Legislature(2007 - 2008)SENATE FINANCE 532

02/04/2008 09:00 AM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SJR 14 BUDGET RESERVE FUND VOTE REQUIREMENT TELECONFERENCED
Moved CSSJR 14(FIN) Out of Committee
+= SB 242 OIL & GAS PRODUCTION TAX DATES TELECONFERENCED
Heard & Held
-- Public Testimony on Above Bill --
+ Bills Previously Heard/Scheduled TELECONFERENCED
SENATE BILL NO. 242                                                                                                           
                                                                                                                                
     "An  Act  relating to  lease  expenditures  that may  be                                                                   
     deducted for  purposes of the production tax  on oil and                                                                   
     gas;  relating   to  the  retroactivity   provisions  of                                                                   
     changes to the production  tax on oil and gas enacted in                                                                   
     ch.  1,  SSSLA  2007; and  providing  for  an  effective                                                                   
     date."                                                                                                                     
                                                                                                                                
Senator  Elton  MOVED  to  ADOPT  Amendment  1,  labeled  25-                                                                   
LS1350\A.1, Bullock, 1/29/08.                                                                                                   
                                                                                                                                
Co-Chair Stedman OBJECTED for discussion purposes.                                                                              
                                                                                                                                
Co-Chair Stedman reported that  the amendment was a technical                                                                   
change.   After  HB  2001 was  enrolled,  some sections  were                                                                   
renumbered; SB 242 conforms to those changes.                                                                                   
                                                                                                                                
There being NO OBJECTION, Amendment 1 was adopted.                                                                              
                                                                                                                                
9:14:39 AM                                                                                                                    
                                                                                                                                
FRED  TRIEM, PETERSBURG,  testified  against the  retroactive                                                                   
component of  the bill.   He related  that his opposition  is                                                                   
based  on  historical  reasons.   He  shared  a  story  about                                                                   
taxation  during  the  early colonial  days  when  the  Crown                                                                   
imposed unfair and vexatious taxes.   When the Declaration of                                                                   
Independence  was  written in  1787,  a clause  was  included                                                                   
regarding enacting  retroactive laws.  He suggested  having a                                                                   
prospective tax at a higher tax  rate.  He concluded that the                                                                   
Alaska legislature should not enact retroactive laws.                                                                           
                                                                                                                                
9:23:35 AM                                                                                                                    
                                                                                                                                
Senator  Thomas asked  Mr. Triem  if he would  feel the  same                                                                   
about  a rebate.    Mr. Triem  thought that  would  not be  a                                                                   
retroactive tax.  He described  his opposition to retroactive                                                                   
taxation.   Senator Thomas  pointed out that  the bill  was a                                                                   
compilation  of many opinions  and was in  response to  a tax                                                                   
rate that some felt was not right.   He thanked the testifier                                                                   
for his comments.                                                                                                               
                                                                                                                                
9:25:11 AM                                                                                                                    
                                                                                                                                
Senator Huggins thought  that many Alaskans felt  the same as                                                                   
Mr. Triem.   He reminded  the committee  that HB 2001  had an                                                                   
effective date of January 1, 2008.                                                                                              
                                                                                                                                
9:26:54 AM                                                                                                                    
                                                                                                                                
KEVIN MITCHELL,  CONOCOPHILLIPS, VICE PRESIDENT,  FINANCE AND                                                                   
ADMINISTRATION,  ALASKA,  pointed  out  that  there  are  two                                                                   
components  to   the  bill,  the  removal  of   the  standard                                                                   
operating cost deduction at Prudhoe  Bay and Kuparuk, and the                                                                   
removal of the retroactive implementation of the bill.                                                                          
                                                                                                                                
