Legislature(2007 - 2008)SENATE FINANCE 532

11/08/2007 01:00 PM FINANCE


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01:13:31 PM Start
01:13:36 PM SB2001
04:37:49 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
--NOTE CHANGE IN AGENDA--
+= SB2001 OIL & GAS TAX AMENDMENTS TELECONFERENCED
Heard & Held
Producer Panel Discussion: 1:00 - 3:00 pm
Exxon, BP and Conoco
-- Testimony <Invitation Only> --
Industry Stakeholder Panel
Discussion: 3:00 - 5:00 pm
Anadarko, Pioneer, Chevron, AVGC,
AOGA and others
-- Testimony <Invitation Only> --
SENATE BILL NO. 2001                                                                                                          
                                                                                                                                
     "An Act  relating to the production  tax on oil and  gas and                                                               
     to conservation surcharges on oil;  relating to the issuance                                                               
     of  advisory   bulletins  and  the  disclosure   of  certain                                                               
     information relating  to the production tax  and the sharing                                                               
     between  agencies of  certain  information  relating to  the                                                               
     production  tax and  to  oil  and gas  or  gas only  leases;                                                               
     amending  the State  Personnel Act  to place  in the  exempt                                                               
     service  certain  state  oil  and  gas  auditors  and  their                                                               
     immediate  supervisors;  establishing  an oil  and  gas  tax                                                               
     credit  fund   and  authorizing  payment  from   that  fund;                                                               
     providing for  retroactive application of  certain statutory                                                               
     and regulatory provisions relating  to the production tax on                                                               
     oil  and  gas and  conservation  surcharges  on oil;  making                                                               
     conforming  amendments;  and   providing  for  an  effective                                                               
     date."                                                                                                                     
                                                                                                                                
1:13:36 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman explained  that industry  representatives would                                                               
be answering questions,  as opposed to making  presentations.  He                                                               
stated that  the Committee  would be addressing  version P  of SB                                                               
2001.                                                                                                                           
                                                                                                                                
CLAIRE  FITZPATRICK,   COMMERCIAL  VICE  PRESIDENT,   BP  ALASKA,                                                               
reported  that BP  has looked  at the  guiding principles  in the                                                               
administration's  original  plan:  fair revenue  for  the  state,                                                               
shared upside, benefits, and  risk, attractive investment climate                                                               
- both  for explorers and  for reinvestment, and  transparency to                                                               
the  state  and taxpayer.    BP  has  also examined  the  various                                                               
proposals.   She pointed out  that BP  is looking at  business in                                                               
Alaska  as  it  relates  to  business as  a  whole,  as  well  as                                                               
incremental investments.  The changes  proposed in version P will                                                               
deteriorate  BP's  business   situation  and  reconsideration  is                                                               
necessary.   She  maintained that  Alaska is  in the  position of                                                               
having a  large resource base, but  it is challenged.   To access                                                               
the  resources   requires  infield   drilling  as  well   as  new                                                               
technology, satellites,  new exploration,  and ways  of unlocking                                                               
heavy oil.  Changing the  tax climate presents serious challenges                                                               
for BP to  develop a long-term sustainable business  model.  BP's                                                               
business model  will be designed  around the  legislation passed.                                                               
She predicted that the economics  and total business climate will                                                               
be worse as a result of the current version of the bill.                                                                        
                                                                                                                                
1:21:33 PM                                                                                                                    
                                                                                                                                
CRAIG HAYMES,  PRODUCTION MANAGER,  EXXONMOBIL, talked  about the                                                               
significant  resource   potential  in  Alaska.     Production  is                                                               
currently down  about one third.   He spoke of the  challenges in                                                               
pursuing  the resource  including unique  costs, remoteness,  and                                                               
environmental considerations.   He predicted that in  10 years 75                                                               
percent of production will come  from new oil, which will require                                                               
new  investment.    The  key  question is  how  to  maximize  and                                                               
commercialize the resource potential.                                                                                           
                                                                                                                                
Mr.  Haymes  stated  that industry  needs  a  predictable  fiscal                                                               
environment.     BP's  investments  are  capital   intensive  and                                                               
evaluated  over decades.   Changing  the fiscal  environment does                                                               
reduce the attractiveness  of projects.  BP  supports a net-based                                                               
tax structure.   PPT has  been in effect  for less than  one year                                                               
and  has  not  had an  audit.    BP  has  been working  with  the                                                               
Department of Revenue to help improve forecasting.                                                                              
                                                                                                                                
Mr. Haymes emphasized that policies  determined today will impact                                                               
future projects.   He noted a five-page summary  of his testimony                                                               
and  30 pages  of details  focusing  on specific  aspects of  the                                                               
bill.   The bill is viewed  as a tax increase  and contains other                                                               
burdens.                                                                                                                        
                                                                                                                                
Mr.  Haymes summarized  that  at today's  prices  under the  ACES                                                               
proposal  the  production tax  will  increase  350 percent  since                                                               
2005.   The current CS  will increase  the production tax  by 470                                                               
percent relative to 2005.                                                                                                       
                                                                                                                                
1:25:51 PM                                                                                                                    
                                                                                                                                
KEVIN  MITCHELL,  VICE  PRESIDENT,  FINANCE  AND  ADMINISTRATION,                                                               
CONOCOPHILLIPS, said  when looking  at future  resource potential                                                               
in  Alaska, new  technology  and  costs will  be  required.   The                                                               
fiscal  regime  will  be  critical  to  ensure  new  development.                                                               
Investments of  the past aren't  the same  as what will  occur in                                                               
the future.                                                                                                                     
                                                                                                                                
Mr. Mitchell  termed the new CS  a tax increase.   All components                                                               
of the bill come together to  further increase the tax burden and                                                               
add  to  the  complexity  of  complying  with  regulations.    He                                                               
maintained that it  would not attract new investors  or appeal to                                                               
existing investors.                                                                                                             
                                                                                                                                
1:28:25 PM                                                                                                                    
                                                                                                                                
Senator Thomas requested  a graphic or handout of the  300 to 400                                                               
percent increase Mr. Haymes is suggesting will occur.                                                                           
                                                                                                                                
Mr. Haymes  directed Senator Thomas'  attention to the  last page                                                               
of his handout.  He explained his calculations.                                                                                 
                                                                                                                                
Senator Thomas  asked if  that's based  on a  price factor.   Mr.                                                               
Haymes  replied that  it  is  based on  $90  oil  and on  today's                                                               
production levels using the Department of Revenue's formulas.                                                                   
                                                                                                                                
1:30:26 PM                                                                                                                    
                                                                                                                                
Senator  Dyson questioned  Exxon's current  investment, which  he                                                               
calculated  at  $1.50  per  barrel.    He  wondered  what  future                                                               
investment   might  cost,   taking  into   consideration  capital                                                               
expenditures.                                                                                                                   
                                                                                                                                
