Legislature(2013 - 2014)SENATE FINANCE 532

03/05/2013 09:00 AM FINANCE

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09:07:18 AM Start
09:07:41 AM SB21
11:29:43 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
Bills Previously Heard/Scheduled
SENATE BILL NO. 21                                                                                                              
     "An  Act relating  to  appropriations  from taxes  paid                                                                    
     under the  Alaska Net Income  Tax Act; relating  to the                                                                    
     oil and gas  production tax rate; relating  to gas used                                                                    
     in the state; relating  to monthly installment payments                                                                    
     of the oil and gas  production tax; relating to oil and                                                                    
     gas  production  tax  credits for  certain  losses  and                                                                    
     expenditures; relating  to oil  and gas  production tax                                                                    
     credit  certificates; relating  to nontransferable  tax                                                                    
     credits based  on production; relating  to the  oil and                                                                    
     gas tax  credit fund; relating to  annual statements by                                                                    
     producers and explorers;  relating to the determination                                                                    
     of annual  oil and gas production  tax values including                                                                    
     adjustments  based on  a percentage  of gross  value at                                                                    
     the  point   of  production  from  certain   leases  or                                                                    
     properties;    making   conforming    amendments;   and                                                                    
     providing for an effective date."                                                                                          
9:07:41 AM                                                                                                                    
Co-Chair Meyer  discussed the agenda  for the day.  He noted                                                                    
that  increasing  oil  production  in  Alaska  was  the  top                                                                    
KARA  MORIARTY,  EXECUTIVE  DIRECTOR,  ALASKA  OIL  AND  GAS                                                                    
ASSOCIATION   (AOGA),   introduced    herself   and   shared                                                                    
information   about  the   organization.   She  provided   a                                                                    
PowerPoint  presentation   titled  "Oil  and   Gas:  Fueling                                                                    
Alaska's Economy"  dated March 5,  2013 (copy on  file). She                                                                    
read  from a  prepared statement  titled "AOGA  Testimony to                                                                    
Senate Finance  on CSSB 21(RES)"  dated March 5,  2013 (copy                                                                    
on file):                                                                                                                       
     The  industry's  greatest  challenge  today,  which  we                                                                    
     share with the  State is the decline  of oil production                                                                    
     from  the North  Slope. We  believe that  the greatest,                                                                    
     most urgent  issue facing this  Legislature in  2013 is                                                                    
     how you  will address this  problem. We cannot  fix the                                                                    
     basic, inherent  properties of any  oil and  gas field,                                                                    
     that  is that  the  resource is  finite and  production                                                                    
     will  eventually  decline.  We  can  fix  some  of  the                                                                    
     economic principles that drive  the development of more                                                                    
     and new  resources. Corrections to the  ACES tax regime                                                                    
     will remove impediments  to development and exploration                                                                    
     and assist  the industry in investing  in projects that                                                                    
     could  both extend  the life  of TAPS  and open  up new                                                                    
     resources  to long  term development.  When we  look to                                                                    
     the future Alaskans see a  robust industry on the North                                                                    
     Slope  growing  like  it  is the  rest  of  the  United                                                                    
     States. We want the jobs here  and not in the Lower 48.                                                                    
     We  want  to create  developments  that  will last  for                                                                    
     decades  more,  creating  jobs  for  our  children  and                                                                    
     opportunities   for   our  communities   to   flourish.                                                                    
     Alaskans want  to see the industry  continue to support                                                                    
     the education  and skills training  that are  needed to                                                                    
     qualify for many  of those jobs. A healthy  oil and gas                                                                    
     industry  is one  that sees  the  economic benefits  of                                                                    
     continuing to invest in projects  in Alaska and keeping                                                                    
     its employees  here, where  they volunteer  their time,                                                                    
     talent and  treasure to make  Alaska a better  place to                                                                    
     live for us all.                                                                                                           
Ms. Moriarty addressed "The Tax "Give Away" Fallacy" (page                                                                      
2 of the prepared AOGA statement):                                                                                              
     We hear  all too often  of the $2 billion  dollars that                                                                    
     will be  a "give away"  to the industry should  the tax                                                                    
     regime  be  changed.  It  is  a  simple  and  effective                                                                    
     communication that completely  misstates the reality of                                                                    
     the tax  structure and its  impact on the  industry. It                                                                    
     is simple to calculate how a  change in a tax rate will                                                                    
     impact amount of taxes collected  if all "other" things                                                                    
     remain constant.  For example,  if production  does not                                                                    
     decline further,  if lifting  costs don't rise,  if the                                                                    
     $2  billion   dollars  of  annual  investment   by  the                                                                    
     industry  to slow  that decline  continues, and  if oil                                                                    
     and  gas prices  do  not shift.  All  of these  "other"                                                                    
     items  seem   to  be  considered   a  given   in  these                                                                    
     calculations  and  it  is   assumed  they  will  remain                                                                    
