Legislature(2011 - 2012)SENATE FINANCE 532

04/06/2012 09:00 AM FINANCE


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09:06:07 AM Start
09:07:10 AM SB192
09:10:39 AM Department of Revenue
10:38:44 AM Alaska Oil and Gas Association
10:51:02 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 192 OIL AND GAS PRODUCTION TAX RATES TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
SENATE BILL NO. 192                                                                                                           
                                                                                                                                
     "An Act relating to the oil and gas production tax;                                                                        
     and providing for an effective date."                                                                                      
                                                                                                                                
9:07:10 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hoffman  MOVED  to ADOPT  the  proposed  committee                                                                    
substitute  for SB  192,  Work  Draft 27-LS1305\U  (Bullock,                                                                    
4/5/12).                                                                                                                        
                                                                                                                                
Co-Chair Stedman OBJECTED for discussion.                                                                                       
                                                                                                                                
DARWIN PETERSON,  STAFF, SENATOR BERT STEDMAN,  outlined the                                                                    
three changes  in the  new CS. He  explained that  there had                                                                    
been  concern  that  the  prior   draft  of  Alaska  Statute                                                                    
43.55.0119(g),  which  included  tax  rates  for  the  three                                                                    
different types of production,  would have allowed producers                                                                    
to access the intermediate tax  level if any production in a                                                                    
field  was  above the  target  volume  decline curve;  as  a                                                                    
result the language  had been redrafted to  clarify that all                                                                    
existing production  below the target volume  would be taxed                                                                    
at the  high progressivity  rate (page  4, lines  19 through                                                                    
25). He pointed  to page 5, lines 8 through  13 that defined                                                                    
what  production was  incremental  above  the target  volume                                                                    
decline rate;  the language  had been  redrafted to  make it                                                                    
clear that any  production above the target  volume would be                                                                    
taxed at  the intermediate progressivity rate,  but that all                                                                    
remaining production  below the  target rate would  still be                                                                    
taxed at the higher rate.                                                                                                       
                                                                                                                                
Mr. Peterson addressed  the third change that  began on page                                                                    
6, line 31.  New language had been inserted  to specify that                                                                    
a company  involved in  a merger  or acquisition  of another                                                                    
company  could not  use the  other  company's production  to                                                                    
increase  its production  above  the  target volume  decline                                                                    
rate.                                                                                                                           
                                                                                                                                
Co-Chair  Stedman  REMOVED  his OBJECTION.  There  being  NO                                                                    
further OBJECTION,  Work Draft  27-LS1305\U was  ADOPTED. He                                                                    
apologized  for   any  confusion  that  had   resulted  from                                                                    
language included in the prior bill version.                                                                                    
                                                                                                                                
^DEPARTMENT OF REVENUE                                                                                                        
                                                                                                                                
9:10:39 AM                                                                                                                    
                                                                                                                                
BRIAN  BUTCHER, COMMISSIONER,  DEPARTMENT OF  REVENUE (DOR),                                                                    
thanked  committee  consultant  PFC Energy  for  a  positive                                                                    
working relationship. He  provided a PowerPoint presentation                                                                    
titled "Comments  on CSSB  192(FIN) Work  Draft 27-LS1305\O"                                                                    
and  noted that  the majority  of the  presentation was  not                                                                    
impacted by the  CS introduced that morning  (copy on file).                                                                    
He relayed  the department's intent  to touch on  the impact                                                                    
that each piece of the legislation would have.                                                                                  
                                                                                                                                
Co-Chair Stedman explained  that an email had  been sent out                                                                    
the prior day to DOR  and other presenters when the drafting                                                                    
glitch had  been identified. Commissioner  Butcher responded                                                                    
that DOR had  taken the email into account;  the only update                                                                    
that was  not reflected in  the presentation was  related to                                                                    
language  that   would  not  allow  an   acquisition  to  be                                                                    
beneficial [to a producer].                                                                                                     
                                                                                                                                
Commissioner Butcher addressed  questions DOR had considered                                                                    
related to its version of an oil tax bill (slide 3):                                                                            
                                                                                                                                
     · Does this bill make Alaska more competitive?                                                                             
                                                                                                                                
     · Does this bill make Alaska more appealing to                                                                             
        potential investors?                                                                                                    
                                                                                                                                
     · Does this bill make our tax structure less                                                                               
        complicated & more understandable to investors?                                                                         
                                                                                                                                
     · Are these changes meaningful enough to compete for                                                                       
        investment capital?                                                                                                     
                                                                                                                                
9:13:20 AM                                                                                                                    
                                                                                                                                
Commissioner Butcher  relayed that the  presentation focused                                                                    
on items  listed on  slide 4  titled "CSSB  192(FIN) Changes                                                                    
from Current Law":                                                                                                              
                                                                                                                                
     · Change to progressivity calculation                                                                                      
                                                                                                                                
          o For currently producing fields                                                                                      
                                                                                                                                
          o For production from currently producing fields                                                                      
             exceeding a production target                                                                                      
                                                                                                                                
          o For new fields                                                                                                      
                                                                                                                                
     · Change to minimum tax                                                                                                    
                                                                                                                                
     · Change to lease expenditure allocation                                                                                   
                                                                                                                                
     · Petroleum information management system                                                                                  
                                                                                                                                
Commissioner Butcher moved to slide  5: "Impact of Change to                                                                    
Progressivity  on Production  Tax  Liability."  The tax  was                                                                    
company   specific  particularly   in   relation  to   lease                                                                    
expenditures.  In general  the  system was  kept neutral  at                                                                    
$100 per  barrel and  taxes were  increased at  lower prices                                                                    
due  to  the  gross  minimum tax  floor  provisions  in  the                                                                    
legislation; however,  there were  companies that  would see                                                                    
tax increases  at $100 per barrel  and under. The tax  was a                                                                    
small reduction  for many companies  above $100  per barrel.                                                                    
He reiterated  that tax changes  would impact  all companies                                                                    
differently.                                                                                                                    
                                                                                                                                
Commissioner  Butcher  pointed  to  slide  6:  "Comments  on                                                                    
Change to  Progressivity." Currently companies  were allowed                                                                    
to use  their lease expenditures to  reduce their production                                                                    
tax  value, which  reduced their  progressive tax  rate. The                                                                    
bill   did   not   factor  lease   expenditures   into   the                                                                    
progressivity calculation. He  explained that companies with                                                                    
higher  lease   expenditures  could   find  the   bill  less                                                                    
attractive because they  would no longer be able  to use the                                                                    
expenditures  to  reduce  their  progressive  tax;  however,                                                                    
companies with lower lease expenditures  could find the bill                                                                    
more  attractive  because  they  would  benefit  from  lower                                                                    
progressive  tax.  He  would provide  detail  later  in  the                                                                    
presentation on the difference between  a company spending a                                                                    
significant amount on development  versus a company spending                                                                    
a smaller amount.                                                                                                               
                                                                                                                                
Commissioner Butcher  informed the committee that  the gross                                                                    
progressive  tax could  reduce the  incentive to  invest and                                                                    
reward  companies   in  a  harvest   mode  with   low  lease                                                                    
expenditures;   however,   certain   progressivity   aspects                                                                    
related to production on new  fields and new production from                                                                    
existing fields could help balance things out.                                                                                  
                                                                                                                                
9:15:50 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman inquired  whether DOR  planned to  provide                                                                    
more   detail   on    information   in   the   presentation.                                                                    
Commissioner Butcher responded in the affirmative.                                                                              
                                                                                                                                
Commissioner  Butcher addressed  slide 7:  "Comments on  the                                                                    
Minimum  Tax."  The  bill would  create  a  substantial  tax                                                                    
increase at  lower prices, generally  at $60 per  barrel and                                                                    
below. The  minimum tax would  impact companies  when prices                                                                    
were below  their current amount.  He elaborated  that state                                                                    
revenues  from oil  would be  less than  half their  current                                                                    
level if  oil prices dropped to  $60 per barrel or  lower; a                                                                    
tax increase would only have  a minimal benefit to the state                                                                    
and  substantial budget  decisions would  be necessary  as a                                                                    
result of the low oil price.                                                                                                    
                                                                                                                                
Co-Chair  Stedman  requested  that Commissioner  Butcher  go                                                                    
into  depth  on  the  items included  in  the  presentation.                                                                    
Commissioner Butcher  explained that the  presentation would                                                                    
provide more substantive detail on following slides.                                                                            
                                                                                                                                
Co-Chair  Stedman  asked  Commissioner Butcher  to  continue                                                                    
with the  presentation, but reiterated  the need  to discuss                                                                    
the items in further detail.                                                                                                    
                                                                                                                                
9:17:31 AM                                                                                                                    
                                                                                                                                
Commissioner Butcher  directed attention  to slide  8 titled                                                                    
"Petroleum Information Management System (PIMS)":                                                                               
                                                                                                                                
     · Requires the Department to have the information                                                                          
       management system in place by January 1, 2014                                                                            
                                                                                                                                
     · Competes with core mission of the Tax Division,                                                                          
        which is to assess and collect taxes                                                                                    
                                                                                                                                