Mr. Mitchell  addressed  retroactivity first.   He said  that                                                                   
the  decision  to  retroactively  apply tax  increases  is  a                                                                   
policy  call  of  the  legislature.   It  is  a  question  of                                                                   
fairness to those taxpayers.   Retroactive tax increases send                                                                   
a very clear message  to investors.  It's a  message that the                                                                   
Alaskan  fiscal   environment  is  an  uncertain   one.    He                                                                   
maintained that  investment decisions  need to be  taken with                                                                   
care.   Retroactive tax  increases are bad  tax policy.   The                                                                   
response  by  investors  is  to  take  a  cautious  approach,                                                                   
especially  with regard  to longer-term  investments.   Long-                                                                   
term  investments  face  more  fiscal  uncertainty  by  their                                                                   
nature.   A track  record of retroactive  tax increases  adds                                                                   
further to that uncertainty.   He gave an example of property                                                                   
taxes  made retroactive,  as a  bad  idea.   He testified  in                                                                   
support of SB 242 because it corrects a wrong.                                                                                  
                                                                                                                                
Mr.  Mitchell  addressed  standard  deduction  for  operating                                                                   
costs at Kuparuk and Prudhoe Bay.   The standard deduction is                                                                   
a tax  targeted on Prudhoe and  Kuparuk, which is  unfair and                                                                   
creates uncertainty for investors  who cannot assume that all                                                                   
investments  and all  taxpayers will  be treated  alike.   He                                                                   
opined that the  current tax policy is not fair  to those old                                                                   
fields  with increasing  need for maintenance  activity.   He                                                                   
maintained that  the tax law  encourages producers  to reduce                                                                   
costs since  actual costs  are increasing  at a rate  greater                                                                   
than  the 3  percent escalation  allowed for  in the  current                                                                   
production tax law.   The increases are a function  of higher                                                                   
activity levels  and industry cost  escalation.  He  spoke of                                                                   
great  opportunities   for  investment  and   development  at                                                                   
Prudhoe  and   Kuparuk.  The  standard  deduction   does  not                                                                   
encourage  that investment,  as  incremental operating  costs                                                                   
are  not  deductable.   He  remarked  that  in light  of  the                                                                   
legislature's  propensity  to   increase  taxes,  the  sunset                                                                   
provision of 2010 does not provide much comfort.                                                                                
                                                                                                                                
Mr.  Mitchell  spoke  about unintended  consequences  of  the                                                                   
standard  deduction.   Almost 70 percent  of operating  costs                                                                   
are manpower  related.   With the  tax law  that is  in place                                                                   
today, the industry is incentivized  to reduce those costs at                                                                   
Prudhoe  and Kuparuk  more  so than  ever  before.   Standard                                                                   
deduction is also having unintended  consequences on facility                                                                   
sharing agreements.  The cost  to new producers for access to                                                                   
Kuparuk  and   Prudhoe  facilities  increases   significantly                                                                   
because  of the  tax effect.    Incremental costs  associated                                                                   
with  processing and  handling  new production  is no  longer                                                                   
deductible.   The revenue  received for  facility sharing  is                                                                   
taxable.  That increases the taxable  margin per barrel which                                                                   
increases the tax  rate that's applied to all  production for                                                                   
those facility owners.  That additional  cost is passed on to                                                                   
the new producer seeking access to those facilities.                                                                            
                                                                                                                                
Mr.  Mitchell  concluded  that  ConocoPhillips  supports  the                                                                   
removal  of the standard  operating cost  deduction  from the                                                                   
production tax law.                                                                                                             
                                                                                                                                
9:33:08 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman   asked  about  the  3   percent  deduction                                                                   
modeling  presented   by  Mr.  Dickinson  previously.     Mr.                                                                   
Mitchell responded that he had  not looked at that in detail.                                                                   
He reported that from 2005 - 2006,  ConocoPhillips' operating                                                                   
costs increased  by around 45 percent.   From 2006 -  2007 it                                                                   
was not  a similar high level  of increase, yet  still higher                                                                   
than at a 3 percent rate.  Without  the regulations in place,                                                                   
it is difficult to know the base line at this time.                                                                             
                                                                                                                                
Co-Chair  Stedman   requested  more  information   about  the                                                                   
"activity  level".   Mr. Mitchell  responded  that those  are                                                                   
maintenance  and repair  activity - continuing  costs  on old                                                                   
fields.  A lot  of the work is not discretionary  and must be                                                                   
done for safety's sake.                                                                                                         
                                                                                                                                