Mr. Haymes related that a  number of factors would determine that                                                               
number.   Historically, Prudhoe Bay  and Kuparuk have  been world                                                               
class reservoirs and have been  extremely productive.  During the                                                               
past  seven  years, 900  wells  have  been  drilled or  about  40                                                               
percent  of production.   Both  the  amount of  reserves and  the                                                               
amount  of  investment  have  increased  in  Prudhoe  Bay.    The                                                               
Department of Revenue's spring forecast  predicts that there will                                                               
be about  1.5 billion barrels of  new oil in the  next ten years.                                                               
Infield development  unit costs  are going  up and  production is                                                               
declining at Prudhoe Bay and Kuparuk.                                                                                           
                                                                                                                                
Mr. Haymes commented on the  challenges of the arctic environment                                                               
in Alaska.   Satellite fields are being developed  because of the                                                               
infrastructure already  in place in  Prudhoe Bay and  in Kuparek.                                                               
Development  costs  are  increasing   due  to  increased  capital                                                               
investment costs  and transportation costs.   If the  crude price                                                               
stays  at a  high level,  the  costs will  continue to  increase.                                                               
Another  challenge   is  that   remaining  resources   aren't  as                                                               
attractive  now  because they  are  offshore  or remote  and  the                                                               
technology  required is  significant.   Work on  heavy oil  isn't                                                               
included in the previous barrel estimate.                                                                                       
                                                                                                                                
1:35:47 PM                                                                                                                    
                                                                                                                                
Senator  Dyson asked  what  the capital  expense  was on  Prudhoe                                                               
Bay's production.   Mr. Haymes recalled that it  took $19 billion                                                               
of investment and that was  just BP's share of expenditure, which                                                               
was about 160,000 barrels.                                                                                                      
                                                                                                                                
Ms.   Fitzpatrick  added   that  it   will  take   a  substantial                                                               
reinvestment to continue production  another 50 years and beyond.                                                               
That's why it's hard to give a definitive answer.                                                                               
                                                                                                                                
1:38:39 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  recalled  that  PPT  modeling  indicated  that                                                               
capital and  operating costs would be  fixed.  Now it  looks like                                                               
there  is a  doubling  of  operating and  capital  expenses.   He                                                               
inquired what  could be done  differently so the same  thing does                                                               
not happen in 18 months.                                                                                                        
                                                                                                                                
Ms.  Fitzpatrick corrected  that it  was actually  ConocoPhillips                                                               
who brought  the economist to the  table.  She suggested  that to                                                               
not have  a repeat several  things should  be done.   First, when                                                               
moving to a  new regime it is  important to take time  to vet it.                                                               
She noted  a willingness to  work with the state  on forecasting.                                                               
There needs  to be good  communication between the  companies and                                                               
the Department of Revenue.                                                                                                      
                                                                                                                                
1:43:17 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman requested Mr. Mitchell's comments.                                                                             
Mr.  Mitchell  reported  that   a  ConocoPhillips  economist  did                                                               
testify  about  seriously rising  prices.  DOR  is now  receiving                                                               
current monthly reports.  Last year  DOR was using very old data.                                                               
Sharing of information should help  with more accurate forecasts,                                                               
but it  will still be wrong  due to variations of  price, volume,                                                               
and cost.                                                                                                                       
                                                                                                                                
1:46:17 PM                                                                                                                    
                                                                                                                                
DAN   SECKERS,  SENIOR   TAX  COUNSEL,   EXXONMOBIL,  said   that                                                               
ExxonMobil  is also  willing to  help  with data  forecasts.   He                                                               
voiced a  concern with  the bill  over ambiguity  in some  of the                                                               
wording.   He pointed  out that  Section 46  is problematic.   He                                                               
said  that   the  language  "any  records   that  the  department                                                               
considers necessary"  is not reasonable.   There is  a compliance                                                               
concern due to ambiguous language in the bill.                                                                                  
                                                                                                                                
Senator  Elton said  he is  prepared  to accept  that at  today's                                                               
prices,  ACES  would increase  production  taxes  by 350  percent                                                               
since 2005, and  the CS for 2001 would  increase production taxes                                                               
by  470 percent.    He inquired  if Exxon  Mobil  was willing  to                                                               
accept that ACES decreases taxes compared  to PPT and that the CS                                                               
holds  taxes level.   He  termed the  ExxonMobil presentation  as                                                               
being somewhat alarmist.                                                                                                        
                                                                                                                                
1:49:41 PM                                                                                                                    
                                                                                                                                
Mr. Haymes  explained that BP  looks at  the amount of  tax being                                                               
paid in  2005 compared to  the amount  today under PPT,  which at                                                               
$90 would be  $4.1 billion.  From a  taxpayer's perspective, $4.1                                                               
billion is a tax increase.   ACES would be a further tax increase                                                               
to $4.9 billion and the current CS would cost $6.3 billion.                                                                     
                                                                                                                                
Senator Elton  countered that  the problem  is that  the argument                                                               
ignores the debates from 2006.   He pointed out that the expected                                                               
tax rate set in 2006 is a tax decrease compared to today.                                                                       
                                                                                                                                
Mr. Haymes  noted that  when looking forward  it is  important to                                                               
consider  the   correct  tax  rate   in  order  to   attract  new                                                               
investment.   He questioned what the  goal is.  He  agreed that a                                                               
lot  of information  was shared,  but perhaps  not passed  around                                                               
properly.                                                                                                                       
                                                                                                                                
Senator Elton saw no need to debate the topic at this time.                                                                     
                                                                                                                                
Co-Chair Hoffman  recalled contemplating changes to  ELF in 1989.                                                               
A  major difference  then was  that  the industry  was trying  to                                                               
convince the  legislature not to  make changes to ELF  because it                                                               
would collapse  the oil industry  in Alaska.  That  didn't happen                                                               
and there has been significant  investment and development on the                                                               
North Slope since then.   As Alaska contemplated changing the tax                                                               
structure  two years  ago, the  oil industry  said it  liked ELF.                                                               
Clearly  times   have  changed.    When   contemplating  PPT  the                                                               
legislature didn't consider high prices  of oil and, as a result,                                                               
oil companies  received record profits. Although  costs have gone                                                               
up and  the tax structure  has changed,  Alaska needs to  get its                                                               
fair share  from oil  taxes.  The  legislature isn't  proposing a                                                               
gross tax,  but rather a  net tax, and  has proposed to  drop out                                                               
the floor at industry's request.                                                                                                
                                                                                                                                