     · Competes with daily staff goals of interacting with                                                                      
        taxpayers, forecasting revenues, and auditing tax                                                                       
        returns                                                                                                                 
                                                                                                                                
     · Will likely delay the completion of those core                                                                           
        duties and result in slower responses to legislative                                                                    
        policy questions                                                                                                        
                                                                                                                                
Commissioner Butcher noted that  DOR had been criticized for                                                                    
not  providing the  legislature  information quickly  enough                                                                    
without catching up  on its audits; the bill  would task the                                                                    
department  with rewriting  regulations, implementing  a new                                                                    
tax,  implementing  a   new  Public  Information  Management                                                                    
System  that  would likely  cost  millions  of dollars,  and                                                                    
adding a number  of positions at the same time  that DOR was                                                                    
working to  put a $35  million tax database system  in place                                                                    
to improve the  prior system. He discussed that  much of the                                                                    
requested information  in the management system  was already                                                                    
gathered by  the Department of Natural  Resources (DNR), the                                                                    
Alaska   Oil  and   Gas  Conservation   Commission  (AOGCC),                                                                    
Department of  Labor and  Workforce Development  (DLWD), and                                                                    
DOR.  He elaborated  that most  of the  DOR information  was                                                                    
confidential and the bill would  require it to gather all of                                                                    
the information  from other departments. He  opined that the                                                                    
process would  be much more  difficult for the  Tax Division                                                                    
given all of its other responsibilities and challenges.                                                                         
                                                                                                                                
Commissioner Butcher read additional  points related to PIMS                                                                    
on slide 9:                                                                                                                     
                                                                                                                                
     · Millions of data elements would have to be manually                                                                      
        uploaded to the system, in various formats including                                                                    
        electronic copies of Excel spreadsheets, PDFs, Word                                                                     
        documents, and in hard copy format                                                                                      
                                                                                                                                
     · Determination would have to be made as to the                                                                            
        confidentiality of each item for uploading to the                                                                       
        system, which would take thousands of employee hours                                                                    
                                                                                                                                
     · Department currently has only begun long-awaited Tax                                                                     
        Revenue Management System (TRMS) project, which is                                                                      
        expected to take 3 - 5 years to complete                                                                                
                                                                                                                                
     · PIMS would likely delay the implementation of that                                                                       
        important tax-specific project                                                                                          
                                                                                                                                
     · Would require significant funding and additional                                                                         
        staff resources for the Department                                                                                      
                                                                                                                                
Commissioner  Butcher  stated  that  from  the  department's                                                                    
perspective,  spending   millions  of  dollars   to  compile                                                                    
information   that   was   already  available   to   various                                                                    
departments  did  not  seem  to  be  a  wise  use  of  state                                                                    
resources.                                                                                                                      
                                                                                                                                
9:20:05 AM                                                                                                                    
                                                                                                                                
BRUCE TANGEMAN, DEPUTY  COMMISSIONER, DEPARTMENT OF REVENUE,                                                                    
pointed out that  some of the graphs in  the printed version                                                                    
of  the  presentation included  too  many  lines; DOR  would                                                                    
provide corrected copies after the meeting.                                                                                     
                                                                                                                                
Commissioner Butcher  looked at  slide 10  titled "Effective                                                                    
Tax Rates" that included a  line chart showing the effective                                                                    
Production  Tax   Rate  (post-credits).  The   current  law,                                                                    
Alaska's  Clear  and Equitable  Share  (ACES)  was shown  in                                                                    
black  ranging from  $40 and  $200; the  governor's proposed                                                                    
bill CSHB 110(FIN) was included  for a frame of reference in                                                                    
red;  and CSSB  192(FIN)  was depicted  in  blue. The  chart                                                                    
showed that  from $60  per barrel and  below the  bill would                                                                    
result in a  significant tax increase (shown  in blue); from                                                                    
the $60 to $110 tax would be  the same as current law; a tax                                                                    
decrease  was seen  at increased  prices that  had not  been                                                                    
reached historically.                                                                                                           
                                                                                                                                
Co-Chair   Stedman   asked   for   verification   that   the                                                                    
presentation  dealt with  effective tax  rates. Commissioner                                                                    
Butcher replied in the affirmative.                                                                                             
                                                                                                                                
Co-Chair Stedman  queried why detail  on marginal  tax rates                                                                    
had not  been included in  the presentation. He  pointed out                                                                    
that the legislation made a  substantial shift away from the                                                                    
marginal tax concern and potential  exposure the state would                                                                    
have associated  with any federal financial  help related to                                                                    
capital  expenditures  (up to  and  over  100 percent)  that                                                                    
could  incentivize   behavior  that  was  not   in  Alaska's                                                                    
interest.                                                                                                                       
                                                                                                                                
Mr. Tangeman responded that the  related graphs DOR had seen                                                                    
showed a  slight improvement on  the marginal side,  but not                                                                    
to the extent  that would have resulted  from the bracketing                                                                    
system under CSHB 110(FIN).                                                                                                     
                                                                                                                                
9:23:10 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman asked whether  DOR believed that going from                                                                    
a 90 percent marginal tax rate  to a 45 percent marginal tax                                                                    
rate was  barely measurable. Mr.  Tangeman replied  that DOR                                                                    
would be happy  to share the graphs with  the committee, but                                                                    
he was  not prepared to go  into detail on the  issue at the                                                                    
time.                                                                                                                           
                                                                                                                                
Co-Chair  Stedman reminded  DOR that  the [oil  tax] subject                                                                    
was  not  new  and  that  it  should  be  careful  with  its                                                                    
testimony. Members  did not  find it  "humorous" to  be told                                                                    
that such  a significant change  [in the marginal  tax rate]                                                                    
was   inconsequential.  He   asked  for   accuracy  in   the                                                                    
discussion.                                                                                                                     
                                                                                                                                
Commissioner Butcher  responded that DOR was  not saying the                                                                    
difference was inconsequential. The  department was happy to                                                                    
provide the data  to the committee, but had not  had time to                                                                    
gather the  information for the  meeting, given that  the CS                                                                    
had  come out  the  prior afternoon.  The presentation  used                                                                    
effective tax rates because DOR  had been told that the rate                                                                    
provided a more well-rounded view.                                                                                              
                                                                                                                                
Co-Chair Stedman  clarified that the effective  rate was the                                                                    
primary  issue;  at high  prices  the  marginal rate  was  a                                                                    
challenge   within  the   current  system.   He  asked   the                                                                    
department to choose its words  carefully because he did not                                                                    
agree  with the  inference  that reducing  the marginal  tax                                                                    
rate   from   90   percent   down    to   45   percent   was                                                                    
inconsequential.                                                                                                                
                                                                                                                                
Commissioner Butcher  answered that DOR had  misspoken if it                                                                    
had described the reduction as insignificant.                                                                                   
                                                                                                                                
9:25:09 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  discussed that  the committee had  heard a                                                                    
substantial  amount of  testimony  that  the current  fiscal                                                                    
system was good for a  harvest mode environment and that the                                                                    
problem existed when oil prices  were above $100. He pointed                                                                    
to the  effective tax  rate proposed  in CSSB  192(FIN) that                                                                    
included a  floor at the  $40 per barrel  price (represented                                                                    
by  the  blue  line  on   slide  10).  He  stated  that  the                                                                    
legislation had roughly  a $50 million impact  on the state-                                                                    
take at  the $100 per  barrel price; whereas,  CSHB 110(FIN)                                                                    
had a  $1.1 billion  impact on the  state. He  wondered what                                                                    
data was available that would  assure the committee that the                                                                    
impact to  the state should  be changed from $50  million to                                                                    
$1.1 billion at  the $100 per barrel  price when consultants                                                                    
had expressed that the change was not needed.                                                                                   
                                                                                                                                
Commissioner Butcher  responded that  he disagreed  with the                                                                    
consultants.  He  stressed  that  Alaska  had  the  nation's                                                                    
highest  tax  rate  and  one  of the  highest  in  any  OECD                                                                    
[Organization  for  Economic Co-operation  and  Development]                                                                    
country; DOR  believed it was  a disincentive that  was seen                                                                    
in the  lack of  production, development, and  investment in                                                                    
Alaska.  He  opined that  the  difference  was more  than  a                                                                    
dollar amount;  it impacted  how companies  evaluated Alaska                                                                    
and how it changed their investment decisions.                                                                                  
                                                                                                                                
9:28:08 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman believed  that the  companies would  speak                                                                    
for themselves, but recalled that  their concern was related                                                                    
to oil  prices above $100  per barrel. The concern  had been                                                                    
one of  the reasons  the committee  had spent  a substantial                                                                    
amount of time  on the issue of prices over  $100 and how to                                                                    
fix the state's increasing  share that became exaggerated at                                                                    
around $200 per barrel.                                                                                                         
                                                                                                                                