9:35:24 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  asked for comment on the  marginal tax rate                                                                   
at $90  per barrel and  who benefits  from it.   Mr. Mitchell                                                                   
replied that the  marginal rates differ depending  on whether                                                                   
one is  talking about an  increase in  price or volume,  or a                                                                   
change in  costs.   In general, at  current price  levels the                                                                   
marginal government  take is around  80-85 percent.   Some of                                                                   
that is driven by the effect of  progressivity.  The marginal                                                                   
take for an  additional dollar per barrel of  revenue ends up                                                                   
being somewhere in excess of 80 percent.                                                                                        
                                                                                                                                
9:37:33 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman suggested  framing  that  answer in  layman                                                                   
terms.    He  gave  an  example  of  revenue  generated  from                                                                   
additional   production  using   80   percent  for   marginal                                                                   
government  take;  the  industry  would  get  20  cents,  the                                                                   
federal government  and the  state would get  80 cents  - the                                                                   
federal  portion   of  that  would  be  roughly   a  marginal                                                                   
corporate tax  rate of 34 percent,  so that the  state number                                                                   
would  be in  the high  40's.   He  concluded  that for  each                                                                   
marginal  barrel  not produced,  the  state  treasury is  the                                                                   
biggest  loser  as  far  as net  incremental  dollars.    Mr.                                                                   
Mitchell agreed,  but thought the  state share would  be even                                                                   
larger  because  the  production tax  is  deductible  against                                                                   
federal  tax.  That  would reduce  the federal  piece at  the                                                                   
expense of  the state.   Co-Chair Stedman emphasized  that it                                                                   
is  in   the  state's  best   interest  to  target   marginal                                                                   
production.                                                                                                                     
                                                                                                                                
9:39:28 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  noted concern  with the standard  deduction                                                                   
because  it  does  not encourage  marginal  production.    He                                                                   
reported  hearing conflicting  information  about  how the  3                                                                   
percent  cap on  operating expenditures  affects Prudhoe  Bay                                                                   
and   Kuparuk,   especially   regarding   new   entrants   or                                                                   
independents.                                                                                                                   
                                                                                                                                
Co-Chair Stedman  asked about  the 3-year  time horizon.   He                                                                   
thought it  could as  easily be extended  as terminated.   He                                                                   
asked  Mr. Mitchell  to ask  ConocoPhillips' economist  about                                                                   
cost escalation  in operating and capital expense  around the                                                                   
world.    In retrospect,  both  the  Administration  and  the                                                                   
legislature  should  have  paid  more  attention.    He  also                                                                   
requested  current thoughts  on  operating  and capital  cost                                                                   
appreciation   globally,    and   for   price    appreciation                                                                   
information for 2007 and 2008.                                                                                                  
                                                                                                                                
9:43:01 AM                                                                                                                    
                                                                                                                                
Senator Thomas  pointed out that Mr. Mitchell  drew attention                                                                   
to  the  relationship  between  operating  cost  and  capital                                                                   
expenditure, because  the more capital one invests,  the more                                                                   
facilities  are  being  built  or expanded.    The  increased                                                                   
operating  expense tax  would  have a  detrimental affect  on                                                                   
expansion  and   exploration.    Mr.  Mitchell   agreed  that                                                                   
additional  capital  investments   usually  bring  additional                                                                   
capital costs.   Senator Thomas  asked if oil  industry taxes                                                                   
around the world  are decreasing.  Mr. Mitchell  replied that                                                                   
taxes  are going up.   Senator  Thomas asked  if profits  are                                                                   
going  up.   Mr.  Mitchell replied  that  income reported  by                                                                   
ConocoPhillips  in Alaska  in 2007  was lower  than in  2006,                                                                   
despite  a  higher  price  environment.    Profits  decreased                                                                   
primarily due to taxes.                                                                                                         
                                                                                                                                