     unchanged  in the  future -  the pundits  of the  "give                                                                    
     away" theory want you to  believe it's that simple. But                                                                    
     it is not.                                                                                                                 
     However  resourceful  the  State's  revenue  estimators                                                                    
     are,  they  cannot   control  decline,  lifting  costs,                                                                    
     future investment,  or the price  of crude oil.  As the                                                                    
     rest  of the  nation swims  in new  industry investment                                                                    
     and  development,  Alaska   languishes.  The  costs  of                                                                    
     operations  continue  to  rise as  North  Slope  fields                                                                    
     decline. The  $2 billion a year  of industry investment                                                                    
     spent in  wrestling decline must now  compete with more                                                                    
     lucrative  projects  elsewhere,  and  with  growing  US                                                                    
     production and  supply of  oil and  gas and  the future                                                                    
     price of that oil and  gas is anyone's guess. Naysayers                                                                    
     to these  necessary and fundamental changes  to our tax                                                                    
     structure   look   only    to   the   downside   simple                                                                    
     calculations  they take  from  a  Revenue Sources  Book                                                                    
     they forget is only  a "guesstimate" of future revenue.                                                                    
     The upside  potential of that  change, though,  is very                                                                    
     real. If  a restructuring  and tax rate  reduction make                                                                    
     investments here more  competitive, companies will want                                                                    
     to make more investments  her for that upside. Deciding                                                                    
     to make  long-term investments in Alaska's  North Slope                                                                    
     requires the industry to see  potential upside to their                                                                    
     investments and assessing the  essential risks of those                                                                    
     investments  are offset  by the  opportunities afforded                                                                    
     in  success.  Without  that  potential  opportunity  in                                                                    
     Alaska,  investment dollars  will  be spent  elsewhere,                                                                    
     where risks are less and opportunity is greater.                                                                           
9:12:21 AM                                                                                                                    
Ms. Moriarty spoke to "Core Principles to Address North                                                                         
Slope Production Decline" on page 3 of the AOGA statement:                                                                      
     As you  consider potential  solutions to  the challenge                                                                    
     that  production  declines  creates  for  Alaska,  AOGA                                                                    
     believes  Governor  Parnell's  four  "core  principles"                                                                    
     offer an excellent cornerstone for this:                                                                                   
       · First, tax reform must be fair to Alaskans.                                                                            
        · Second, it must encourage new production.                                                                             
        · Third, it must be simple, so that it restores                                                                         
          balance to the system.                                                                                                
        · Fourth, it must be durable for the long term.                                                                         
     We  believe  the addition  of  a  fifth such  principle                                                                    
     would be  required to meet Alaska's  goals, because the                                                                    
     challenge  is not  that there  are  too many  companies                                                                    
     pursuing  opportunities, but  that  here  are too  few.                                                                    
     Alaska   should  therefore   avoid  tax   changes  that                                                                    
     artificially create "winners" and "losers."                                                                                
Ms. Moriarty shared that she would speak to several                                                                             
features of the CS and would outline some of the issues                                                                         
that it did not address.                                                                                                        
9:13:21 AM                                                                                                                    
Ms. Moriarty discussed slide 6 of the PowerPoint                                                                                
presentation titled "CSSB 21(RES) Component: Progressivity"                                                                     
and continued reading from page 3 of the AOGA statement:                                                                        
     AOGA  endorses the  elimination  of progressivity.  The                                                                    
     impact of  Progressivity as part  of the ACES  tax rate                                                                    
     in industry  investment decision  making is  the single                                                                    
     most  influential component  of Alaska's  tax structure                                                                    
     negatively  impacting investment  decisions related  to                                                                    
     Alaskan  projects. Taxes  are paid  by the  industry in                                                                    
     virtually every  jurisdiction in which we  function and                                                                    
     so we  are very  familiar with how  they work.  But the                                                                    
     uniformity and  consistency in  the application  of tax                                                                    
     impacts as  they relate  to investment  decision making                                                                    
     found  in  almost  every  jurisdiction  is  missing  in                                                                    
     Alaska. As  my member  companies have testified  in the                                                                    
     past,  investment  decisions  are driven  by  combining                                                                    
     high and  low case  scenarios where costs  and revenues                                                                    
     are estimated and  best case cash flows  and worst case                                                                    
     cash  flows are  measured,  risked  and analyzed.  Each                                                                    
     potential project,  in every jurisdiction,  is measured                                                                    
     and  compared  and  only  some   are  funded.  As  your                                                                    
     consultant,  Roger  Marks  pointed out  yesterday,  the                                                                    