Co-Chair  Hoffman  disputed  that   Alaska  is  an  unstable  tax                                                               
environment.     He   viewed   the  current   legislation  as   a                                                               
modification of PPT,  which was the only major  change since ELF,                                                               
and the  environment has been  stable for  18 years.   The Alaska                                                               
legislature  is  cognizant  that  the oil  industry  is  a  major                                                               
contributor  to the  economy, but  the bottom  line is  there are                                                               
windfall profits  and the  legislature needs to  look at  the tax                                                               
structure at the  high end of oil prices.   The legislature needs                                                               
to make certain Alaskans are receiving their fair share.                                                                        
                                                                                                                                
1:58:32 PM                                                                                                                    
                                                                                                                                
Senator  Huggins requested  more  information  about BP's  stated                                                               
number of 70,000 barrels and Exxon's 50,000 barrels.                                                                            
                                                                                                                                
Ms. Fitzpatrick  clarified that the  number was from new  wells -                                                               
infield drilling - and well work combined.                                                                                      
                                                                                                                                
Mr.  Haymes  said  he  quoted   40,000  barrels  associated  with                                                               
satellite development  around core fields in  Kuparuk and Prudhoe                                                               
Bay.                                                                                                                            
                                                                                                                                
Senator    Huggins   requested    an   equivocal    number   from                                                               
ConocoPhillips.                                                                                                                 
                                                                                                                                
JIM  TAYLOR, VICE  PRESIDENT, COMMERCIAL  ASSETS, CONOCOPHILLIPS,                                                               
reported  that the  company has  not stated  such a  number.   He                                                               
maintained that  future investments are not  the same investments                                                               
as the past for  a variety of reasons.  One  reason is that known                                                               
resource potential  on the  North Slope  is primarily  in viscous                                                               
and  heavy  oil and  the  cost  to exploit  that  is  high.   The                                                               
recovery rates and  production volumes are much lower.   Up to 70                                                               
percent  of  future  production  will   need  to  come  from  new                                                               
investments,  which are  more challenging  than old  investments.                                                               
Prudhoe  Bay and  Kuparuk are  North America's  largest and  best                                                               
fields.                                                                                                                         
                                                                                                                                
Senator Huggins said this reminded  him of the English Channel in                                                               
1944.  He  noted that Senator Hoffman previously  referred to the                                                               
floor.   He  requested  comments  on how  the  industry sees  the                                                               
floor.                                                                                                                          
                                                                                                                                
2:03:28 PM                                                                                                                    
                                                                                                                                
Mr. Mitchell  related that  the floor in  the original  ACES bill                                                               
was  a 10  percent  gross tax  on  the two  legacy  fields.   The                                                               
intention with  the floor was  to provide fallback for  the state                                                               
in a low price environment;  however, the floor had the potential                                                               
to hurt investment.  The floor  could be triggered by a low price                                                               
scenario - a  low margin scenario.  High  investments are another                                                               
trigger.                                                                                                                        
                                                                                                                                
2:06:08 PM                                                                                                                    
                                                                                                                                
Ms. Fitzpatrick  added that  the expectation  was that  the floor                                                               
would kick in  at the lower end  of prices, but with  the kind of                                                               
investment  profiles at  the time,  it was  actually going  to be                                                               
higher,  with a  result that  there would  need to  be a  default                                                               
assumption that the floor would kick in.                                                                                        
                                                                                                                                
Senator Elton asked for a  definition of moderate prices and high                                                               
prices.                                                                                                                         
                                                                                                                                
Mr. Mitchell  said he was  looking at the  $50 - $60  price range                                                               
for moderate prices at the time.                                                                                                
                                                                                                                                
Ms. Fitzpatrick agreed with that assessment.                                                                                    
                                                                                                                                
Mr. Seckers  pointed out that  ExxonMobil does not  discuss these                                                               
terms amongst the oil companies due to antitrust laws.                                                                          
                                                                                                                                
2:09:22 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman returned  to the discussion of PPT  when most of                                                               
the analysis  was done  when oil  prices were  below $60.   Under                                                               
that  modeling, operating  and capital  costs  were held  static,                                                               
which isn't true  today.  He requested  information about current                                                               
operating and  capital costs.   He inquired about a  reference to                                                               
$550  million   in  integrity  management  costs   in  BP's  20-F                                                               
disclosure.                                                                                                                     
                                                                                                                                
2:11:34 PM                                                                                                                    
                                                                                                                                
Ms. Fitzpatrick said  that the $550 million was  spread over 2007                                                               
and 2008.  It includes the money  that has been spent and will be                                                               
spent  on oil  transfer lines.   It  also includes  a variety  of                                                               
things;  improving  efficiency   of  equipment,  weather  repair,                                                               
facility expansion, and upgrading facilities and equipment.                                                                     
                                                                                                                                
Co-Chair Stedman  restated that  the $550  million was  phased in                                                               
during 2007 and  2008.  A number that appears  in the paper quite                                                               
often  dealing with  oil transfer  line corrosion  issue is  $260                                                               
million. He inquired  about the relationship of  the $260 million                                                               
and the $550 million.                                                                                                           
                                                                                                                                
Ms. Fitzpatrick  explained that  $260 million  is a  gross number                                                               
and the  $550 million  is a  BP net  number.   Approximately one-                                                               
quarter of  the $260  million is BP's  interest share  in Prudhoe                                                               
Bay and is included within the  $550 million.  In response to the                                                               
question if  the $550  will go away,  Ms. Fitzpatrick  said those                                                               
items will have been  done, but there will be new  items due to a                                                               
new   infrastructure.     There   will   be   a  need   for   new                                                               
infrastructure, so  there will be  capital needed over  and above                                                               
the previous amount.                                                                                                            
                                                                                                                                
Senator Elton asked,  of the $550 million, how  much is recovered                                                               
from others  operating in the field.   He also wondered  if other                                                               
companies have the same kind of infrastructure needs.                                                                           
                                                                                                                                
Ms. Fitzpatrick  replied that the $550  is part of BP's  share of                                                               
working interest owners' expenses.                                                                                              
                                                                                                                                
Mr.  Taylor  commented  on  the  ongoing  development  costs  and                                                               
prudent operatorship that goes along  with the care and duty that                                                               
an  operator has  to take  on  world class  assets.   There is  a                                                               
constant  evaluation   to  maintain  assets  in   the  best  way.                                                               
Reservoirs  require good  integrity management  and they  must be                                                               
properly maintained to last 50 years                                                                                            
                                                                                                                                
2:18:59 PM                                                                                                                    
                                                                                                                                
Senator Elton said  he is still struggling with  the $550 million                                                               
number.  He asked how the $550 million would be paid down.                                                                      
                                                                                                                                