9:44:59 AM                                                                                                                    
                                                                                                                                
Senator  Huggins  addressed unintended  consequences  of  the                                                                   
standard deduction,  which were  not known  at the  time that                                                                   
AGIA passed.   He requested  information about  solutions for                                                                   
unintended  consequences.   Mr. Mitchell  replied that  there                                                                   
have not been  any conversations on that subject  between the                                                                   
Administration   and   the  producers.      Senator   Huggins                                                                   
emphasized  that   the  legislature  needs  to   push  for  a                                                                   
resolution to the problem.                                                                                                      
                                                                                                                                
9:47:17 AM                                                                                                                    
                                                                                                                                
Senator Dyson  requested that the Administration  participate                                                                   
in the conversation about unintended consequences.                                                                              
                                                                                                                                
Co-Chair Stedman  agreed.  He stressed that  the marginal tax                                                                   
issue  also  needed to  be  addressed.   Senator  Dyson  also                                                                   
wanted input  from the Administration  about the  zero fiscal                                                                   
note, which  he thought did not  make sense.  He  thought the                                                                   
fiscal  note should  reflect  the  consequences  if the  bill                                                                   
passes.  He  recalled reluctance to reopen the  discussion on                                                                   
HB 2001.                                                                                                                        
                                                                                                                                
Co-Chair  Stedman  reported that  the  fiscal  note from  the                                                                   
Department of Revenue  was for about $800 million,  not zero.                                                                   
He agreed to find out more about  the impact to the treasury.                                                                   
                                                                                                                                
9:50:26 AM                                                                                                                    
                                                                                                                                
Senator  Thomas  asked  if  the  standard  deduction  was  an                                                                   
onerous  provision  to the  industry.   Mr.  Mitchell  talked                                                                   
about how the tax  bill was based on a net  tax structure and                                                                   
not a  gross tax structure.   The standard deduction  removes                                                                   
some aspects of  the true net tax and it becomes  more like a                                                                   
modified gross tax.                                                                                                             
                                                                                                                                
Co-Chair Stedman reported that  it costs about $25 per barrel                                                                   
to get  the oil  out of  the ground  and shipped  out.   With                                                                   
market value  at $75, there  is a $50  profit.   The marginal                                                                   
tax would be around 80 percent.   He countered that it shifts                                                                   
more toward gross, rather than  pushing the marginal tax rate                                                                   
up.   Mr. Mitchell  agreed.  He  explained that the  standard                                                                   
deduction, to  the extent that  actual costs are  higher than                                                                   
the  cap on  operating costs,  becomes  another tax  increase                                                                   
over  and  above  the increase  in  progressivity  and  other                                                                   
factors.                                                                                                                        
                                                                                                                                
9:53:38 AM                                                                                                                    
                                                                                                                                
MARILYN  CROCKETT, EXECUTIVE  DIRECTOR,  ALASKA  OIL AND  GAS                                                                   
ASSOCIATION (AOGA), read from a written statement:                                                                              
                                                                                                                                
     AOGA  is  a  trade  association  for  the  oil  and  gas                                                                   
     industry  in  Alaska. Our  16  members account  for  the                                                                   
     majority  of  oil  and  gas   exploration,  development,                                                                   
     production,   transportation,  refining   and  marketing                                                                   
     activities  in the  state. My  testimony today  reflects                                                                   
     the  full consensus  of  the members  of  AOGA, with  no                                                                   
     dissent.                                                                                                                   
                                                                                                                                
     It  is  no  secret  that  AOGA  opposed  the  provisions                                                                   
     addressed   in  this  bill   during  the  2007   Special                                                                   
     Legislative Session. And  it should come as no surprise,                                                                   
     of  course,  that we  do  support  the repeal  of  these                                                                   
     provisions now. In fact,  just in the first three months                                                                   
     since  the passage of  ACES, we  have already  seen some                                                                   
     companies  announce   reductions  in   their  investment                                                                   
     plans.  Unfortunately, this  is a  trend we expect  will                                                                   
     continue.                                                                                                                  
                                                                                                                                