Co-Chair Hoffman believed  that it would be  more helpful if                                                                    
the  chart's  Y axis  (slide  10)  used dollars  instead  of                                                                    
percentages.  The chart  showed the  tax rate  going up  100                                                                    
percent [at the  $40 level], but when the  number was looked                                                                    
at in dollars the graph would  not be as drastic. He offered                                                                    
that under the  scenario cash to the companies  at $40 would                                                                    
be a  reduction of $194 million  and at $100 the  amount was                                                                    
negligible; however,  at $150 per  barrel cash  to companies                                                                    
represented   approximately   two-thirds  of   one   billion                                                                    
dollars; at $170 per barrel  companies would receive over $1                                                                    
billion; at  $200 companies would receive  $1.75 billion. He                                                                    
believed  companies would  be looking  at  the numbers  when                                                                    
developing  investment models.  The committee  believed that                                                                    
the state  should have  protection at the  low price  end if                                                                    
substantial changes  were made  at the high  end of  the tax                                                                    
formula. When $194 million was  compared to the potential of                                                                    
another  $1 billion  at the  $170  price per  barrel it  was                                                                    
significant. He  addressed that the probability  of $170 per                                                                    
barrel oil was  low, but consultants had also  said that the                                                                    
probability of $40  per barrel oil was very low  as well. He                                                                    
opined  that the  finance committees  would be  "scrambling"                                                                    
anyway if  the price  of oil dropped  to $40.  He reiterated                                                                    
that if the state gave on  the high price end that it should                                                                    
have some protections on the low price end.                                                                                     
                                                                                                                                
9:31:57 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman   noted  that  at  the   $140  per  barrel                                                                    
(indicated  by a  green  line on  slide  10) the  difference                                                                    
between ACES  and CSSB 192(FIN)  was $765 million  [ACES was                                                                    
$765 million  higher]; the difference between  ACES and CSHB                                                                    
110(FIN)  was  $2.784  billion   [ACES  was  $2.784  billion                                                                    
higher];  the  difference  between CSSB  192(FIN)  and  CSHB                                                                    
110(FIN)  was  $2  billion [CSSB  192(FIN)  was  $2  billion                                                                    
higher]. He emphasized that the amounts were significant.                                                                       
                                                                                                                                
Commissioner Butcher  replied to Co-Chair  Hoffman's earlier                                                                    
question.  He explained  that looking  at the  dollar amount                                                                    
was  worthwhile;   however,  the   reason  the   chart  used                                                                    
percentages  was that  keeping the  transportation operating                                                                    
and  capital  expenditures  constant the  percentages  would                                                                    
apply for any  year and in any scenario.  The chart provided                                                                    
more of a snapshot into the  future than it would if current                                                                    
dollars were used.                                                                                                              
                                                                                                                                
Co-Chair Hoffman surmised that  the presentation appeared to                                                                    
be geared towards providing shock value.                                                                                        
                                                                                                                                
9:33:31 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  pointed to the  bend in the  CSSB 192(FIN)                                                                    
line (blue)  where the  goal was to  keep the  percentage of                                                                    
profit  evenly split  and staying  constant at  prices above                                                                    
approximately $120 per barrel ($130  shown on the chart). He                                                                    
asked DOR  to explain why  the CSSB 192(FIN)  line flattened                                                                    
out;  it  flattened  out intentionally  to  hold  the  split                                                                    
constant and  to get away  from the marginal tax  impact the                                                                    
state  was  facing at  high  rates;  he believed  the  chart                                                                    
looked accurate  related to that  point. He opined  that the                                                                    
chart looked  dramatic, but the number  was somewhere around                                                                    
$300 million  more to  the state than  under current  law at                                                                    
$40 per  barrel. He observed  that there was an  increase to                                                                    
the state  at a $40  per barrel price of  approximately $300                                                                    
million,  but at  prices of  $120  the state  was giving  up                                                                    
approximately   $277  million.   He   speculated  that   the                                                                    
probability of  hitting $40 per  barrel and  remaining there                                                                    
without significant state and  industry involvement would be                                                                    
minimal. He could  not imagine running at $40  oil without a                                                                    
substantial modification  to the current structure  in order                                                                    
to  keep  the  industry  alive and  vibrant  and  the  state                                                                    
functioning.                                                                                                                    
                                                                                                                                
9:36:12 AM                                                                                                                    
                                                                                                                                
Mr.  Tangeman commented  that in  the recent  past, $40  per                                                                    
barrel to  $140 per  barrel swings had  occurred in  a short                                                                    
amount  of  time.  He  noted that  the  occurrence  was  not                                                                    
unheard of;  DOR was projecting relatively  flat prices into                                                                    
the  near future,  but price  swings had  happened and  they                                                                    
would have a serious impact on the budget.                                                                                      
                                                                                                                                
Co-Chair  Stedman agreed,  but the  swings had  not been  at                                                                    
sustained  levels for  quite  some time.  He  referred to  a                                                                    
"price shock  upward" at $145  per barrel that  had occurred                                                                    
in the past.                                                                                                                    
                                                                                                                                
Co-Chair Hoffman agreed that  [major price fluctuations] had                                                                    
occurred  in the  past. He  reiterated an  earlier statement                                                                    
that  consultants believed  the  occurrence would  be a  low                                                                    
probability.                                                                                                                    
                                                                                                                                
Senator  Thomas thanked  DOR for  its presentation.  He read                                                                    
from a proposal by consultant PFC Energy:                                                                                       
                                                                                                                                
     "Consistent with DOR  methodology these revenue numbers                                                                    
     do not include  payments for tax credits  which are not                                                                    
     claimed  against   current  production  as   these  are                                                                    
     accounted  for separately  in the  budget. In  3013 DOR                                                                    
     forecasts  a potential  liability of  $400 million  for                                                                    
     these credits."                                                                                                            
                                                                                                                                
Senator Thomas  understood that  PFC Energy's  proposal used                                                                    
credits that  had been claimed, but  not anticipated claims.                                                                    
He  asked for  clarification  on whether  the  DOR chart  on                                                                    
slide 10 included anticipated credits.                                                                                          
                                                                                                                                
Commissioner  Butcher answered  that DOR  excluded the  $400                                                                    
million in  credits that did  not result in a  tax liability                                                                    
for the companies;  the credits were accounted  for but were                                                                    
not included  in how the  effective tax rates would  work on                                                                    
companies   currently  paying   taxes  because   there  were                                                                    
companies  that currently  had no  production  and were  not                                                                    
paying taxes.                                                                                                                   
                                                                                                                                
9:38:47 AM                                                                                                                    
                                                                                                                                
Senator Thomas  commented that  at one  time there  had been                                                                    
predictions  of oil  prices at  $150 per  barrel, which  had                                                                    
seemed  hard to  imagine  when oil  was at  $30  or $40  per                                                                    
barrel. He  reflected that  oil prices had  been at  $30 per                                                                    
barrel in  the relatively  recent past and  currently Alaska                                                                    
North Slope (ANS)  prices were at $120 per  barrel. He noted                                                                    
that  it was  always good  to  be prepared  for the  future,                                                                    
which was hard to predict.                                                                                                      
                                                                                                                                
Commissioner Butcher replied  that DOR had wanted  to show a                                                                    
per-barrel price  range from approximately  $40 to  $200. He                                                                    
acknowledged that it  was not likely oil  prices would reach                                                                    
the end  of the spectrum  in either direction, but  the goal                                                                    
had been to keep the numbers  in a realm that was reasonable                                                                    
for the future.                                                                                                                 
                                                                                                                                
Senator  Thomas surmised  that a  10 percent  to 15  percent                                                                    
increase in the  price of oil over the next  few years would                                                                    
be   reasonable.  Commissioner   Butcher  agreed   that  the                                                                    
increase would  be reasonable, but  noted that the  price of                                                                    
oil had  never coincided  with a  normal inflation  rate. He                                                                    
referred to a time when oil  had gone from $30 per barrel to                                                                    
$15 per barrel over an extended period.                                                                                         
                                                                                                                                
9:40:47 AM                                                                                                                    
                                                                                                                                
Commissioner  Butcher moved  to slide  11 titled  "Effective                                                                    
Tax Rates  - Impact of  Producing 25% Over Target  (i.e. 1/5                                                                    
of  Production  at  Lower  Rate." The  slide  showed  how  a                                                                    
currently producing  company's effective  tax rate  would be                                                                    
impacted  if  it  were  to increase  its  production  to  25                                                                    
percent over the target. Current  law (ACES) was represented                                                                    
in black;  CSSB 192(FIN) was  shown in blue; and  the dotted                                                                    
blue  line  showed  what  a company  would  pay  under  CSSB                                                                    
192(FIN) if it produced 25 percent over target.                                                                                 
                                                                                                                                
Co-Chair  Stedman discussed  that  production was  currently                                                                    
about 600,000  barrels per  day and that  an increase  of 25                                                                    
percent  would bring  the total  to 750,000.  There had  not                                                                    
been  a significant  amount  of time  spent  looking at  the                                                                    
capital costs to  get to 750,000 barrels per  day; there had                                                                    
been discussion that it would  take $3 billion to $5 billion                                                                    
per year (the equivalent to  the Oooguruk and Nikaitchuq oil                                                                    
fields) to  level out.  He did  not know  how much  it would                                                                    
take  to get  to the  750,000 amount,  but he  supposed they                                                                    
could inquire and try to determine an answer.                                                                                   
                                                                                                                                