Ms.  Fitzpatrick  pointed  out  that the  $550  million  is  both                                                               
capital and expense in all fields.                                                                                              
                                                                                                                                
Senator Elton repeated the question  whether any part of the $550                                                               
million would be paid by another company.                                                                                       
                                                                                                                                
Ms. Fitzpatrick explained  that the fact that it is  net means it                                                               
belongs to BP.                                                                                                                  
                                                                                                                                
Co-Chair  Hoffman recalled  that  EconOne said  that the  futures                                                               
prices through  2011 are quoted  at $80  barrel.  He  wondered if                                                               
that is an accurate projection.                                                                                                 
                                                                                                                                
2:21:34 PM                                                                                                                    
                                                                                                                                
Mr. Taylor  was not sure about  that. He reported that  the quote                                                               
he received yesterday  for ten years futures  strip price, issued                                                               
by  the New  York Mercantile  Exchange  (NYMEX), was  in the  $60                                                               
range.   He admitted that  the companies do have  planning prices                                                               
that are confidential.                                                                                                          
                                                                                                                                
Co-Chair Hoffman related that it was a NYMEX strip through 2011.                                                                
                                                                                                                                
Ms. Fitzpatrick  reported that  NYMEX changes  on a  daily basis.                                                               
The last ten-year average was $31.                                                                                              
                                                                                                                                
Co-Chair Hoffman  agreed that there has  been a lot of  change in                                                               
the last 24 months.                                                                                                             
                                                                                                                                
Co-Chair Stedman  brought up the  issue of oil in  an environment                                                               
of $80 to $90 oil, and  the idea that the committee hasn't looked                                                               
at the  fairness of the  PPT tax structure  at higher prices.   A                                                               
lot  of  time was  spent  on  the $20  to  $60  range.   He  also                                                               
mentioned  the   inelasticity  of   the  operating   and  capital                                                               
expenditures imbedded within the model.   He expressed a need for                                                               
more time to deal with such a complex issue.                                                                                    
                                                                                                                                
2:24:29 PM                                                                                                                    
                                                                                                                                
Mr.  Taylor appreciated  the gravity  of  the responsibility  the                                                               
legislature  has  to   make  these  decisions.     He  said  that                                                               
ConocoPhillips was glad for the  opportunity to comment on how it                                                               
sees some of  the changes.  The  issue at hand is  that there has                                                               
been a tax increase - PPT  - which introduced progressivity.  The                                                               
question is  whether PPT was at  the right level, and  how it can                                                               
be  improved to  increase predictability.   The  preservation and                                                               
fostering  of  a  healthy  investment  environment  is  the  goal                                                               
because state revenues are a  form of taxation, but also royalty.                                                               
Change has  occurred and it has  already altered ConocoPhillips's                                                               
plans, and  it must reassess  every time  there is a  change. The                                                               
more  frequent  the   change,  the  more  difficult   it  is  for                                                               
ConocoPhillips.                                                                                                                 
                                                                                                                                
Mr.  Taylor  addressed the  global  increase  in demand  that  is                                                               
driving the  high prices  and how  it affects  Alaska.   The more                                                               
stability  there  is  the  better.     The  preservation  of  the                                                               
investment environment is the goal.                                                                                             
                                                                                                                                
2:27:48 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman   addressed  transitional   investment  credits                                                               
(TIE).  He requested a response from the three firms.                                                                           
                                                                                                                                
Mr.  Mitchell said  ConocoPhillips has  consistently favored  TIE                                                               
credits because they soften the impact  of tax changes.  They are                                                               
only of  value to companies  that have  invested in the  past and                                                               
that intend  to invest  in the  future.   Companies hurt  most by                                                               
removing TIE credits are the ones that were most active.                                                                        
                                                                                                                                
Co-Chair  Stedman  recalled  the  discussion  under  PPT  of  TIE                                                               
credits.   He asked  if TIE  credits should  be granted  when the                                                               
price of  oil is higher  than previous  modeling.  He  asked what                                                               
the effect of  the 2 for 1  stimulus is now with  the doubling of                                                               
capital and operating expenditures.                                                                                             
                                                                                                                                
2:32:26 PM                                                                                                                    
                                                                                                                                
Ms. Fitzpatrick  agreed that there was  inflationary pressure and                                                               
an increase in  activity, which is causing an  increase in costs.                                                               
There  is  an  increasing  trend  that is  over  and  above  pure                                                               
inflation.                                                                                                                      
                                                                                                                                
Co-Chair  Stedman pointed  out the  $213 million  modeling number                                                               
for 2008.   He questioned if the  state actually got 2  for 1 for                                                               
exploration and  development.  He  requested more  information on                                                               
which  dollars went  to expenditures  for future  development and                                                               
which went for maintenance.                                                                                                     
                                                                                                                                
2:35:33 PM                                                                                                                    
                                                                                                                                
Mr. Taylor  looked at cost  inflation and price with  the benefit                                                               
of  hindsight.   He  used as  an example,  a  regular and  steady                                                               
investor, and  maintained that to  reflect back  and say 2  for 1                                                               
wasn't as good as you thought it was, isn't exactly fair.                                                                       
                                                                                                                                
Co-Chair Hoffman  said he  has heard arguments  that if  the base                                                               
tax  rate  is  increased  to  25 percent,  there  would  be  more                                                               
exploration  because of  the increase  in  credits.   He said  he                                                               
didn't  agree  with  that  idea.   He  requested  the  producers'                                                               
opinion on that point.                                                                                                          
                                                                                                                                
Mr. Haymes  thought that an  increase in  the tax rate  would not                                                               
stimulate investment activity.   One needs to look  beyond two or                                                               
three years  when looking at the  economics of projects.   No one                                                               
will explore  unless they think  they can move it  to development                                                               
which is the  next phase of the cycle.   The production phase has                                                               
ongoing capital  and operating  costs.  Then  there is  a decline                                                               
and  it becomes  more difficult  to  pursue the  barrels of  gas.                                                               
Finally,  there  is  a  site   remediation  phase.    The  entire                                                               
lifecycle needs  to be looked  at when considering  the economics                                                               
of a project.   Sensitivities around costs,  price, and resources                                                               
need to  be considered.   Increasing a  tax rate within  the same                                                               
net structure system would not encourage investment activity.                                                                   
                                                                                                                                
2:40:30 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman brought up the issue of joint interest billing.                                                                
                                                                                                                                
Mr.  Haymes said  that as  a non-operator  of some  of the  major                                                               
fields, ExxonMobil  looks very hard  at joint  interest billings.                                                               
He explained how joint interest billings are audited.                                                                           
                                                                                                                                