     In considering  the merits of SB 242, it's  important to                                                                   
     take  into account  how it  will  impact the  real-world                                                                   
     situation  that  Alaska faces.  The  greatest  challenge                                                                   
     that confronts this generation  of Alaskans and the next                                                                   
     is  the ongoing  decline  of oil  production, which  has                                                                   
     been, is  today, and promises to remain  the cornerstone                                                                   
     of the finances of state government.                                                                                       
                                                                                                                                
     Production  decline is  eroding  this cornerstone.  Even                                                                   
     with  the massive  investments made  in the past,  North                                                                   
     Slope  production declined  an  average of  6.2% a  year                                                                   
     from FY 1997  to FY 2007, and Cook Inlet  oil production                                                                   
     declined  at 8.0%  a  year. Without  those  investments,                                                                   
     decline would have been approximately 15%.                                                                                 
                                                                                                                                
     There are  three categories of investment  that can slow                                                                   
     the  rate of  decline on  the North Slope,  or at  least                                                                   
     keep  it  from  getting any  worse.  These  are,  first,                                                                   
     investment  in  exploration   to  discover  new  fields;                                                                   
     second, investment  in existing fields to  prevent their                                                                   
     decline  from  accelerating;  and third,  investment  in                                                                   
     innovation, technology, and new                                                                                            
     infrastructure  to  allow development  of  the vast  but                                                                   
     challenging resource  of heavy and viscous  oil that has                                                                   
     already been discovered.                                                                                                   
                                                                                                                                
     To  be sure,  exploration  plays  an important  role  in                                                                   
     Alaska  production. But even  when exploration  succeeds                                                                   
     in  discovering  a commercially  viable  field, it  will                                                                   
     take  years from  the time  of its  discovery until  the                                                                   
     time  production from  it begins.  But the challenge  of                                                                   
     declining  production  confronts   Alaska  today  -  not                                                                   
     eight,  ten or a  dozen years from  now. By  its nature,                                                                   
     investing   in  exploration   can  make  a   significant                                                                   
     contribution toward  solving the challenge  of declining                                                                   
     production in the longer  term, but not the shorter term                                                                   
     when results are urgently needed.                                                                                          
                                                                                                                                
     Investment in heavy and viscous  oil development is also                                                                   
     a solution in the mid to  long term. The first well ever                                                                   
     drilled to  test production from the Ugnu  Formation was                                                                   
     only drilled in 2007 in the  Milne Point Unit, and it is                                                                   
     still  being  tested  and  evaluated to  gain  a  better                                                                   
     understanding  of the  physical  characteristics of  the                                                                   
     Ugnu oil.  There are plans  to use the results  of these                                                                   
     tests  and  evaluations  to  plan and  develop  a  pilot                                                                   
     project  for producing  Ugnu oil.  Until then,  West Sak                                                                   
     will continue  to be  the only commercial  heavy/viscous                                                                   
     opportunity.                                                                                                               
                                                                                                                                
     This  gets  us  to  investment  in  currently  producing                                                                   
     fields. Fortunately,  there are investments  that can be                                                                   
     made, and are being made,  in these fields to slow their                                                                   
     decline. In  the short term, this is in-fill  drilling -                                                                   
     that  is, drilling  new  wells into  the  portions of  a                                                                   
     reservoir that  are between the wells that  have already                                                                   
     been drilled. This accelerates  the drainage of oil from                                                                   
     the rock that currently lies  in between existing wells.                                                                   
     In-fill  drilling  last  year  contributed  some  70,000                                                                   
     barrels a day to production  from the Prudhoe Bay field.                                                                   
     To put  this into perspective,  a 70,000 barrel  per day                                                                   
                          th                                                                                                    
     field would  be the 4  largest stand-alone  field on the                                                                   
     North Slope today.                                                                                                         
                                                                                                                                