     international  investment climate  is characterized  by                                                                    
     plenty  of  opportunities,  fluid capital,  but  finite                                                                    
     capital.  To  choose what  they  can  and cannot  fund,                                                                    
     companies  have  compared  each potential  project,  no                                                                    
     matter the  jurisdiction, by  application of  a uniform                                                                    
     investment  decision measuring  formula. When  Alaska's                                                                    
     tax system is quantified and  added to this measure for                                                                    
     proposed  Alaskan projects  the best  cases are  always                                                                    
     burdened with an  excessively high tax rate  and as the                                                                    
     assumed  high   cases  get  better,  the   burden  only                                                                    
     Progressivity  brings extraordinary  complexity to  the                                                                    
     tax, not only in calculating  what the tax is, but also                                                                    
     in analyzing  what the amount  of the  progressivity is                                                                    
     for  any  particular  item that  affects  a  taxpayer's                                                                    
     Production  Tax  Value  (PTV). This  complexity  exists                                                                    
     because the  tax rate for progressivity  depends on the                                                                    
     taxpayer's PTV per barrel, and  then the resulting rate                                                                    
     is  applied to  the very  same PTV  that set  the rate.                                                                    
     This  circularity  in  the  tax  calculation  leads  to                                                                    
     bizarre  effects. For  instance, simply  the fact  that                                                                    
     oil  prices   fluctuate  during   a  year   instead  of                                                                    
     remaining  perfectly flat  increases the  tax due  even                                                                    
     though  the average  of the  fluctuating prices  is the                                                                    
     same  as  the   flat  price  -  and   the  greater  the                                                                    
     fluctuation,  the greater  the  tax from  progressivity                                                                    
     becomes. There  is no  objective economic  or financial                                                                    
     reason  for the  tax  to go  up;  instead, this  occurs                                                                    
     entirely  because  the   progressivity  calculation  is                                                                    
     The  repeal of  progressivity  is  consistent with  all                                                                    
     four  core  principles   outlined  above.  Its  removal                                                                    
     improves  fairness  because   operators  that  increase                                                                    
     margins   through  efficiency   would   no  longer   be                                                                    
     automatically  penalized.  Its removal  encourages  new                                                                    
     production  because  it  reduces   the  tax  burden  on                                                                    
     investment,  as  discussed  above.  Its  removal  is  a                                                                    
     significant  step toward  simplicity. And,  lastly, its                                                                    
     removal  enhances durability  because it  satisfies the                                                                    
     three preceding core principles.                                                                                           
9:16:54 AM                                                                                                                    
Ms. Moriarty moved to slide 7: "CSSB 21(RES) Component:                                                                         
Increasing the Base Tax Rate" and read from page 4 of the                                                                       
prepared AOGA statement:                                                                                                        
     AOGA does not  endorse increasing the base  tax rate to                                                                    
     35%. Let's go back  to the industry investment decision                                                                    
     process again.  Increasing the  base tax  rate, besides                                                                    
     burdening  every  investment  case with  a  higher  tax                                                                    
     rate, now adds  an additional burden to  the worst case                                                                    
     scenarios when oil prices are  low or project costs are                                                                    
     high. When applying  the current base tax  rates to the                                                                    
     investment  cases for  a  proposed  project, until  one                                                                    
     assumes a  price collapse occurs and  the minimum fixed                                                                    
     rates apply, even when little  revenue is assumed to be                                                                    
     generated, the  base tax applies.  The burden of  a 35%                                                                    
     versus a 25%  rate is easy to envision  as every middle                                                                    
     case and every worst case  scenario is burdened with an                                                                    
     additional  10%  tax  rate.   This  assumed  cost  will                                                                    
     negatively   impact   the  potential   returns   deemed                                                                    
     available   for   any   Alaskan   project   and   drive                                                                    
     investments to  be made elsewhere. Increasing  the base                                                                    
     tax  rate is  contrary  to the  second core  principle;                                                                    
     there  is not  any  reasonable  argument that  suggests                                                                    
     increasing  the  base  tax  rate  would  encourage  new                                                                    
Ms.  Moriarty  added  that  beginning   in  2007,  AOGA  had                                                                    
vocalized that  the 25 percent  base tax rate was  too high.                                                                    
She  turned  to  slide  8:   "CSSB  21(RES)  Component:  Tax                                                                    
Credits" and read from page 5 of the AOGA statement:                                                                            
     In general, tax  credits, because they act  to offset a                                                                    
     part  of  the costs  of  certain  investments when  the                                                                    
     expenditure is  made are an important  tool in reducing                                                                    
     the deemed risks of  those expenditures. Industry makes                                                                    
     investments  to  seek  returns.   Costs  of  any  kind,                                                                    
     including taxes reduce those returns,  so the offset of                                                                    
     tax cost by a tax  credit provides immediate benefit to                                                                    
     the investment return  calculation. Whether those costs                                                                    