AT EASE:       2:41:47 PM                                                                                                     
                                                                                                                                
RECONVENE:     2:42:40 PM                                                                                                     
                                                                                                                                
                                                                                                                                
Mr. Haymes continued to explain  that joint interest billings are                                                               
used as a starting point.                                                                                                       
                                                                                                                                
AT EASE:       2:43:36 PM                                                                                                     
                                                                                                                                
RECONVENE:     2:49:24 PM                                                                                                     
                                                                                                                                
Mr.  Haymes   explained  that  ExxonMobil  uses   joint  interest                                                               
billings  for auditing  purposes and  spends over  100 weeks  per                                                               
year doing so to ensure accurate and appropriate records.                                                                       
                                                                                                                                
2:51:04 PM                                                                                                                    
                                                                                                                                
Mr.  Seckers   said  that  joint   interest  billings   form  the                                                               
foundation  of how  tax returns  are filed.   The  process begins                                                               
with going over projects.  Then,  as the bills are incurred, they                                                               
are  audited  for compliance  with  agreements.   Next,  the  tax                                                               
department makes sure they conform to  the law.  Finally, they go                                                               
to  the tax  lawyers for  compliance, a  return is  prepared, the                                                               
senior tax  auditors review them,  and then the return  is filed.                                                               
ExxonMobil   will   not   file  falsified   returns   under   any                                                               
circumstances.  There is no incentive to pay more than required.                                                                
                                                                                                                                
Mr.  Seckers   explained  that  Section   65  of   the  Committee                                                               
Substitute  would  delete two  very  important  sections of  PPT:                                                               
Sections 165(c) and  (d).  Those sections gave  permission to the                                                               
Department of Revenue  to look at the joint  interest billings as                                                               
a starting point  for audits.  He testified in  opposition to the                                                               
removal of those sections.                                                                                                      
                                                                                                                                
2:55:35 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman noted that discussion  is needed on the topic of                                                               
topping plants.                                                                                                                 
                                                                                                                                
Co-Chair   Hoffman    referenced   a   prior    presentation   by                                                               
ConocoPhillips.    The last  page  of  their handout  lists  nine                                                               
negative impacts  on investment climate.   He questioned  if they                                                               
were prioritized.                                                                                                               
                                                                                                                                
Mr.  Mitchell said  no. He  maintained that  most items  comprise                                                               
some form of tax increase.                                                                                                      
                                                                                                                                
Co-Chair Hoffman asked  where a tax increase to  25 percent might                                                               
rank with the other negative items.                                                                                             
                                                                                                                                
2:57:35 PM                                                                                                                    
                                                                                                                                
Mr. Mitchell stated that ExxonMobil  hasn't done that analysis in                                                               
order of  preference.   There is an  element of  tradeoff between                                                               
base  rate  and   progressivity.    It  is   debatable  which  is                                                               
preferable.                                                                                                                     
                                                                                                                                
Ms. Fitzpatrick  agreed, but added  that when designing  a fiscal                                                               
policy,  in   order  to  maximize   investment  in   the  future,                                                               
flexibility should  be considered.   Investment at the  lower end                                                               
should be encouraged, but with consideration to progressivity.                                                                  
                                                                                                                                
Senator  Huggins  said  he  isn't  interested  in  subsidizing  a                                                               
topping plant  on the North  Slope.  He  had heard it  would cost                                                               
$300 million  on the North  Slope and $54  million in Kenai.   He                                                               
asked  about low  sulfur diesel  from Kenai  and the  costs of  a                                                               
topping plant.                                                                                                                  
                                                                                                                                
3:01:28 PM                                                                                                                    
                                                                                                                                
Mr. Taylor related  that the issue of a  topping plant culminated                                                               
in  a  June 2005  agreement  between  ConocoPhillips BP  and  the                                                               
Alaska  Department of  the Environment.   They  discussed an  EPA                                                               
agreement  regarding  clean  fuels.     In  order  to  comply,  a                                                               
transition agreement with ADEK was made.   A topping plant in the                                                               
North was  contemplated for  economic, environmental,  and safety                                                               
reasons.  It is more  expensive to build a manufacturing facility                                                               
on the North  Slope than on the Kenai Peninsula.   That is offset                                                               
by  the costs  and risks  associated with  transportation by  the                                                               
road or barge.   ConocoPhillips had embarked  on an authorization                                                               
for  design and  has  spent  $40 million  to  $50  million for  a                                                               
project that has been stopped.                                                                                                  
                                                                                                                                
Mr. Taylor suggested that it can  be satisfied in ways other than                                                               
building a manufacturing  facility on the North  Slope, but would                                                               
require expansion of existing facilities,  which already have had                                                               
expansions in order  to meet the state's ultra  low sulfur diesel                                                               
(ULSD) requirements.   He suggested considering  that during peak                                                               
demand times,  when supplies  could become tight,  it would  be a                                                               
wise  investment to  have  the  facility in  place  on the  North                                                               
Slope.                                                                                                                          
                                                                                                                                
3:05:47 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman inquired if the issue is access to the credit.                                                                 
                                                                                                                                
Mr.  Taylor replied  that access  to the  credit is  an issue  at                                                               
hand.   It  is an  investment  for the  benefit of  the lease  to                                                               
comply   with  state   and  federal   environmental  regulations.                                                               
Offsetting that  would cause  reevaluation of  where to  have the                                                               
ULSD and decide on the best way to transport it.                                                                                
                                                                                                                                
Co-Chair Stedman  asked if  $300 million  is an  accurate number.                                                               
Mr. Taylor thought it was relatively accurate.                                                                                  
                                                                                                                                
Senator Huggins emphasized that his  interest is hearing from the                                                               
administration's risk management people that  they are willing to                                                               
accept the  risk if it  must be  transported to the  North Slope.                                                               
It's not about tax credits.                                                                                                     
                                                                                                                                
Co-Chair Stedman  asked for an  estimate of the truck  traffic up                                                               
the highway if the facility was not built.                                                                                      
                                                                                                                                
3:08:13 PM                                                                                                                    
                                                                                                                                
Mr. Taylor reported that the peak number of trucks would be 55.                                                                 
                                                                                                                                
Senator  Elton  asked if  the  cheapest  option  is to  have  the                                                               
topping plant rather  than transporting low sulfur  diesel to the                                                               
slope.                                                                                                                          
                                                                                                                                
Mr. Taylor  said it's more  economical, more efficient,  and less                                                               
risky to  supplement diesel manufacturing  capacity on  the North                                                               
Slope.   There already  is up  to 5,000 barrels  a day  of diesel                                                               
being produced on the North Slope  for the exclusive use of those                                                               
leases.   Environmental  requirements  for ultra  low diesel  are                                                               
new.   They  require  the  investment of  a  physical process  to                                                               
remove the  sulfur from the  current manufacturing  process. This                                                               
is an  enhancement and an addition  to what already exists.    In                                                               
order to meet that requirement,  if it came from other locations,                                                               
it  would render  some of  the  investments that  have been  made                                                               
redundant.                                                                                                                      
                                                                                                                                