     There are also major investments  being made, and yet to                                                                   
     be  made, in  "renewal" of  the  surface facilities  for                                                                   
     existing  fields. For  instance,  the gathering  centers                                                                   
     and flow  stations for the  Prudhoe Bay field  have been                                                                   
     in service  for over  30 years now.  If Prudhoe  Bay and                                                                   
     the other producing fields  are to continue producing in                                                                   
     the   decades  to   come,   their  original   production                                                                   
     facilities  will  need  to be  overhauled  or  replaced.                                                                   
     Also,  as increasing  amounts of  heavy and viscous  oil                                                                   
     come  into production,  even  relatively new  facilities                                                                   
     that    were    designed   for    comparatively    light                                                                   
     "conventional"  oil will probably  need to be  modified,                                                                   
     refitted  or replaced  in  order to  minimize  operating                                                                   
     problems in handling that  heavy/viscous oil. Regardless                                                                   
     of  the stimulus  or purpose  for  making them,  renewal                                                                   
     investments in production  infrastructure present a very                                                                   
     similar  cash-flow pattern as  there is for  investments                                                                   
     in the original  infrastructure to develop  a field. And                                                                   
     consequently,   tax   policy   affecting   the   initial                                                                   
     development  infrastructure equally  affects renewal  as                                                                   
     well.  Let's  first  examine   repeal  of  the  standard                                                                   
     deduction, embodied in AS 43.55.165(k) and (l).                                                                            
                                                                                                                                
     According  to  the  Department of  Revenue's  Fall  2007                                                                   
     Revenue Forecast, 64-68%  of future production will come                                                                   
     from  the  Prudhoe  Bay and  Kuparuk  fields  and  their                                                                   
     satellites -  the very fields  which are subject  to the                                                                   
     standard  deduction   limitation.  This   production  is                                                                   
     absolutely  critical to the  state and, if  anything, we                                                                   
     should be doing all we can  to ensure aggressive efforts                                                                   
     are undertaken  to stem the  decline from  these fields.                                                                   
     Unfortunately,  limiting the  deductibility of  expenses                                                                   
     incurred to  carry out these  functions does  nothing to                                                                   
     encourage this needed investment.                                                                                          
                                                                                                                                
     DOR  is reportedly  forecasting a  relatively small  gap                                                                   
     between  2006  costs  and  costs for  future  years.  We                                                                   
     maintain  that the  recent acceleration  in the  cost of                                                                   
     doing  business in  the oil  patch  doesn't support  the                                                                   
     notion  that costs  will increase  only modestly  in the                                                                   
     near-term.   Indeed,   worldwide,    industry   analysts                                                                   
     continue to project steadily  increasing costs. Further,                                                                   
     just last  week, one north slope operator  projected the                                                                   
     cost  of  operations  in  the Prudhoe  Bay  and  Kuparuk                                                                   
     fields at $450  million dollars over the  amount for the                                                                   
     standard deduction.                                                                                                        
                                                                                                                                
     Some  have  argued  that since  the  standard  deduction                                                                   
     applies    only   to    operating   expenses,    capital                                                                   
     expenditures are  not affected. The reality  is that the                                                                   
     fiscal  impact  of  anticipated  operating  costs  is  a                                                                   
     critical component  of decision-making when  it comes to                                                                   
     capital  expenditures. As  individuals we consider  this                                                                   
     anytime we  make a purchase-whether  it be a  vehicle or                                                                   
     an appliance.  As legislators consider  capital budgets,                                                                   
     a keen eye is focused on  what the operational impact of                                                                   
     that capital expenditure will be.                                                                                          
                                                                                                                                
     So  long   as  the  standard  deduction   is  in  place,                                                                   
     decisions on  capital expenditures in these  fields will                                                                   
     be impacted. Further, given  the hundreds of millions of                                                                   
     dollars  at stake, little  comfort can  be taken  in the                                                                   
     2009 review  of this provision. Prudent  decision-making                                                                   
     today must  be conservative and  cannot be based  on the                                                                   
     "chance" that the standard  deduction will be eliminated                                                                   
     during the 2009 review.                                                                                                    
                                                                                                                                