     are for drilling a well,  building a facility to gather                                                                    
     new  oil, or  installing a  pipe to  gather oil,  a tax                                                                    
     credit represents an immediate  and direct reduction in                                                                    
     the amount  that a potential  investor puts at  risk in                                                                    
     spending  money   on  equipment  and   facilities  that                                                                    
     benefit production.                                                                                                        
     Those tax  credits are  directly related  to production                                                                    
     as investments must actually be  made for the credit to                                                                    
     be  utilized  and  those  investments  will  positively                                                                    
     impact production.  It is important to  note that there                                                                    
     is no tax  credit liability for the State  at all until                                                                    
     an investor  invests here. The investment  has no other                                                                    
     purpose than creating  return by positively influencing                                                                    
     production. So it costs the  State nothing to offer the                                                                    
     credit until the  investment is made and  at that point                                                                    
     the  tax credit  has already  succeeded in  what it  is                                                                    
     supposed to  do - namely to  attract investment dollars                                                                    
     here  for   investments  that  will  act   to  increase                                                                    
     production and reduce decline.                                                                                             
Ms. Moriarty discussed the proposal to repeal the Qualified                                                                     
Capital Expenditure (QCE) tax credit on page 5 of the                                                                           
prepared AOGA statement:                                                                                                        
     A. Repeal of the  Qualified Capital Expenditure ("QCE")                                                                    
     Tax Credit.                                                                                                                
     AOGA  does  not support  the  repeal  of the  Qualified                                                                    
     Capital   Expenditure  Tax   Credit.  Even   while  the                                                                    
     elimination   of   progressivity  would   improve   the                                                                    
     competitiveness   of  Alaskan   investments  from   the                                                                    
     present  ACES tax,  the elimination  of the  QCE Credit                                                                    
     would claw  back one important financial  incentive and                                                                    
     a  part  of ACES  that  actually  acts to  improve  the                                                                    
     competitive   environment.  The   QCE  Credit   depends                                                                    
     entirely  on how  much is  invested here,  and provides                                                                    
     benefits  for  investments  even when  oil  prices  are                                                                    
     lower.  While the  benefit  from ending  progressivity,                                                                    
     which  depends  on  the  price of  oil  relative  to  a                                                                    
     producer's  lease expenditures,  helps when  oil prices                                                                    
     are higher  the QCE  provides benefits when  prices are                                                                    
     not. In  this mid-range of  oil prices the loss  of QCE                                                                    
     Credit  would  outweigh the  benefit  from  the end  of                                                                    
     Repeal  of the  QCE credit  is contrary  to the  second                                                                    
     core principle.  Furthermore, because  every producer's                                                                    
     costs  are  different  and   prices  will  impact  them                                                                    
     differentially  AOGA,  fears  the  repeal  of  the  QCE                                                                    
     Credit is  worse than  creating "winners"  and "losers"                                                                    
     because  it only  creates  "losers" artificially  among                                                                    
     producers,   and   we   see   no   sound   tax   policy                                                                    
     justification for doing so.                                                                                                
     For  these reasons,  AOGA believes  the elimination  of                                                                    
     the  QCE tax  credits would  be a  mistake. Instead  of                                                                    
     that, one possibility  might be to expand  the scope of                                                                    
     the  "well  lease  expenditure"  tax  credit  under  AS                                                                    
     43.55.023(l)  so it  is available  to producers  on the                                                                    
     North  Slope.   This  credit  has   several  meaningful                                                                    
     advantages. First, it  focuses investment incentives on                                                                    
     subsurface intangible-drilling  expenditures, which are                                                                    
     a  reasonable   proxy  for  direct  spending   on  well                                                                    
     activity and,  in turn, production. Second,  the credit                                                                    
     is clear  because it uses already  established concepts                                                                    
     in  the federal  Internal  Revenue Code.  Third, it  is                                                                    
     fair  because   it  applies  equally   to  well-related                                                                    
     spending in  all areas of  the state,  without creating                                                                    
     winners and losers merely on the basis of geography.                                                                       
Ms. Moriarty noted that the well lease expenditure credit                                                                       
was used heavily in Cook Inlet.                                                                                                 
9:22:13 AM                                                                                                                    
Ms. Moriarty detailed slide 9: "CSSB 21(RES) Component: Tax                                                                     
Credits" and read from page 6 of the prepared AOGA                                                                              
     B. The $5 dollar per barrel tax credit.                                                                                    
     AOGA is not certain that  the potential benefit of a $5                                                                    
     dollar  per barrel  tax  credit  under AS  43.55.024(i)                                                                    
     will be offset by other burdens.                                                                                           
     There  are multiple  issues to  balance when  taking in                                                                    
     the  numerous proposed  changes  found  in CSSB21.  The                                                                    