9:42:17 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:42:58 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
9:43:08 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman referred  to comments in the  press that it                                                                    
would be nice  to reach production of 1  million barrels per                                                                    
day. He surmised that everyone  would like to see that level                                                                    
of production,  but maintaining production at  600,000 would                                                                    
surprise many  people and reaching  750,000 barrels  per day                                                                    
would be monumental.                                                                                                            
                                                                                                                                
Commissioner  Butcher  answered  that   slide  11  showed  a                                                                    
conceptual percentage;  it did not show  that production was                                                                    
currently at  600,000 barrels per  day and what  would occur                                                                    
at 750,000.  The slide  showed what it  would look  like for                                                                    
any company  (regardless of  production levels)  to increase                                                                    
production and how the lower  tax rate would factor into the                                                                    
entire amount of tax the company would pay.                                                                                     
                                                                                                                                
Co-Chair  Stedman remarked  that  BP  accounted for  roughly                                                                    
half of the production in Prudhoe Bay.                                                                                          
                                                                                                                                
Mr. Tangeman  thought it  would be  interesting to  hear the                                                                    
perspectives  of the  companies when  they presented  to the                                                                    
committee.   The   department    agreed   that   significant                                                                    
investment would need to take  place in order to extract the                                                                    
resource and it  felt that the net system under  ACES was an                                                                    
incentive (tax  credits were a separate  issue that effected                                                                    
the  tax),  but  DOR  believed  shifting  to  gross  on  the                                                                    
progressivity portion  of the tax was  likely a disincentive                                                                    
to  investment  at   a  time  when  the   state  would  need                                                                    
significant  investment  to  extract the  harder  to  access                                                                    
hydrocarbons.  The  oil  would  not be  easy  to  reach  and                                                                    
included  heavy,  viscous, shale  oils  that  would be  more                                                                    
capital intensive.                                                                                                              
                                                                                                                                
9:45:03 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  relayed that the topic  would be discussed                                                                    
later,  given  that  there were  varying  views  related  to                                                                    
simplifying the tax code to  incentivize heavy, viscous, and                                                                    
shale oils, and cost allocation  issues. He remarked that it                                                                    
was  nice to  see  the  impact of  the  25 percent  increase                                                                    
(shown on  slide 11), but  the committee had focused  on the                                                                    
cash  flows  and  net present  value  over  the  incremental                                                                    
production of  a 10,000  barrel field; how  to move  the tax                                                                    
code to enhance the rate of  return and cash flows to enable                                                                    
companies to  reach or get  closer to their hurdle  rates so                                                                    
they would  begin new projects.  He observed that  the slide                                                                    
did not address  the same focus. He believed  that the slide                                                                    
addressed a piece of the equation,  but to get to get to the                                                                    
core of  the issue  it was  necessary to  measure companies'                                                                    
cash  flows and  rates  of return.  He  noted the  committee                                                                    
would ask  the industry  the questions. He  appreciated that                                                                    
the slide referenced the effect of full credits.                                                                                
                                                                                                                                
Commissioner Butcher discussed that  slides 12 and 13 showed                                                                    
how  the  legislation and  gross  [tax]  issue would  impact                                                                    
high-cost   and   low-cost    producers   in   relation   to                                                                    
economically  challenged  projects  that would  have  higher                                                                    
costs such as, heavy or  shale oil, and developments located                                                                    
farther from infrastructure. Slide  12 titled "Effective Tax                                                                    
Rates - High-Cost Producer" included  an estimate of $20 per                                                                    
barrel  for  operating  expenses  and  $25  per  barrel  for                                                                    
capital expenditures.  Slide 13 titled "Effective  Tax Rates                                                                    
- Low-Cost  Producer" included data related  to companies in                                                                    
harvest  mode  that  would  be doing  what  they  needed  to                                                                    
continue producing at their current  rate. He explained that                                                                    
there would  be a considerable  tax increase under  the bill                                                                    
for  high-cost companies  dealing with  more challenged  and                                                                    
expensive fields (slide 12).                                                                                                    
                                                                                                                                
9:48:22 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman replied  that  the committee  had seen  an                                                                    
analysis showing  that present value numbers  would increase                                                                    
under the legislation in a  high-cost scenario. He expounded                                                                    
that the  high-cost producers'  economics had  improved over                                                                    
the lifecycle of their investments  in other projections the                                                                    
committee  had seen.  He furthered  that  the committee  had                                                                    
seen   numerous  presentations   with  varying   degrees  of                                                                    
progressivity  and its  impact  on rate  of  return and  net                                                                    
present values in order to  determine what to include in the                                                                    
bill. He  asked to  see how  the lifecycle  economics worked                                                                    
according  to DOR;  if the  numbers were  not improved  over                                                                    
ACES, the  system would not  be improved. He wanted  to work                                                                    
with DOR  on the  issues because he  believed that  its data                                                                    
conceptually did  not fit with  other data presented  to the                                                                    
committee.                                                                                                                      
                                                                                                                                
Commissioner Butcher  responded that  DOR would be  happy to                                                                    
provide the data.  He noted that the  presentation took into                                                                    
account far  fewer variables than  looking at  the lifecycle                                                                    
of a field.                                                                                                                     
                                                                                                                                
Mr. Tangeman pointed  out that the black  line (current ACES                                                                    
system)  took the  deduction of  all  qualified capital  and                                                                    
operating  expenditures into  account; the  blue line  (CSSB                                                                    
192(FIN)) that  reflected a  net system for  the base  and a                                                                    
gross system for the progressivity,  did not allow companies                                                                    
to  take as  many capital  and operating  lease expenditures                                                                    
against their taxes.                                                                                                            
                                                                                                                                
9:51:01 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  observed  that in  certain  circumstances                                                                    
progressivity on  the gross tax  in a  high-cost environment                                                                    
was  somewhat of  a disadvantage;  however, it  put downward                                                                    
pressure  on  the expenditure  side  from  the producer.  He                                                                    
referred  to  concerns  with the  current  ACES  tax  system                                                                    
related  to   the  high-cost  expenditure   side  including,                                                                    
exposure  to  the state  for  all  of  the credits  and  the                                                                    
mechanics of the  high tax structure and how  it worked. The                                                                    
goal was to fix the problem.                                                                                                    
                                                                                                                                
Mr. Tangeman agreed  that the tax credits  used to construct                                                                    
the  ACES  line  (shown  in  black on  slide  12)  could  be                                                                    
adjusted in any  tax regime. He noted that  working with the                                                                    
tax  credit system  within the  existing infrastructure  the                                                                    
black line could be adjusted however a person wanted.                                                                           
                                                                                                                                
Commissioner Butcher discussed that  slide 13 "Effective Tax                                                                    
Rates -  Low-Cost Producer" showed the  effective production                                                                    
tax rate (post credits)  using per barrel operating expenses                                                                    
of $10  and capital expenses  of $3 for a  low-cost producer                                                                    
or a  producer in  harvest mode. He  pointed out  that there                                                                    
was a substantial tax reduction for the producers.                                                                              
                                                                                                                                
9:53:09 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman remarked  that  one of  the  goals was  to                                                                    
bring the tax rate down at  prices above $100 per barrel. He                                                                    
relayed  that one  of the  fundamental points  the committee                                                                    
had heard  repeatedly was that  there was  a lack of  a need                                                                    
for incentive at prices below  $100 per barrel in the legacy                                                                    
fields. He  queried how  DOR justified  moving approximately                                                                    
$1.1 billion to  the industry when consultants  had told the                                                                    
committee that it was not justified.                                                                                            
                                                                                                                                
Commissioner   Butcher  respectfully   disagreed  with   the                                                                    
opinions  of the  consultants. He  stressed that  Alaska had                                                                    
one of the highest tax  rates of any OECD country. Companies                                                                    
that  did not  do business  in  the state  had talked  about                                                                    
Alaska's  high  tax rate.  He  stated  that even  under  the                                                                    
proposed  CSHB 110(FIN)  Alaska would  have the  highest tax                                                                    
rate  in  North  America.  He emphasized  that  billions  of                                                                    
dollars  in  increased  investment was  needed  to  increase                                                                    
production. He asserted that maybe  there was a "sweet spot"                                                                    
between ACES and CSHB 110(FIN)  where taxes were reduced and                                                                    
investment was  increased. He relayed that  the governor had                                                                    
said  he  was  willing  to work  on  whatever  scenario  was                                                                    
feasible.  The  department  had  not  heard  from  companies                                                                    
subsequent  to the  release of  the most  recent version  of                                                                    
CSSB 192(FIN);  therefore, it did  not know what  they would                                                                    
say. The  department's quick snapshot  of the bill  was that                                                                    
it  discouraged investment  of higher-cost,  more challenged                                                                    
projects  and   encouraged  harvest  mode,  which   was  the                                                                    
opposite direction  the administration  had been  going with                                                                    
the governor's bill.                                                                                                            
                                                                                                                                