     Turning now to retroactivity,  let's look at the history                                                                   
     of  implementation  of  retroactive  taxing  provisions.                                                                   
     When  enacting  the original  Petroleum  Production  Tax                                                                   
     (PPT)  the Legislature  increased the  tax by over  $800                                                                   
     million  during the last  nine months  of 2006  alone by                                                                   
     applying it  retroactively back  to April first  of that                                                                   
     year. Then, during the last  Special Legislative Session                                                                   
     this  past   fall,  again,  the  Legislature   made  the                                                                   
     additional tax changes retroactive.                                                                                        
     In two short years, the industry  has been subjected not                                                                   
     only to  significant changes  in its tax  structure, but                                                                   
     changes  which have been  applied retroactively.  We are                                                                   
     not aware  of any other  oil producing region  which has                                                                   
     retroactively applied changes to its tax regime.                                                                           
                                                                                                                                
     Not  only  is this  bad  tax  policy,  it sends  a  dire                                                                   
     warning  to  current  and  new investors,  who  have  no                                                                   
     assurances  that the government  tax regime in  place as                                                                   
     they  make investment  decisions  will  remain in  place                                                                   
     and, if  changes are pursued,  that those  changes won't                                                                   
     be  made   retroactive  after  they've   made  important                                                                   
     investment decisions.                                                                                                      
     In  addition  to  the impact  on  investment  decisions,                                                                   
     there  are very  real,  practical impacts  dealing  with                                                                   
     retroactivity  with  which the  State  and industry  are                                                                   
     currently grappling.                                                                                                       
                                                                                                                                
     Under the current ACES law,  retroactive calculations of                                                                   
     tax are  required and it  is not clear how  many aspects                                                                   
     of the calculation should  be applied. Specifically, the                                                                   
     tax  is a  yearly tax  and  as such  the statutory  rate                                                                   
     change  from   22.5%  to  25%  creates   complexity  and                                                                   
     uncertainty  about  how this  should  be calculated.  We                                                                   
     have  asked, but  not yet  received clarification  about                                                                   
     what  the tax  rate is for  2007. The  mechanics of  the                                                                   
     calculation  simply  do  not  allow  you  to  apply  one                                                                   
     percentage  the  first  half  of the  year  and  another                                                                   
     percentage  for the second  half of  the year  since the                                                                   
     tax is  calculated for the  full year against 100%  of a                                                                   
     producer's production, sales, and expenditures.                                                                            
                                                                                                                                
     Additionally,  the new law  only allows  50% of  the 20%                                                                   
     capital  credit to  be used  in the first  year. So,  in                                                                   
     2007   this  applies   to  only   half  the  year.   The                                                                   
     retroactivity  requirement makes  it difficult  to apply                                                                   
     this provision of the law.  During the first half of the                                                                   
     year you should  be able to receive and use  100% of the                                                                   
     credits  earned. But  the question  then becomes  how to                                                                   
     calculate how  much can be  used during the  second half                                                                   
     of the year, since this is  a yearly tax and credits are                                                                   
     earned for the year.                                                                                                       
                                                                                                                                
     These  issues   have  come  up  repeatedly   during  the                                                                   
     workshops being  held by the Department  of Revenue over                                                                   
     the past  two months on development of  its implementing                                                                   
     regulations  but  the Department  has  not identified  a                                                                   
     solution to  clarify a way  forward and comply  with the                                                                   
     law as enacted.                                                                                                            
                                                                                                                                
     In conclusion, SB 242 provides  an opportunity to ensure                                                                   
     that the majority  of new production needed  to stem the                                                                   
     decline of Alaska production  in the short-term comes to                                                                   
     fruition.  We  encourage  the  Committee  to  move  this                                                                   
     legislation. Thank you.                                                                                                    
                                                                                                                                
10:04:15 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman requested information concerning the cost                                                                      
of $400 million that was presented in Anchorage.                                                                                
                                                                                                                                
Senator Thomas wondered  how it is known whether  a reduction                                                                   
in investment is  due to the tax change or if it  is due to a                                                                   
new "find"  somewhere else  in the world.   He questioned  if                                                                   
the  reduction in  investment  is verifiable.   Ms.  Crockett                                                                   
thought that some of it was verifiable.   She gave an example                                                                   
of a project that  would not work due to the  tax change, and                                                                   
others where it would not be known.                                                                                             
                                                                                                                                