     removal of  progressivity, the  increase in  base rate,                                                                    
     early sunset of the  QCE credit all create interrelated                                                                    
     issues  and while  a $5  dollar per  barrel tax  credit                                                                    
     would provide  benefits both in  real tax costs  and in                                                                    
     investment decision  making, the weight of  the benefit                                                                    
     in respect  to the  other changes  is hard  to measure.                                                                    
     AOGA applauds  the concept of  tying incentives  to the                                                                    
     goal  of increased  production and  as such  allowing a                                                                    
     tax credit per barrel.  One must consider, though, what                                                                    
     the $5/bbl  credit will mean  to a small  producer with                                                                    
     little production  as opposed  to the  legacy producers                                                                    
     that already  have established large  scale production.                                                                    
     In view  of the investment decision  making process and                                                                    
     the Alaskan  tax structure's impact  on it, we  are not                                                                    
     certain  that  this  benefit is  offset  by  the  other                                                                    
     burdens  contemplated when  striving  for  the goal  of                                                                    
     increasing production.                                                                                                     
Ms. Moriarty addressed slide 10: "CSSB 21(RES)/Component:                                                                       
Tax Credits" and read from on page 7 of the prepared AOGA                                                                       
     C. Small-Producer and Exploration Credits.                                                                                 
     AOGA  endorses  the  proposal   to  extend  the  small-                                                                    
     producer tax credit under  AS 43.55.024 and exploration                                                                    
     tax credits under AS 43.55.025  from the present sunset                                                                    
     dates in 2016 to a later date.                                                                                             
     The State  had sound policy reasons  for creating these                                                                    
     small producer  and exploration tax credits,  and those                                                                    
     reasons  are just  as valid  today as  they were  then.                                                                    
     AOGA   believes  these   credits  have   increased  the                                                                    
     likelihood  of participation  by  new industry  players                                                                    
     and  act to  increase the  opportunities that  could be                                                                    
     found  by expanding  exploration.  The  purpose of  the                                                                    
     small-producer tax  credit was  to attract  new players                                                                    
     to Alaska  who might otherwise have  been deterred from                                                                    
     coming here  by presumptions of increased  risks and of                                                                    
     higher-than-average costs and  expenses. The success of                                                                    
     the  credit in  attracting new  participants is  a fact                                                                    
     that cannot  be denied. AOGA  sees this success  in its                                                                    
     own membership,  and in other companies  that have come                                                                    
     here and  are now active. Smaller  producers often have                                                                    
     a different perspective  about the opportunities around                                                                    
     them, and  as such  can bring with  them new  ideas and                                                                    
     opportunities.  New  participants  with new  ideas  can                                                                    
     only  strengthen  and  improve  the  Alaskan  petroleum                                                                    
     industry  and  help  the  state  stem  the  decline  in                                                                    
     production.  We  know  from testimony  that  the  small                                                                    
     producer tax  credit has made a  material difference in                                                                    
     individual  companies'  decisions  to do  business  and                                                                    
     invest in Alaska.                                                                                                          
     The purpose  and justification for the  exploration tax                                                                    
     credits  under AS  43.55.025  are  equally clear.  Huge                                                                    
     parts    of   this    state   remain    unexplored   or                                                                    
     underexplored.  Again,  these   tax  credits  are  only                                                                    
     earned when actual  expenditures for exploration occur.                                                                    
     The  credits  tangibly reduce  the  risks  faced by  an                                                                    
     explorer and  as such  incentivize them  to go  out and                                                                    
     search for oil  and gas that is  much needed. Increased                                                                    
     exploration  leads to  increased development  and these                                                                    
     credits  act  to  increase exploration  and  should  be                                                                    
     extended  as well.  Just as  with the  QCE credits  for                                                                    
     capital  investments,  there   is  no  exploration  tax                                                                    
     credit without  real money having  first been  spent on                                                                    
     exploration work that qualifies for these tax credits.                                                                     
9:25:04 AM                                                                                                                    
Ms. Moriarty turned to slide 11: "CSSB 21(RES) Component:                                                                       
Tax Credits" and read from pages 7 and 8 of the AOGA                                                                            
     D.  Limiting  the transferability  of  "carried-forward                                                                    
     annual loss" tax credits.                                                                                                  
     AOGA    does   not    support    the   limitation    on                                                                    
     transferability   of  these   losses.   We  have   some                                                                    
     reservation   about   the   proposal  to   bar   almost                                                                    
     completely   the   transferability   of   the   current                                                                    
     "carried-forward  annual  loss"  tax credits  under  AS                                                                    
     43.55.023(b).  New participants  and new  explorers are                                                                    