9:55:31 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman believed  that according  to testimony  it                                                                    
was  more  accurate  to  say that  current  tax  regime  was                                                                    
affected if a producer was  operating under harvest mode. He                                                                    
did  not  think  there  had  been  any  testimony  from  the                                                                    
committee's  consultants   that  CSSB   192(FIN)  encouraged                                                                    
harvest mode.                                                                                                                   
                                                                                                                                
Commissioner Butcher  explained that under harvest  mode the                                                                    
bill was better than current law.                                                                                               
                                                                                                                                
Co-Chair   Stedman  agreed.   He  added   that  there   were                                                                    
significant differences between  Alaska that was "subsurface                                                                    
owned  and commons"  and any  other area  in North  America.                                                                    
Alaska   had   different   cost  environments   and   other;                                                                    
therefore,  it  was not  possible  to  compare Alaska's  tax                                                                    
structure directly  with those of other  states. He remarked                                                                    
that Prudhoe Bay was one of  the most prolific oil basins in                                                                    
the  world; there  had  been testimony  that  the field  was                                                                    
among  the world's  top 10  oil fields.  He opined  that the                                                                    
comparison  was too  narrow.  He did  not  believe that  the                                                                    
state had ever limited its  comparisons to North America and                                                                    
he did not think it was appropriate.                                                                                            
                                                                                                                                
Commissioner Butcher clarified he  had not been referring to                                                                    
the  issue addressed  by Co-Chair  Stedman; however,  he did                                                                    
believe  there  was  value   in  North  America  comparisons                                                                    
because most  the companies doing  business in Alaska  had a                                                                    
North  American   focus.  He  noted  that   PFC  Energy  had                                                                    
discussed  that  Norway was  the  only  other OECD  location                                                                    
above Alaska  and at  $140 per barrel  it dropped  below the                                                                    
state. He expressed  that [the tax rate]  was a disincentive                                                                    
to business in the state and  that it was important to focus                                                                    
on the  current system rather  than on high oil  prices that                                                                    
may never be  seen; the high costs of doing  business in the                                                                    
state were  another component that  played into  the state's                                                                    
competitiveness with other areas.                                                                                               
                                                                                                                                
9:58:25 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman   noted  that  ACES  and   PPT  (Petroleum                                                                    
Production  Tax)  had  been  intentionally  modeled  against                                                                    
Norway's  fiscal  regime.  He  added  that  it  was  not  by                                                                    
happenstance  that the  state tracked  the Norway  system so                                                                    
closely.                                                                                                                        
                                                                                                                                
Co-Chair Hoffman  wondered whether Commissioner  Butcher had                                                                    
been  referring to  the administration  when he  stated that                                                                    
"we" have  not discussed the  current bill version  with the                                                                    
oil companies.  Commissioner Butcher  responded that  he had                                                                    
only been  referring to  himself and  Mr. Tangeman;  DOR had                                                                    
only worked on the current version internally.                                                                                  
                                                                                                                                
Co-Chair Stedman surmised  that based on the  chart on slide                                                                    
13  the current  bill  enhanced the  economics for  low-cost                                                                    
producers.    Commissioner   Butcher    answered   in    the                                                                    
affirmative.                                                                                                                    
                                                                                                                                
Co-Chair  Stedman thought  there  was a  peak spread  around                                                                    
$130 per barrel  (slide 13) and that  the economics improved                                                                    
and  got closer  together above  and below  $130 per  barrel                                                                    
relative  to   the  ununitized  fields  in   CSHB  110(FIN).                                                                    
Commissioner Butcher responded in the affirmative.                                                                              
                                                                                                                                
Co-Chair  Stedman that  CSSB 192(FIN)  did  not address  the                                                                    
ununitized  fields included  in CSHB  110(FIN). He  believed                                                                    
that  CSSB  192(FIN)  incentives  would  get  close  to  the                                                                    
unitized  fields  and what  the  existing  producers in  the                                                                    
basin would  pay under CSHB  110(FIN). He restated  that the                                                                    
CSSB 192(FIN)  incentives came close to  where CSHB 110(FIN)                                                                    
was without incentives.                                                                                                         
                                                                                                                                
10:00:55 AM                                                                                                                   
                                                                                                                                
Commissioner Butcher  concluded with  slide 14:  "Summary of                                                                    
DOR  Comments on  CSSB 192  (FIN)." The  department believed                                                                    
that  the  changes  in  CSSB 192(FIN)  moved  in  the  wrong                                                                    
direction   by  discouraging   higher  investment   on  more                                                                    
challenged projects  and encouraging harvest mode;  and made                                                                    
the state's complicated tax structure  more complex with the                                                                    
change to  part net, part  gross. He emphasized  his concern                                                                    
about  the  additional  burdens of  a  multi-million  dollar                                                                    
database that DOR would have  to compile. The department had                                                                    
been  working  desperately  to catch  up  with  the  70-plus                                                                    
regulations, audits, and  other that had come  up within the                                                                    
past 6 years.  He relayed that the department  was doing the                                                                    
best it  could and everything  it needed  to do, but  it was                                                                    
opposed to the idea of a new database.                                                                                          
                                                                                                                                
10:02:21 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman  asked if  DOR believed  the bill  would be                                                                    
worse than ACES. Commissioner Butcher  replied that the bill                                                                    
was more complicated  than ACES because of  items that would                                                                    
need administering and new regulations  would need to be put                                                                    
in place.  Additionally, the bill  appeared to be  worse for                                                                    
high-cost projects due to the  taxes a company would have to                                                                    
pay.                                                                                                                            
                                                                                                                                
Co-Chair Stedman asked  DOR to follow up  with the committee                                                                    
on the  full cycle  economics of  CSSB 192(FIN),  given that                                                                    
DOR's  data  was  different.   He  recalled  that  petroleum                                                                    
consultant   Pedro   van   Meurs   had   pointed   out   the                                                                    
dysfunctionality  of  CSHB  110(FIN)  related  to  its  cost                                                                    
allocation  issues  between different  hydrocarbon  streams.                                                                    
Mr.  van Meurs  had discussed  that it  was cleaner  to stay                                                                    
away  from  the  cost  allocation   concept  by  moving  the                                                                    
progressivity  on the  gross. He  stated that  the DOR  data                                                                    
showed   a  180-degree   difference   from   at  least   two                                                                    
consultants that  had reviewed the  bill. There had  been no                                                                    
discussion on  the decoupling  of oil  and gas,  which would                                                                    
substantially  increase  the size  of  the  bill. Under  the                                                                    
current  structure the  state  would  lose approximately  $2                                                                    
billion per  year if it ran  a 4.5 billion cubic  feet line.                                                                    
He asked  for the department's  opinion on the  delinking of                                                                    
oil and gas.  He asked if the items should  be linked, which                                                                    
would mean the state would face a $2 billion loss.                                                                              
                                                                                                                                
Commissioner  Butcher replied  in  the negative.  He had  no                                                                    
doubt that  if the price  of oil  dropped to $40  per barrel                                                                    
for  an extended  time  period there  would  be changes  and                                                                    
difficult decisions  to be  made. Additionally,  he believed                                                                    
that oil and gas would be  delinked before a major gas sale.                                                                    
He relayed  that DOR was willing  to work on the  issue with                                                                    
the committee,  but he felt  that CSSB 192(FIN) was  not the                                                                    
only way to decouple oil and gas.                                                                                               
                                                                                                                                
10:05:20 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman felt that the  state had some risk exposure                                                                    
with the  linkage of oil  and gas  in the first  open season                                                                    
associated with  the Alaska  Gasline Inducement  Act (AGIA).                                                                    
The committee  was working to  get a definitive  answer from                                                                    
the  administration on  the issue  and until  told otherwise                                                                    
the committee  would operate under  the assumption  that the                                                                    
state had significant financial exposure.                                                                                       
                                                                                                                                
Commissioner Butcher replied that  the Department of Law had                                                                    
relayed that the  particular door had been  closed. He would                                                                    
provide the information to the committee.                                                                                       
                                                                                                                                
Senator  McGuire  wondered  how  much had  centered  on  the                                                                    
ability  to   write-off  costs  associated  with   gas  from                                                                    
companies that had been moving  toward a gasline under AGIA.                                                                    
She felt  that the  linking of  oil and  gas had  provided a                                                                    
significant  advantage for  the companies.  She opined  that                                                                    
the negotiation of a rate  through decoupling was one issue,                                                                    
but another issue was how  cost had factored into companies'                                                                    
willingness in  Pt. Thompson  and other  areas to  explore a                                                                    
gasline.  She requested  to hear  from DOR,  Exxon, BP,  and                                                                    
Conoco Philips  on the  issues. She  discussed that  she and                                                                    
Senator Tom  Wagoner had  introduced SB 309  in the  past to                                                                    
incentivize  drilling in  Cook Inlet,  which had  been done.                                                                    
She believed that the players  with the ability to write-off                                                                    
their costs in  Cook Inlet were more prone to  invest in the                                                                    
area.  She  expressed  concern   about  impacts  that  would                                                                    
disincentivize investment  in Cook Inlet and  areas that led                                                                    
to the gasline.                                                                                                                 
                                                                                                                                