Senator Elton  asked if  it is  more cost  efficient to  have the                                                               
topping  plant over  time  than  it is  to  transport low  sulfur                                                               
diesel to the slope.                                                                                                            
                                                                                                                                
Mr. Taylor said it was.                                                                                                         
                                                                                                                                
Senator Elton  summarized that more  credits would be  offered so                                                               
that the producer could select the cheaper option.                                                                              
                                                                                                                                
Mr. Mitchell clarified that with  the tax credits the North Slope                                                               
ULSD  plant is  the  lower  cost option.    Without the  credits,                                                               
trucking is the lower cost option.                                                                                              
                                                                                                                                
Senator  Olson  asked if  data  confidentiality  is for  federal,                                                               
state,  and private  land, and,  if the  state is  subsidizing 40                                                               
percent of the  exploration, why it shouldn't have  access to the                                                               
data.                                                                                                                           
                                                                                                                                
3:12:39 PM                                                                                                                    
                                                                                                                                
Mr.  Mitchell  responded  that  the  concern  around  exploration                                                               
confidentiality is the provision that  in order to obtain the tax                                                               
credit, exploration  data is  only held  confidential for  a two-                                                               
year  period.     The   data  can   be  valuable   or  worthless.                                                               
ConocoPhillips may  choose not  to apply for  the credits  if the                                                               
confidential information is  deemed to be more  valuable than the                                                               
value of the credit.                                                                                                            
                                                                                                                                
Senator  Olson asked  for  how long  a period  of  time the  data                                                               
should be held  confidential in order for  ConocoPhillips to take                                                               
advantage of the credits.                                                                                                       
                                                                                                                                
Mr.  Mitchell  recalled a  10-year  option  under PPT  and  would                                                               
prefer to see that in this legislation.                                                                                         
                                                                                                                                
Senator  Olson restated  his question  regarding federal,  state,                                                               
and private  lands.  He  wondered if there a  distinction between                                                               
who owns the land.                                                                                                              
                                                                                                                                
3:14:40 PM                                                                                                                    
                                                                                                                                
Mr.  Mitchell  understood  that   the  provisions  are  the  same                                                               
regardless of who owns  the land.  He spoke of  a conflict by the                                                               
Department of Natural Resources when collecting data on non-                                                                    
state lands, which are competitors.                                                                                             
                                                                                                                                
Senator Olson  reported that producers haven't  given feedback on                                                               
that issue.                                                                                                                     
                                                                                                                                
Ms.  Fitzpatrick said  she had  brought oil  samples with  her in                                                               
order to show the different viscosities.                                                                                        
                                                                                                                                
AT EASE:     3:16:53 PM                                                                                                       
                                                                                                                                
RECONVENE:   3:40:47 PM                                                                                                       
                                                                                                                                
INDUSTRY STAKEHOLDERS                                                                                                           
                                                                                                                                
3:43:05 PM                                                                                                                    
                                                                                                                                
JOHN  ZAGER, GENERAL  MANAGER,  CHEVRON-ALASKA, provided  opening                                                               
statements.    He  asked the  committee  to  consider  unintended                                                               
consequences of  the bill, and to  think about the base  rate and                                                               
progressivity in the context of  future investment.  He suggested                                                               
considering if Alaska is getting what  it needs.  He related that                                                               
he thinks of Alaska as an asset  to be sold and the customers are                                                               
the oil  companies.  How the  asset is priced in  the market will                                                               
determine how many will show up and  bid.  If it is a world class                                                               
asset,  premium  prices  can  be   charged.    He  spoke  of  the                                                               
risk/reward balance.                                                                                                            
                                                                                                                                
Mr. Zager spoke of a recent  lease sale worth $2.4 million, which                                                               
he termed  an abysmal amount.   Recently,  in the Gulf  of Mexico                                                               
$2.4 billion was bid  on a lease sale.  He used  a car analogy to                                                               
make his  point.  He  offered suggestions on  how to set  a price                                                               
for resources in Alaska.                                                                                                        
                                                                                                                                
Mr. Zager felt  that there was no debate that  moving from PPT to                                                               
ACES will not improve the investment  climate in Alaska.  It will                                                               
only make  it worse.  He  recalled the process of  going from ELF                                                               
to ACES, which had incentives that  have begun to pay off.  Going                                                               
from  PPT  to  the  current  legislation  shows  no  benefits  to                                                               
increase investments, only  an increase in taxes.   He emphasized                                                               
the importance of considering future investment.                                                                                
                                                                                                                                
3:46:59 PM                                                                                                                    
                                                                                                                                
Mr. Zager highlighted a list of  items more specific to the bill.                                                               
He  had   concerns  about  TIA  credits,   retroactivity  of  the                                                               
effective date,  and disallowing  certain costs for  in-state vs.                                                               
out-of-state.   He  mentioned the  weakening  of terms  regarding                                                               
taxpayer  confidentiality.    He   expressed  concern  about  the                                                               
multiple  layers  of penalties  for  missed  payments and  errant                                                               
reporting and those effects on operation.                                                                                       
                                                                                                                                
Mr.  Zager thought  that this  legislation  was more  complicated                                                               
than PPT  and there was  less time to discuss  its ramifications.                                                               
He inquired  to what degree  the legislature was willing  to risk                                                               
the  future of  oil  and  gas investment  in  Alaska  and in  the                                                               
Alaskan  economy.   He questioned  if Alaska  is really  open for                                                               
business.                                                                                                                       
                                                                                                                                
3:51:13 PM                                                                                                                    
                                                                                                                                
Mr. Zager spoke of Chevron-Alaska's  commitment to the state.  He                                                               
questioned  if  there  would  be more  or  less  opportunity  for                                                               
Alaskan's  children  if  the  bill   passes.    He  concluded  by                                                               
requesting the committee to look at the bill in its totality.                                                                   
                                                                                                                                
3:52:10 PM                                                                                                                    
                                                                                                                                
PAT FOLEY,  MANAGER, LAND AND  EXTERNAL AFFAIRS,  PIONEER NATURAL                                                               
RESOURCES, related  that he wanted to  focus on a single  issue -                                                               
progressivity.  He  reported that Pioneer is  a large independent                                                               
$6 billion market  cap company with a project in  the North Slope                                                               
and one in Cook Inlet.                                                                                                          
                                                                                                                                