     many  times not  yet  producing in  the  state or  only                                                                    
     producing  small volumes  of oil  and gas  and as  such                                                                    
     have  little  or  no production  tax  liabilities.  The                                                                    
     ability to transfer their losses  to others allows them                                                                    
     to  monetize the  investments they  have already  made,                                                                    
     both  reducing  their  cost exposure  on  the  original                                                                    
     expenditure and  hopefully at  the same  time acquiring                                                                    
     additional capital  for more investment.  These credits                                                                    
     arise  every  year for  any  active  explorer until  it                                                                    
     finds oil  or gas  and finally incurs  production taxes                                                                    
     to apply  the credit against. At  present explorers can                                                                    
     only realize  immediate benefit  from these  credits by                                                                    
     selling them to  other taxpayers or cashing  them in at                                                                    
     the state  Oil and Gas  Tax Credit Fund  established in                                                                    
     AS 43.55.028.                                                                                                              
     Under the  Bill as proposed, transfers  would cease and                                                                    
     explorers would have to hold on  to losses for up to 10                                                                    
     years  for  possible use  against  taxes  on their  own                                                                    
     production.  The potential  that  a loss  could not  be                                                                    
     offset against  tax expenses or  monetized in  the near                                                                    
     term places more risk on  the decision to invest and as                                                                    
     such  makes such  activities less  likely to  occur. If                                                                    
     the transferability  must cease,  then the cost  of the                                                                    
     expiration  of the  loss carry  forward  after only  10                                                                    
     years, where on the  North Slope exploration success to                                                                    
     production can  easily take  longer, is  another factor                                                                    
     that negatively impacts  investment decisions. Although                                                                    
     the annual addition for interest  will allow the losses                                                                    
     to retain  some value, we  also believe that a  15 year                                                                    
     period before  expiration of the loss  carry forward is                                                                    
     the   minimum   timeframe    that   should   apply   if                                                                    
     transferability is removed.                                                                                                
9:27:29 AM                                                                                                                    
Ms. Moriarty moved to slide 12: "CSSB 21(RES) Component:                                                                        
Tax Credits" and read from pages 8 and 9 of the AOGA                                                                            
     E. The "Anti-stackable" section                                                                                            
     AOGA does not  think this new section  is necessary. In                                                                    
     Section  22  of the  CS,  AS  43.55.025 is  amended  by                                                                    
     adding a new subsection to read:                                                                                           
          (q)  An  exploration  expenditure  incurred  after                                                                    
          December  31,  2013, to  explore  for  oil or  gas                                                                    
          located north  of 68  degrees North  latitude that                                                                    
          is the  basis for a  credit under (a)(1),  (2), or                                                                    
          (3) of this section may  not also be the basis for                                                                    
          a  credit  claimed  under  AS  43.55.023  or  this                                                                    
     AOGA does not understand why  this new section is being                                                                    
     proposed as  it is  our understanding the  concern this                                                                    
     new language  is to trying  address is  already covered                                                                    
     in existing statutes.                                                                                                      
     F. New credit for Manufacturing                                                                                            
     AOGA  supports the  new proposed  manufacturing credit.                                                                    
     Although this  credit is directed to  the incentivizing                                                                    
     of   development  and   manufacture  of   drilling  and                                                                    
     exploration methods  and materials,  it may not  have a                                                                    
     great   impact  on   the  reduction   of  the   current                                                                    
     production decline. However, it is  a step in the right                                                                    
     direction   to   incentivize    jobs   and   additional                                                                    
     investment,  and having  more  jobs  and investment  in                                                                    
     Alaska is never a bad thing.                                                                                               
9:28:54 AM                                                                                                                    
Ms. Moriarty discussed slide 13: "CSSB 21(RES) Component:                                                                       
Gross Revenue Exclusion (GRE)" and read from page 9 of the                                                                      
AOGA statement:                                                                                                                 
     4. Gross Revenue Exclusion.                                                                                                
     AOGA endorses the proposed  30% gross revenue exclusion                                                                    
     or GRE,  but has concerns on  breadth of applicability.                                                                    
     The   GRE  would,   in  calculation   of  the   taxable                                                                    
     Production Tax  Value, exclude 30%  of the  Gross Value                                                                    
     at the  Point of  Production of  what we'll  call "non-                                                                    
     legacy"  production. Thus  the  GRE provides  incentive                                                                    
     for finding  new oil and  getting it produced.  As much                                                                    
     as AOGA  supports this proposal  we are  also concerned                                                                    
     that it is too narrowly  focused. This narrow focus and                                                                    
     application  to only  certain  areas, especially  those                                                                    