Commissioner  Butcher  replied  that  he was  aware  of  the                                                                    
issue, but did not have insight  on the role the issue would                                                                    
play. He noted  that there would be a  significant amount of                                                                    
work done  on gas  fiscals between present  day and  a major                                                                    
gas  sale in  the  future. He  noted  that Governor  Parnell                                                                    
hoped that the FY 13  legislative session could focus on gas                                                                    
fiscals.                                                                                                                        
                                                                                                                                
Mr. Tangeman  added that Senator  McGuire was  correct about                                                                    
the interplay between  Cook Inlet, the North  Slope, and the                                                                    
companies   involved  associated   with   the  various   tax                                                                    
structures (i.e.  net versus gross,  versus a net  and gross                                                                    
combination). He remarked  that an issue was  how the change                                                                    
would  impact DOR  and the  state. He  referred to  a belief                                                                    
that the  state was  "out-gunned"; the private  sector could                                                                    
pay more,  gear up more  quickly, and had more  resources to                                                                    
throw at  problems. The  state had been  under the  same tax                                                                    
system for  4.5 to  5 years;  state employees  (auditors and                                                                    
other) dealing with the ACES  tax structure on a daily basis                                                                    
understood  it.   He  relayed   that  Repsol   had  recently                                                                    
contacted  DOR for  an explanation  of ACES.  The state  was                                                                    
currently  on equal  footing and  understood  the system  as                                                                    
well or  better than the  private sector. He opined  that an                                                                    
overhaul of the  system may be a step  backwards because the                                                                    
department   would  have   to  start   over  after   it  had                                                                    
implemented  over 70  regulations;  all  of the  regulations                                                                    
would  have  to be  analyzed  to  determine how  they  would                                                                    
interplay with  each other. He  explained that the  point of                                                                    
CSHB  110(FIN) was  to work  within the  current system.  He                                                                    
furthered that  there were a  multitude of moving  parts and                                                                    
there were various ways to  deal with tax credits to achieve                                                                    
different results.  He believed that  it was better  to deal                                                                    
with the tax system that was currently in place.                                                                                
                                                                                                                                
10:11:24 AM                                                                                                                   
                                                                                                                                
Senator McGuire  surmised that  the creation  of a  dual tax                                                                    
system  using  gross for  progressivity  and  net for  other                                                                    
would  require  state  employees  to  assess  two  different                                                                    
structures.  Mr. Tangeman  replied  in  the affirmative.  He                                                                    
expounded that DOR  would figure out and work  with a change                                                                    
to  the   tax  system   if  a   new  structure   passed  the                                                                    
legislature; however,  DOR understood the current  system in                                                                    
greater detail than most companies coming into the state.                                                                       
                                                                                                                                
Co-Chair  Stedman  opined  that   there  was  a  substantial                                                                    
difference between going from a  tax and royalty system to a                                                                    
concession system (i.e.  from PPT to ACES).  He believed the                                                                    
difference was  much greater than moving  progressivity from                                                                    
the net and switching it  to the gross; the main calculation                                                                    
was multiplying the  amount of oil produced  and the portion                                                                    
of the  oil allocated  to royalties. He  did not  agree with                                                                    
DOR's  testimony,  excluding  the concerns  related  to  the                                                                    
proposed  implementation of  a new  database; he  recognized                                                                    
that the database represented a piece of complexity.                                                                            
                                                                                                                                
Co-Chair Hoffman  wondered whether  a portion of  the burden                                                                    
related  to  the  proposed  database   or  portions  of  the                                                                    
legislation  could   be  lifted  if  effective   dates  were                                                                    
postponed.                                                                                                                      
                                                                                                                                
Commissioner Butcher  responded that it would  be a benefit;                                                                    
however, the database  was still a significant  lift for the                                                                    
department that had  a minimal amount of  involvement in the                                                                    
information.                                                                                                                    
                                                                                                                                
10:14:38 AM                                                                                                                   
                                                                                                                                
Mr. Tangeman  added DOR had previously  provided a schematic                                                                    
that included  the 35 pieces  of information  required under                                                                    
CSSB 192 (FIN);  DOR, DNR, and AOGCC  already collected much                                                                    
of  the  information.  He expounded  that  the  Tax  Revenue                                                                    
Management System (TRMS) DOR was  working to implement would                                                                    
replace  the current  antiquated system.  He furthered  that                                                                    
PIMS would  work with the  same dataset. Work on  TRMS would                                                                    
feed into other types of  things that would be beneficial to                                                                    
the public  and would get at  the same dataset as  PIMS, but                                                                    
with a different  output. He felt that  DOR could accomplish                                                                    
the objective of PIMS with TRMS in the future.                                                                                  
                                                                                                                                
Senator Thomas conveyed that the  committee had not intended                                                                    
to   create  a   "huge  worthless   system";  most   of  the                                                                    
committee's concern  had originated from a  lack of accurate                                                                    
or conflicting  information from different  departments. The                                                                    
goal of  the proposed system  was to provide  a coordination                                                                    
of  activity  between  departments. He  detailed  that  most                                                                    
state  departments had  antiquated  systems,  which was  the                                                                    
reason money  for a system  had been appropriated  the prior                                                                    
year.  He   expounded  that  it  was   discouraging  to  get                                                                    
different answers from different  departments. He hoped that                                                                    
requiring departments  to provide information to  DOR for it                                                                    
to   coordinate  would   automate   processes  and   provide                                                                    
efficiency  that would  lead to  a better  tax understanding                                                                    
and better auditing performance.                                                                                                
                                                                                                                                
10:18:07 AM                                                                                                                   
                                                                                                                                
Commissioner Butcher  replied that  DOR was working  to come                                                                    
up  with a  cost estimate  for the  committee. One  estimate                                                                    
from Kathy  Forester of AOGCC was  approximately $36 million                                                                    
and 10 to 12 positions.  The department did not know whether                                                                    
that would be the price,  but the cost would be substantial;                                                                    
the  more  different  systems,  databases,  and  forms  were                                                                    
involved the more complex it became.                                                                                            
                                                                                                                                
Mr. Tangeman elaborated that DOR  had been coordinating with                                                                    
AOGCC and the  Division of Oil and Gas because  it had spent                                                                    
the  past year  working on  TRMS. The  department recognized                                                                    
that  the  system in  place  required  companies to  provide                                                                    
information  to  several  different departments  in  diverse                                                                    
formats.   Ultimately  DOR   wanted  to   see  all   of  the                                                                    
information  being  sent to  one  location  and divvied  out                                                                    
based on confidentiality, non-confidentiality, and other.                                                                       
                                                                                                                                
Senator Olson  referred to proposed gasline  legislation (HB                                                                    
9) that  included a  first open season  in January  2013. He                                                                    
was  concerned  that companies  would  not  bid on  an  open                                                                    
season if  they did  not have  a good idea  of what  the tax                                                                    
rate  would be;  especially  if the  possibility  of an  LNG                                                                    
plant used for export was considered for Kenai or other.                                                                        
                                                                                                                                
Commissioner  Butcher   answered  that  two   pipelines  had                                                                    
previously had  open seasons. There  needed to be  work done                                                                    
by the state  and companies related to gas  fiscals beyond a                                                                    
coupling.  He hoped  that the  work required  would be  done                                                                    
sooner rather than later.                                                                                                       
                                                                                                                                
10:20:55 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman  requested  calculations that  showed  the                                                                    
deterioration  of  the economics  with  the  lower tax  rate                                                                    
based  on  DOR's belief  that  changes  under CSSB  192(FIN)                                                                    
moved in the  wrong direction (slide 14).  He was interested                                                                    
in the  full-cycle economics and  FY 13 numbers  relative to                                                                    
the current system.  He would agree with DOR  that the state                                                                    
would be going in the  wrong direction if the numbers showed                                                                    
that  the  tax rates  were  higher  than those  under  ACES;                                                                    
however,  if  the  calculations   showed  lower  figures  he                                                                    
thought DOR should reevaluate its  remarks. He discussed the                                                                    
goal of encouraging industry to  move away from harvest mode                                                                    
and he  wanted specific  detail on  how the  bill encouraged                                                                    
it.                                                                                                                             
                                                                                                                                
Commissioner  Butcher  replied that  DOR  did  not have  the                                                                    
specific details  related to the  full scale  economics, but                                                                    
it was happy to work  with committee aide Darwin Peterson to                                                                    
accomplish the  committee's request.  The point on  slide 14                                                                    
was  based on  the  fact that  high-cost developments  would                                                                    
benefit  less  when the  tax  system  moved  from net  to  a                                                                    
net/gross combination.                                                                                                          
                                                                                                                                
Commissioner Butcher noted that  Department of Law (DOL) had                                                                    
brought up  potential constitutional issue related  to equal                                                                    
taxing of  different companies. The department  of Law would                                                                    
follow up  with Legislative Legal Services  and Mr. Peterson                                                                    
on  the   issue.  He  mentioned  that   there  were  several                                                                    
technical tweaks  related to new field  definitions that DOR                                                                    
would talk to the committee about.                                                                                              
                                                                                                                                