Mr. Foley explained  that Pioneer's peer group  is different than                                                               
other groups in Alaska because they  do most of their business in                                                               
the  Lower 48.   Pioneer's  investment  alternatives compares  to                                                               
those onshore in  Texas.  He referenced a website  that lists all                                                               
onshore wells in  the U.S.  He stated that  the tax policy should                                                               
consider motivating onshore companies to come to Alaska.                                                                        
                                                                                                                                
3:54:06 PM                                                                                                                    
                                                                                                                                
Mr. Foley addressed  progressivity.  In the  Lower 48, government                                                               
take  is  low  compared  to  Alaska.    At  higher  prices,  with                                                               
progressivity, the  government take  in Alaska  increases, making                                                               
it less attractive for companies like Pioneer.                                                                                  
                                                                                                                                
Mr. Foley  described a  Pioneer project where  80 percent  of the                                                               
resource lies on net profit  leases.  Thirty percent of Pioneer's                                                               
net profit is  paid to the state, in addition  to royalty, income                                                               
tax, and PPT.   The government take ends up  at 83 percent, which                                                               
is dramatically  different than  67 to 69  percent at  Kuparak or                                                               
Prudhoe Bay.                                                                                                                    
                                                                                                                                
3:56:09 PM                                                                                                                    
                                                                                                                                
Mr. Foley asked  the committee to consider that  net profit share                                                               
payments  be   creditable  against  PPT   payments,  specifically                                                               
against  progressivity.    He   believed  that  progressivity  is                                                               
designed  to capture  the price  upside.   The  net profit  share                                                               
payment already captures the price  upside.  He suggested that it                                                               
apply not just to Pioneer, but  to all net profit share leases on                                                               
the North Slope.  In 2006, the  total sum of the net profit share                                                               
payments is about $87 million.   The highest payer of net profits                                                               
is BP.                                                                                                                          
                                                                                                                                
3:57:55 PM                                                                                                                    
                                                                                                                                
MARK  HANLEY, MANAGER,  PUBLIC  AFFAIRS, ANADARKO-ALASKA,  voiced                                                               
concern about increasing taxes and  requested the lowest tax rate                                                               
possible.    He  re-emphasized   staying  with  the  net  profits                                                               
approach,  not   just  with   the  base   rate,  but   also  with                                                               
progressivity.                                                                                                                  
                                                                                                                                
3:59:08 PM                                                                                                                    
                                                                                                                                
Mr. Hanley  stated that Anadarko does  not support retroactivity.                                                               
Regulations on how much Anadarko  must pay has not been finalized                                                               
for the current year  and now it is going to  change.  He thought                                                               
there were adequate  penalties in existing law,  which can assess                                                               
up to 25 percent.                                                                                                               
                                                                                                                                
Mr. Foley addressed  retroactivity - there are  provisions in the                                                               
bill  based  on  ACES  incentive credits.    He  mentioned  other                                                               
unintended  quirks in  the bill.    Pioneer has  worked with  the                                                               
administration on potential fixes.                                                                                              
                                                                                                                                
Mr. Foley  spoke of lease  expenditures.  He voiced  concern that                                                               
excluded costs for legitimate expenses result in a tax.                                                                         
                                                                                                                                
4:02:30 PM                                                                                                                    
                                                                                                                                
Senator  Elton emphasized  that he  is looking  for results  that                                                               
everyone can live  with.  He questions Mr.  Foley's comparison of                                                               
government  take in  the Lower  48 with  Alaska's and  maintained                                                               
that  there  are  significant differences.    He  requested  more                                                               
information.   He suspected that  government take is one  part of                                                               
picture and company take is another.                                                                                            
                                                                                                                                
Mr. Foley related that the difference between government and                                                                    
company take is that company take is "one, minus government                                                                     
take".  In the Lower 48 the government take is about 50 percent                                                                 
and the royalty is typically not owned by the state.                                                                            
                                                                                                                                
4:04:27 PM                                                                                                                    
                                                                                                                                
Senator Elton said that his expectation  was that in the Lower 48                                                               
profits are reduced  because they are shared  with another owner,                                                               
rather than with the government.                                                                                                
                                                                                                                                
Mr. Foley  explained that company take  is on a gross  basis, and                                                               
not diluted by the fact that there are other partners.                                                                          
                                                                                                                                
Senator Elton  discussed the  division of  the revenue  stream in                                                               
Alaska;  between   the  state,  the  company,   and  the  federal                                                               
government.   In  the Lower  48 it  could be  state, the  federal                                                               
government, and another resource owner and company.                                                                             
                                                                                                                                
4:05:43 PM                                                                                                                    
                                                                                                                                
Mr. Zager  replied that  he did not  see the  distinction because                                                               
there are multiple owners in Alaska, as well.                                                                                   
                                                                                                                                
Senator  Elton  thought  that  in   Alaska  the  state  owns  the                                                               
resource.  In  Texas someone else may own the  resource.  He said                                                               
he is trying  to figure out if government take  is different than                                                               
company  take  in  that  scenario   and  whether  it  is  a  fair                                                               
comparison.                                                                                                                     
                                                                                                                                
4:06:39 PM                                                                                                                    
                                                                                                                                
Mr. Foley  said that  regardless of  where, government  take plus                                                               
company take equals  one.  The federal government  is included in                                                               
government take.  He reiterated his company's statistics.                                                                       
                                                                                                                                
Senator  Elton  maintained  that  it  was  not  fair  to  compare                                                               
government take  in Alaska  and in Texas,  because in  Alaska the                                                               
state is the government and the resource owner.                                                                                 
                                                                                                                                
4:08:30 PM                                                                                                                    
                                                                                                                                
Mr. Foley  agreed.  There  is a royalty in  the Lower 48  that is                                                               
not paid  to the state.   He explained that he  has included that                                                               
in  the state  take.   Senator Elton  countered that  it was  not                                                               
included in government take in the Lower 48.                                                                                    
                                                                                                                                
Co-Chair  Stedman  used the  Gulf  of  Mexico  as an  example  of                                                               
needing to be sure that comparisons include like calculations.                                                                  
                                                                                                                                
Mr.  Zager  thought that  "we're  saying  the  same thing".    He                                                               
clarified that  what is left  over is  what the company  gets and                                                               
everything else is called government  take.  Technically, it is a                                                               
lease holder and the government.                                                                                                
                                                                                                                                
4:10:32 PM                                                                                                                    
                                                                                                                                
Senator Elton  summarized that Mr.  Foley was saying  that Alaska                                                               
is a  higher cost  environment, so there  shouldn't be  a problem                                                               
sharing company take in Alaska and Texas.                                                                                       
                                                                                                                                
Mr. Foley agreed.   He reported his company take  in Alaska is 17                                                               
percent; in the Lower 48 it is closer to 50 percent.                                                                            
                                                                                                                                
Co-Chair  Stedman noted  that it  was important  to make  careful                                                               
comparisons.                                                                                                                    
                                                                                                                                