Senator Thomas  agreed that  it is  difficult to verify  such                                                                   
projects.  Ms. Crockett responded  that expenditures in older                                                                   
fields are known.                                                                                                               
                                                                                                                                
10:09:34 AM                                                                                                                   
                                                                                                                                
Senator Elton  thought that even  if some decisions  had been                                                                   
made  to  not  invest,  those  decisions  could  be  business                                                                   
decisions.   He  summarized  that there  is  an $800  million                                                                   
impact  on the retroactivity  and a  $450 million  difference                                                                   
between the standard deduction  and what actually occurs, for                                                                   
a net effect of  $1.2 billion.  One of the  ways to encourage                                                                   
passage of this  bill would be to cancel investment  in order                                                                   
to  save  $1.2  billion.    Ms.  Crockett  talked  about  how                                                                   
investment  decisions are made.   She  reiterated that  the 3                                                                   
percent  and the  retroactivity  provisions  are the  factors                                                                   
which would drive the investment decisions.                                                                                     
                                                                                                                                
Co-Chair Stedman  reported that the state forecast  for FY 08                                                                   
is for 730,000  barrels of oil  a day, at $72.60  per barrel,                                                                   
which equals $19.4  billion in gross revenue.  If  oil was at                                                                   
$90 per barrel, there would be  $24 billion in gross revenue.                                                                   
It costs $25 to get oil out of  the ground and to market.  He                                                                   
summarized  that   some  concerns  such  as   termination  of                                                                   
projects and postponement  of projects would  be addressed at                                                                   
future meetings.  He reported  that he had trouble connecting                                                                   
the "no  impact on capital costs  of the 3  percent operating                                                                   
cap" and the goal to slow the  decline of oil production.  He                                                                   
hoped to get clarification through these discussions.                                                                           
                                                                                                                                
10:14:34 AM                                                                                                                   
                                                                                                                                
Senator Huggins  requested more information  about unintended                                                                   
consequences  for  small  explorers   and  developers.    Ms.                                                                   
Crockett spoke about  the facility access issue.   She sensed                                                                   
that the  Administration  has been talking  to the  producers                                                                   
and to the smaller  independent companies to see  if there is                                                                   
a way to  address this without  having to legislate  it.  She                                                                   
thought  that no  one intended  that  an independent  company                                                                   
bringing a  new field  on line  was going to  have to  pay an                                                                   
extreme premium in  order to access the facilities.   She did                                                                   
not believe there  was an attempt to limit  the deductibility                                                                   
of the companies that own the facilities.                                                                                       
                                                                                                                                
10:16:52 AM                                                                                                                   
                                                                                                                                
Senator Huggins  spoke of the  rational behind the bill.   He                                                                   
maintained  that it  was not  about money,  but rather  about                                                                   
poor techniques used  to set public policy.   He recalled the                                                                   
special session  debates about  removing the "taint  of PPT",                                                                   
which  he supported.    He noted  the  lack  of debate  about                                                                   
standard deduction.   He maintained  that the  public process                                                                   
was circumnavigated.   The Administration did  not oppose the                                                                   
issue, though they did not claim  to know the consequences of                                                                   
standard  deductions.   The  sunset provision  anchored  some                                                                   
votes.   Senator Huggins maintained  that this bill  is about                                                                   
"doing the right  thing" on behalf of Alaskans.   He showed a                                                                   
photo  depicting the  Cadet Honor  Code  at West  Point.   He                                                                   
concluded  that  the honor  code  should  be followed  as  it                                                                   
applies to this situation.                                                                                                      
                                                                                                                                
SB  242  was   heard  and  HELD  in  Committee   for  further                                                                   
consideration.                                                                                                                  
                                                                                                                                
AT-EASE: 10:23:06 AM                                                                                                          
                                                                                                                                
RESUME: 10:23:38 AM                                                                                                           
                                                                                                                                

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