when                                                               
prices were below $65 a barrel.                                                                                                 
MR. MARKS  answered the high  operating and capital cost  that he                                                               
used [for  the slide]  was on the  order of $50  a barrel  and he                                                               
doubts  that  back  in  those years  anyone  would  have  pursued                                                               
production at  those costs.   In further response, he  said that,                                                               
today, $50 is  the end spectrum with what might  be possible with                                                               
viscous oil  and other oil that  is in remote areas.   A producer                                                               
would not  want to  develop that  oil if the  price was  $70, but                                                               
would need to be aware of what happens if it is.                                                                                
9:13:07 PM                                                                                                                    
[CSSB 21(FIN) am(efd fld) was held over.]                                                                                       

Document Name Date/Time Subjects
HRES SB21 DNR & DOR Presentation 3.28.13.pdf HRES 3/28/2013 6:00:00 PM
SB 21