4:11:44 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman   turned  to  Pioneer's  issue   of  offsetting                                                               
progressivity.    He recalled  a  debate  under PPT  between  the                                                               
administration and  the legislature where the  legislature wanted                                                               
to include  progressivity to  ensure that  the state's  share did                                                               
not decline during advancing prices.  It depended on the relative                                                               
magnitude  of progressivity.   He  questioned at  what point  the                                                               
companies would want to put  profit sharing against progressivity                                                               
tax.                                                                                                                            
                                                                                                                                
Mr. Foley explained  that his net profit is about  18 percent and                                                               
progressivity is  another 9 percent.   On average  the government                                                               
take is  in the high  60's, but his  company pays higher  than 80                                                               
percent.                                                                                                                        
                                                                                                                                
4:14:27 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman pointed out that  the original PPT triggered $40                                                               
on the  North Slope.   He wondered if  dropping the slope  to $30                                                               
per barrel would help or make it worse.                                                                                         
                                                                                                                                
Mr.  Foley said  that it  alleviates  the problem,  but it  still                                                               
disadvantages a net profit share lease holder.                                                                                  
                                                                                                                                
Senator  Elton asked  what the  government  take will  be in  the                                                               
first year of  production.  Mr. Foley did not  know, but admitted                                                               
that they would not pay a  net profit or production tax; however,                                                               
they would  pay a state income  tax, a property tax,  and federal                                                               
income tax.                                                                                                                     
                                                                                                                                
Senator Elton concluded that it is  83 percent in the future once                                                               
costs are recovered.                                                                                                            
                                                                                                                                
Mr. Foley explained that the 83 percent is a total life cycle.                                                                  
                                                                                                                                
4:16:01 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  pointed out  that due  to time  constraints the                                                               
models of  life cycle  costs have  not been  discussed.   He said                                                               
that Mr.  Foley's point is  being heard that  progressivity could                                                               
alter the producer take substantially.                                                                                          
                                                                                                                                
Mr. Foley added  that progressivity captures price  upside and on                                                               
a net profit share lease the profit upside is already captured.                                                                 
                                                                                                                                
4:17:37 PM                                                                                                                    
                                                                                                                                
MARK HANLEY,  MANAGER, PUBLIC AFFAIRS, ANADARKO-ALASKA,  stated a                                                               
preference  for the  existing PPT  progressivity compared  to the                                                               
one in  ACES because  it starts  higher and goes  up faster.   He                                                               
suggested  keeping  in mind  a  third  option in  the  Governor's                                                               
proposal  that annualized  progressivity, which  is a  benefit to                                                               
the company.                                                                                                                    
                                                                                                                                
4:19:15 PM                                                                                                                    
                                                                                                                                
Senator Elton  asked Mr. Zager  about investment  decisions based                                                               
on the PPT tax recipe, which  had an outcome that did not happen.                                                               
He wondered  if Mr. Zager  used internal assumptions.   Mr. Zager                                                               
explained how his projects are modeled.                                                                                         
                                                                                                                                
Senator Elton  hoped that  Mr. Zager's  assumptions on  cost were                                                               
better than the states.                                                                                                         
                                                                                                                                
Mr. Zager  reported that there  were dramatic increases  in costs                                                               
which were higher  than projected 3-4 years ago.   He referred to                                                               
a slide that depicted dramatically increasing costs.                                                                            
                                                                                                                                
4:22:57 PM                                                                                                                    
                                                                                                                                
Mr.  Hanley commented  on two  categories  of cost;  inflationary                                                               
cost and added investment.  He  did not know if either was driven                                                               
by PPT.  He pointed out that expenditures had gone up.                                                                          
                                                                                                                                
Mr.  Hanley  addressed  the  insinuation   that  costs  were  not                                                               
disclosed when they  were known or that costs  were over inflated                                                               
to  show lower  returns resulting  in lower  tax.   He felt  that                                                               
companies were accused  of both.  Inflation vs.  investment is an                                                               
important  distinction   to  make  when  considering   why  state                                                               
revenues   were  less   than   expected.     He  suggested   that                                                               
inflationary costs had an impact on smaller returns.                                                                            
                                                                                                                                
4:26:09 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  referred to earlier  testimony that  there were                                                               
substantial  inflation pressures  on  the  operating and  capital                                                               
expenses   whereby  margins   actually   spread.     There   were                                                               
substantial increases in the price of oil.                                                                                      
                                                                                                                                
Mr. Hanley agreed.                                                                                                              
                                                                                                                                
Mr. Zager  pointed out  the cycle  where prices  go up  first and                                                               
then costs will tend to lag and then eventually catch up.                                                                       
                                                                                                                                
Co-Chair  Stedman said  that  in  the future  the  state will  be                                                               
monitoring   the  Opex   and  Capex   so  it   can  become   more                                                               
sophisticated in expectations.                                                                                                  
                                                                                                                                
4:28:07 PM                                                                                                                    
                                                                                                                                
Senator Thomas  referred to  the cost lag  and thought  it seemed                                                               
like costs  accelerated with PPT.   The state should  be prepared                                                               
for future cost lags.                                                                                                           
                                                                                                                                
Mr. Zager  explained the  circumstances when  oil prices  were at                                                               
$70  and  the  system  was  taxed   to  the  max.    Whether  the                                                               
incremental $20 will incite another  round of activity depends on                                                               
the staying  power of the $90  price.  Investments now  are based                                                               
on that price.                                                                                                                  
                                                                                                                                
Senator  Thomas  wondered if  the  price  of rigs  was  increased                                                               
during high oil prices.                                                                                                         
                                                                                                                                
4:30:27 PM                                                                                                                    
                                                                                                                                
Mr. Zager  said that the  drilling companies have a  long memory.                                                               
He  clarified that  there  are  other costs.    He described  how                                                               
negotiating  power  changes  during  high and  low  prices.    He                                                               
pointed out that when taxing the producers the service industry                                                                 
is impacted as well.                                                                                                            
                                                                                                                                
Mr. Hanley emphasized the importance of having as few unintended                                                                
consequences as possible.                                                                                                       
                                                                                                                                
4:32:27 PM                                                                                                                    
                                                                                                                                
Senator Thomas asked Mr. Foley if he spent time negotiating with                                                                
the state about the royalty reduction and other unique issues.                                                                  
                                                                                                                                
Mr. Foley said that was correct.  Pioneer has benefited from                                                                    
royalty reduction.  He detailed how it worked for his company                                                                   
under PPT.                                                                                                                      
                                                                                                                                
CS HB 2001 (FIN) am was HELD in Committee for further                                                                           
consideration.                                                                                                                  
                                                                                                                                

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