Co-Chair  Stedman   had  not  heard  the   concern  about  a                                                                    
potential  constitutional  issue   and  requested  that  the                                                                    
departments get the information to his office.                                                                                  
                                                                                                                                
Co-Chair Hoffman pointed to slide  3 and queried whether the                                                                    
bill made  Alaska more appealing  to potential  investors if                                                                    
the price of  oil was $170 per  barrel. Commissioner Butcher                                                                    
responded in  the affirmative, but  noted that the  price of                                                                    
oil had never  reached $170 per barrel. The  price could get                                                                    
that high  at some point,  but he did not  believe decisions                                                                    
should be focused on the possibility.                                                                                           
                                                                                                                                
10:24:33 AM                                                                                                                   
                                                                                                                                
Co-Chair  Hoffman  answered  that   world  history  had  not                                                                    
predicted $145  per barrel four years  earlier. Commissioner                                                                    
Butcher responded  in the affirmative. He  recalled that the                                                                    
price  had dropped  to $37  per barrel  following the  price                                                                    
spike.                                                                                                                          
                                                                                                                                
Co-Chair Hoffman asked  at what price level  the bill became                                                                    
appealing.                                                                                                                      
                                                                                                                                
Commissioner  Butcher replied  that  it was  up  to the  oil                                                                    
companies to  provide the answer. He  expounded that because                                                                    
the  information   was  proprietary,  companies   would  not                                                                    
provide  what  specifically  in their  economic  model  they                                                                    
based  decisions on.  According to  information provided  to                                                                    
the department  the number had been  more conservative ($70,                                                                    
$80, or $90 per barrel).  Companies were aware of what would                                                                    
happen  if oil  reached  $170  per barrel,  but  he did  not                                                                    
believe  that they  made investment  decisions based  on the                                                                    
figure as opposed to a  price around $70, which according to                                                                    
history was more likely to be seen.                                                                                             
                                                                                                                                
10:25:38 AM                                                                                                                   
                                                                                                                                
Co-Chair Hoffman  believed that it  was all relative  and it                                                                    
was hard  to know what the  price of oil would  be. He asked                                                                    
whether DOR  believed that overall the  current bill version                                                                    
would  not   make  Alaska   more  appealing   to  investors.                                                                    
Commissioner  Butcher   deferred  the  answer  to   the  oil                                                                    
companies.                                                                                                                      
                                                                                                                                
Co-Chair  Hoffman  pointed out  that  DOR  had included  the                                                                    
remark in its presentation. He  observed that DOR had voiced                                                                    
that CSHB 110(FIN)  would be an improvement, but  it did not                                                                    
want to say yes or no to the current bill.                                                                                      
                                                                                                                                
Commissioner Butcher  responded that the questions  on slide                                                                    
3   had  been   considered   by  the   department  and   the                                                                    
administration  as  it  worked  on a  bill.  The  department                                                                    
believed that  oil companies had  agreed with  CSHB 110(FIN)                                                                    
because  they  had  come  up with  commitments  based  on  a                                                                    
material  change  that  would positively  affect  investment                                                                    
decisions and  a discussion  of dollar  amounts. He  did not                                                                    
know how oil companies felt about CSSB 192(FIN).                                                                                
                                                                                                                                
Co-Chair Stedman  remarked that oil companies  had expressed                                                                    
interest,  but  he  did  not  believe  that  they  had  made                                                                    
commitments. He understood that it  took all three major oil                                                                    
companies to  agree; it was  not much of a  commitment until                                                                    
the  companies signed  a letter  of agreement.  He requested                                                                    
that a commitment  should be delivered to his  office if one                                                                    
existed.                                                                                                                        
                                                                                                                                
Mr.  Tangeman  responded that  not  all  investments on  the                                                                    
North  Slope  would require  the  agreement  from all  three                                                                    
major oil companies. He believed  that there were some areas                                                                    
that only required that two companies provide approval.                                                                         
                                                                                                                                
10:27:50 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman  noted that  prior testimony  had indicated                                                                    
that it  would take $3  billion to  $5 billion per  year and                                                                    
not $5  billion over  seven to ten  years. He  stressed that                                                                    
that  $5  billion could  barely  be  seen in  the  analysis,                                                                    
unless  there were  multiple consecutive  years driving  the                                                                    
production curve up.                                                                                                            
                                                                                                                                
Commissioner Butcher  agreed. There had been  $5 billion, $9                                                                    
billion,  and other  figures discussed,  but he  did believe                                                                    
the state would know until  a bill passed. He continued that                                                                    
the  question related  to whether  the legislature  passed a                                                                    
bill that was  viewed positively by the industry  or not. He                                                                    
stated that  a tax  reduction bill that  resulted in  no new                                                                    
investment or development did not achieve the desired goal.                                                                     
                                                                                                                                
Co-Chair Hoffman  queried whether  DOR could  answer whether                                                                    
the bill  made Alaska  more competitive  (item 1,  slide 3).                                                                    
Commissioner Butcher replied that  he could see the problems                                                                    
a potential  investor would  have with  the bill  because of                                                                    
the initial complexity. He could  not speak for the industry                                                                    
related to the specific economics of the legislation.                                                                           
                                                                                                                                
Co-Chair Stedman  pointed out  that at  $100 per  barrel the                                                                    
bill moved  approximately $277 million across  the table [to                                                                    
the  industry]  in FY  13  figures;  whereas, CSHB  110(FIN)                                                                    
moved $2  billion. He elaborated  that there was  more money                                                                    
to the  industry in the  tax change than in  the incremental                                                                    
drilling; he  wanted to  see economics  that showed  that it                                                                    
was  not true.  He believed  the drive  was more  for a  tax                                                                    
change than the  benefit of the incremental  drilling in the                                                                    
bottom line  dollars. He requested an  analysis showing that                                                                    
the  initial  review  of  the   numbers  was  incorrect.  He                                                                    
concluded  that  it  would  take  a  substantial  amount  of                                                                    
enhanced  oil recovery  to make  a $2  billion per  year net                                                                    
swing to  the state's treasury; oil  companies would receive                                                                    
$8 billion  to $10 billion  before they started  turning the                                                                    
oil.                                                                                                                            
                                                                                                                                
10:30:43 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:38:25 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
^ALASKA OIL AND GAS ASSOCIATION                                                                                               
                                                                                                                                
10:38:44 AM                                                                                                                   
                                                                                                                                
KARA  MORIARTY,  EXECUTIVE  DIRECTOR,  ALASKA  OIL  AND  GAS                                                                    
ASSOCIATION (AOGA),  spoke from  a prepared  statement (copy                                                                    
on file):                                                                                                                       
                                                                                                                                
     On behalf  of the  member companies  of the  Alaska Oil                                                                    
     and Gas  Association, who account  for the  majority of                                                                    
     oil  and gas  exploration, production,  transportation,                                                                    
     refining and marketing  in this state, I  would like to                                                                    
     offer the  following comments regarding  work-draft "0"                                                                    
     of a  Senate Finance  CS for  Senate Bill  192. Despite                                                                    
     the diversity of our membership,  my comments reflect a                                                                    
     100% consensus among them.                                                                                                 
                                                                                                                                
     On  March  16 we  testified  to  you about  the  Senate                                                                    
     Resources version  of the  Bill. At  that time  we told                                                                    
     you that,  unless one is  satisfied to see  North Slope                                                                    
     oil production continue  to decline at about  6% a year                                                                    
     or  more, meaningful  changes need  to be  made to  the                                                                    
     present ACES tax.  We pointed out a  number of measures                                                                    
     that the Resources  CS could have taken  but didn't, as                                                                    
     well as a number of things  that it proposed to do that                                                                    
     would be counterproductive.                                                                                                
                                                                                                                                
     Despite all  the time  and effort  that have  gone into                                                                    
     work-draft "0",  we have to  say that this new  CS also                                                                    
     falls  short  of  the meaningful  tax  change  that  is                                                                    
     called for in  order to meet the  challenge of stopping                                                                    
     decline,  much less  the even  harder  goal of  getting                                                                    
     back to  a million  barrels a  day flowing  through the                                                                    
     TAPS oil pipeline.                                                                                                         
                                                                                                                                
     The CS does indeed provide  a slightly less onerous tax                                                                    
     treatment for  new fields and increases  in production.                                                                    
     But  we would  remind you  that two  very new  fields -                                                                    
     Oooguruk and  Nikaitchuq -are each expected  to peak at                                                                    
     around 20,000 barrels a day.  This year the North Slope                                                                    
     at a 6% decline will  decline by roughly 40,000 barrels                                                                    
     a day,  as much  as these two  new fields  combined. In                                                                    
     other  words, to  offset the  decline,  two new  fields                                                                    
     like Oooguruk  and Nikaitchuq would  need to  come into                                                                    
     production  each year.  These  slight improvements  are                                                                    
     not likely to generate even this level of development.                                                                     
                                                                                                                                