     outside existing Units where  the best prospects of new                                                                    
     oil are  likely to  be found, needlessly  restricts the                                                                    
     benefits that such a proposal  could have on increasing                                                                    
     production. Fields  likely to  lose out on  getting any                                                                    
     GRE are  Prudhoe Bay,  Kuparuk, Lisburne,  Milne Point,                                                                    
     Endicott, Niakuk,  Point McIntyre, and Alpine;  as well                                                                    
     as the  Prudhoe Bay satellite fields  Aurora, Borealis,                                                                    
     Midnight Sun, North Prudhoe Bay,  Orion and Polaris and                                                                    
     the  Kuparuk satellites  Meltwater, NEWS,  Tabasco, Tam                                                                    
     and West Sak.                                                                                                              
     Econ One  Research, Inc.  has previously  provided this                                                                    
     body a  presentation entitled Analysis of  Alaska's Tax                                                                    
     System,    North     Slope    Investment     and    The                                                                    
     Administration's Proposal, HE  72. In that presentation                                                                    
     oil  and  gas   resources  described  as  "Economically                                                                    
     Recoverable @  $90/bbl" total  29.1 billion  barrels of                                                                    
     oil and  barrel-equivalents of gas  of which  3 billion                                                                    
     are in the central North  Slope where all the currently                                                                    
     producing and therefore ineligible  fields are. Of this                                                                    
     3  billion barrels,  an estimated  2.5 billion  or more                                                                    
     stands  to come  from  Prudhoe Bay,  Kuparuk and  other                                                                    
     legacy  fields already  in  production. The  Governor's                                                                    
     second  "core principle"  for tax  legislation is  that                                                                    
     "it must  encourage new production."  But, in  order to                                                                    
     get   results   from   such  encouragement,   the   tax                                                                    
     legislation  must  incentivize the  best  opportunities                                                                    
     that  Alaska  has  for  getting  results.  The  GRE  as                                                                    
     proposed may get  some results but in terms  of what it                                                                    
     attempts to  "encourage," it leaves  out at least  80 -                                                                    
     90 percent of  the 3 billion barrel  opportunity in the                                                                    
     central North Slope that Econ One has identified.                                                                          
     AOGA  is continuing  to search  for ways  to adapt  the                                                                    
     Gross Revenue  Exclusion to include legacy  fields in a                                                                    
     way that might be  acceptable to the Administration and                                                                    
     the  Legislature.  It may  turn  out,  however, that  a                                                                    
     different approach  may be necessary to  "encourage new                                                                    
     production" from legacy fields.                                                                                            
9:31:07 AM                                                                                                                    
Ms. Moriarty  pointed to slide 14:  "CSSB 21(RES) Component:                                                                    
Competitiveness Review Board" and  relayed that AOGA did not                                                                    
support  the concept.  She read  from  page 10  of the  AOGA                                                                    
     Oil and Gas Competitiveness Review Board                                                                                   
     The  proposed Board  provides an  oversight and  review                                                                    
     process  that we  believe would  be  burdensome to  the                                                                    
     industry  and  contravenes  the  Governor's  principles                                                                    
     relating durability  in the long term.  The perspective                                                                    
     that  the  proposed changes  found  in  the Bill  would                                                                    
     provide a long term solution  to problems we know exist                                                                    
     are placed in jeopardy  because the very certainty that                                                                    
     is required for sound  investment decision making would                                                                    
     be placed  in question with  each annual report  of the                                                                    
     Board.  Instead of  moving forward  with projects  that                                                                    
     might help  stem decline,  industry resources  would be                                                                    
     used   to   assist   the  Board   in   collecting   and                                                                    
     understanding   complex   information  of   long   term                                                                    
     consequence   on  a   quarterly  basis.   Finally,  the                                                                    
     documentation and  information the Board  might request                                                                    
     or require is  of the highest proprietary  value to oil                                                                    
     and  gas  companies  and confidentiality  concerns  and                                                                    
     related complexities  would hinder  the efforts  of the                                                                    
     industry as well as the  Board. While we appreciate the                                                                    
     ability to  represent industry  on the  proposed board,                                                                    
     our concerns cause AOGA to  question both the viability                                                                    
     and  the effectiveness  of the  proposed  Board and  as                                                                    
     such we cannot support its proposed formation.                                                                             
9:32:44 AM                                                                                                                    
Ms. Moriarty detailed slide 15: "Components Not Addressed                                                                       
in CSSB 21(RES)" and read from pages 10 and 11 of the AOGA                                                                      
     There are  several significant problems in  the present                                                                    
     ACES tax that are not addressed  in CSSB 21, and I will                                                                    
     address a few of them this morning.                                                                                        
     A.  Minimum   tax  for   North  Slope   production.  AS                                                                    
     43.55.011(t)  sets  a  minimum  tax  that  is  targeted                                                                    
     solely  against North  Slope  production.  That tax  is                                                                    