     The producers of the existing  non-legacy fields on the                                                                    
     Slope, and  the developers of  any new fields  that may                                                                    
     be  discovered, need  as  much  production as  possible                                                                    
     flowing  from the  legacy fields  through the  TAPS oil                                                                    
     pipeline in order to keep  the costs affordable to ship                                                                    
     their oil from the  Slope to its refinery destinations.                                                                    
     Unaffordably  high transportation  costs could  cripple                                                                    
     the economics  of any new  fields that might  be found,                                                                    
     as  well   as  the   economics  of   non-legacy  fields                                                                    
     currently in production.                                                                                                   
                                                                                                                                
     In other words, the North  Slope oil province is like a                                                                    
     tree,  with  the  two great  legacy  fields  being  its                                                                    
     trunk, and with the  other fields being branches rising                                                                    
     out of  the trunk. If  one peels  the bark off  all the                                                                    
     way around  the trunk  and make  it unhealthy,  all the                                                                    
     other  branches will  become unhealthy  too, no  matter                                                                    
     how  robust  they might  have  been  if the  trunk  had                                                                    
     stayed strong.                                                                                                             
                                                                                                                                
     It has been openly  acknowledged during the Committee's                                                                    
     hearings   that  the   intent  is   to  keep   the  tax                                                                    
     essentially the same as the  present tax for the legacy                                                                    
     fields  at $100  oil, and  workdraft "0"  reflects that                                                                    
     intent. But  that intent is  just the opposite  of what                                                                    
     we urged you  to do in our March 16th  testimony on the                                                                    
     Resources CS,  and it is  the opposite of what  we urge                                                                    
     you to do now.                                                                                                             
                                                                                                                                
     Throughout  the  Twenty-seventh Legislature,  AOGA  and                                                                    
     others  have been  testifying about  what is  happening                                                                    
     with  their businesses  on the  North Slope,  about the                                                                    
     interrelationship between  the level of  new investment                                                                    
     each year  and the rate  of decline in  ANS production,                                                                    
     and  about   the  effects  taxes  have   on  investment                                                                    
     decisions.  These  explanations  are not  threats,  but                                                                    
     they  are  not bluffs  either.  They  have been  candid                                                                    
     attempts  to  describe  to   you  how  those  companies                                                                    
     evaluate  their investment  opportunities here  against                                                                    
     their  opportunities elsewhere,  and  how Alaska's  tax                                                                    
     regime   can  influence   the  decisions   about  which                                                                    
     opportunities to take.                                                                                                     
                                                                                                                                
     Those  decisions   reflect  the  expectations   of  the                                                                    
     companies'  respective shareholders  that each  company                                                                    
     will chose  the opportunities  that it perceives  to be                                                                    
     best,  all things  considered  including  taxes. If  an                                                                    
     Alaskan opportunity  is better  than one  elsewhere and                                                                    
     there is  enough budgeted money  only for one  of them,                                                                    
     the  shareholders  expect, and  in  a  very real  sense                                                                    
     demand,  that  the  Alaska opportunity  be  taken.  The                                                                    
     reductions in  the level  of companies'  investments in                                                                    
     Alaska since the enactment of  ACES are not any kind of                                                                    
     retaliation  for ACES'  enactment, nor  does a  company                                                                    
     cut back  here to spite  its face. The  investments are                                                                    
     nothing more, and nothing less,  than the result of the                                                                    
     competition  of   the  Alaskan   opportunities  against                                                                    
     opportunities elsewhere.                                                                                                   
                                                                                                                                
     Anyone   is  free   to  believe   that  the   declining                                                                    
     investments  and  declining  production  on  the  North                                                                    
     Slope  are due  to something  other than  these reasons                                                                    
     ... but  they will  be mistaken. Unfortunately,  by the                                                                    
     time they  are proven  to be mistaken,  the opportunity                                                                    
     for Alaska  to have  addressed the situation  will have                                                                    
     passed. And there aren't any "do overs."                                                                                   
                                                                                                                                
     Without meaningful tax relief  for the legacy fields as                                                                    
     well as  the other  production, the bark  will continue                                                                    
     to be  peeled off  the tree  trunk, harming  the entire                                                                    
     tree. Work-draft  "0" threatens  harm for  every member                                                                    
     in AOGA.                                                                                                                   
                                                                                                                                
     Thank  you,  Mr. Chairman  and  Members  of the  Senate                                                                    
     Finance Committee,  for this  opportunity to  share our                                                                    
     deep and  grave concerns with you  about work-draft "0"                                                                    
     of  the Finance  CS. We  respectfully ask  you to  take                                                                    
     another look  at what  it would do,  and to  replace it                                                                    
     with a CS  that would provide meaningful  tax change to                                                                    
     enable  the additional  investments the  state and  its                                                                    
     future need.                                                                                                               
                                                                                                                                
     In closing, let me repeat  that these comments have the                                                                    
     unanimous  support  of   AOGA's  members:  Apache,  BP.                                                                    
     Chevron,  Eni   petroleum,  ExxonMobil,   Flint  Hills,                                                                    
     Hilcorp, Marathon, Petro  Star, Pioneer, Repsol, Shell,                                                                    
     Statoil,  Tesoro,  XTO  Energy,  and  Alyeska  Pipeline                                                                    
     Service  Company. Thank  you  for  this opportunity  to                                                                    
     share them with you.                                                                                                       
                                                                                                                                
10:46:12 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman believed  that it was challenge  to come up                                                                    
with a  universal definition of  the words  "meaningful" and                                                                    
"significant." He  believed that  at $120 per  barrel moving                                                                    
$277   million   to   the  industry   was   meaningful   and                                                                    
significant;  another person's  interpretation could  be the                                                                    
$2 billion  under CSHB  110(FIN). He asked  for help  with a                                                                    
definition.                                                                                                                     
                                                                                                                                
Ms.  Moriarty  responded  that AOGA  represented  a  diverse                                                                    
group  of  oil  companies  and the  term  meaningful  had  a                                                                    
different  implication  for  each   of  the  companies.  She                                                                    
explained that  after AOGA's evaluation none  of its members                                                                    
believed    that   the    bill   would    improve   Alaska's                                                                    
competitiveness   compared  to   other  projects   in  their                                                                    
portfolios.   The   association  thought   that   bracketing                                                                    
progressivity  (included  in   CSHB  110(FIN))  would  bring                                                                    
Alaska to a more competitive playing field.                                                                                     
                                                                                                                                
Co-Chair  Stedman  clarified  that  bracketing  was  only  a                                                                    
mechanism to shift  cash from one side to the  other side of                                                                    
the table.                                                                                                                      
                                                                                                                                
Ms. Moriarty replied  that AOGA viewed bracketing  as a more                                                                    
substantial  change  in  progressivity versus  the  proposed                                                                    
structure under CSSB 192(FIN).                                                                                                  
                                                                                                                                
Co-Chair  Stedman agreed  that  bracketing  did represent  a                                                                    
more substantial change  related to the shifting  of cash at                                                                    
a price of  $100 to $120 per barrel. The  current bill would                                                                    
shift $2.6  billion at $200  per barrel versus  $4.4 billion                                                                    
under CSHB 110(FIN); there was  more shifting of cash to the                                                                    
industry above $60 per barrel  under CSHB 110(FIN). He noted                                                                    
that CSSB 192(FIN) also included a floor.                                                                                       
                                                                                                                                
10:48:21 AM                                                                                                                   
                                                                                                                                
Senator Thomas  thanked Ms.  Moriarty for  her presentation.                                                                    
He believed that the commitment  portion of the equation was                                                                    
very  important.  He  opined  that  a  tax  structure  could                                                                    
probably be  structured depending on commitments  where more                                                                    
of  a business  relationship  existed and  one could  expect                                                                    
that if "y"  happened that "x" would take  place. He pointed                                                                    
to  discussions related  to a  number of  projects that  had                                                                    
been in place prior to ACES  that could have been done going                                                                    
forward; he surmised  the state would probably be  in a very                                                                    
different  situation of  understanding the  terms meaningful                                                                    
and commitments. He  thought it would have  been possible to                                                                    
implement a tax  rate that would take effect  once a company                                                                    
committed to  expend money on  production. He  observed that                                                                    
"it  was  simply  language  to  put  things  in  place"  and                                                                    
believed  that the  legislature and  other players  had "all                                                                    
fallen  short of  trying to  get a  better understanding  of                                                                    
what would take place in  the future," which was not helpful                                                                    
to the process.                                                                                                                 
                                                                                                                                
Co-Chair Stedman relayed that  the scheduled BP presentation                                                                    
would be heard during the afternoon meeting that day.                                                                           
                                                                                                                                
SB  192  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                

Document Name Date/Time Subjects
Sb 192 040612 CSSB 192 Version U.pdf SFIN 4/6/2012 9:00:00 AM
SB 192
SB 192 DOR 12.04.06 SenFin Overview of SB192 (FIN) Version O.pdf SFIN 4/6/2012 9:00:00 AM
SB 192
SB 192 040612 AOGA Testimony.pdf SFIN 4/6/2012 9:00:00 AM
SB 192