     based on the gross value  of that production instead of                                                                    
     the regular  tax based on  "net" Production  Tax Value.                                                                    
     The rationale for adopting it  was to protect the State                                                                    
    against low petroleum revenues when prices are low.                                                                         
     The   minimum  tax   only  complicates   potential  new                                                                    
     investors' analyses of what their  tax would be if they                                                                    
     invest   here   instead    of   someplace   else,   and                                                                    
     consequently  it has,  if anything,  driven investments                                                                    
     away.  AS   43.55.01  1  (t)  should   be  repealed  or                                                                    
     consideration given to  significantly reducing the rate                                                                    
     of the minimum tax.                                                                                                        
     B. Statute  of limitations  & statutory  interest. Here                                                                    
     we have two concerns that  are interrelated, but not in                                                                    
     an immediately obvious way.                                                                                                
     The  statute of  limitations under  AS 43.55.075(a)  is                                                                    
     six years from  the date when the tax  return was filed                                                                    
     for  the  tax  being  audited,  while  the  limitations                                                                    
     period for  other taxes under AS  43.05.260(a) is three                                                                    
     years from  the filing  date of  the tax  return. Under                                                                    
     both  statutes, the  period may  be extended  by mutual                                                                    
     consent of  the taxpayer and the  Department of Revenue                                                                    
     The statutory  rate of  interest under  AS 43.05.225(1)                                                                    
     for tax underpayments is  "five percentage points above                                                                    
     the annual  rate charged member  banks for  advances by                                                                    
     the 12th Federal  Reserve District as of  the first day                                                                    
     of that calendar  quarter, or at the annual  rate of 11                                                                    
     percent, whichever is  greater, compounded quarterly as                                                                    
     of  the  last day  of  that  quarter[.]" Currently  the                                                                    
     Federal Reserve  rate is  very low, so  11% APR  is the                                                                    
     applicable rate.                                                                                                           
     We are  asking that, if  the Department chooses  to not                                                                    
     exercise its  authority in  providing certainty  to the                                                                    
     taxpayer  to allow  them to  be able  to calculate  the                                                                    
     correct  amount of  tax due,  then  the doubling-up  of                                                                    
     that uncertainty  through statutory interest  should be                                                                    
     lessened -  either by shortening the  period for making                                                                    
     Department "determinations" from six  years back to the                                                                    
     usual  three,   or  by  eliminating  the   11%  minimum                                                                    
     interest rate on the statutory interest rate, or both.                                                                     
     C.  Joint-interest billings.  Our concern  about joint-                                                                    
     interest billings  is also  primarily a  problem caused                                                                    
     by the approach the Department  has chosen to take with                                                                    
     its  tax  regulations.  Instead of  starting  with  the                                                                    
     joint-interest billings that participants  in a unit or                                                                    
     other joint  operation receive  from the  operator, the                                                                    
     regulations  reflect  an   assumption  that  each  non-                                                                    
     operating participant  has information, in  addition to                                                                    
     the operator's  billings to them,  that allows  them to                                                                    
     determine which expenditures  are deductible as allowed                                                                    
     "lease expenditures"  under AS 43.55.165 and  which are                                                                    
     not. This  assumption is  wholly unrealistic.  And even                                                                    
     if there were some merit  to it, the regulations opt to                                                                    
     audit  each   participant  separately   regarding  that                                                                    
     participant's interpretation of  which expenditures are                                                                    
     deductible and  which are not, instead  of auditing the                                                                    
     system  of accounts  used by  the operator  and telling                                                                    
     all participants  which cost  items in  that accounting                                                                    
     system  are  deductible and  which  are  not. In  other                                                                    
     words, instead of one audit  of the expenses by a joint                                                                    
     venture  for any  given period,  the Department  audits                                                                    
     each  participant separately  for its  respective share                                                                    
     of the same pool of expenses.                                                                                              
     We  are   not  asking   for  legislation  to   put  the                                                                    
     Department's  regulations  on  a different  track.  But                                                                    
     there are some  in the Department who  believe that the                                                                    
     repeal by the 2007  ACES legislation of AS 43.55.l65(c)                                                                    
     and (d)  -which specifically authorized  the Department                                                                    
     to   rely   on   joint-interest  billings   means   the                                                                    
     Department cannot  legally rely  on them now.  While we                                                                    
     disagree  with this  position (which  is  also at  odds                                                                    
     with  what  the  Department  testified  to  during  the                                                                    
     enactment of  the 2007 ACES  legislation), we  do think                                                                    
     it   would   be   appropriate   to   restore   language                                                                    
     specifically  authorizing  the  Department to  rely  on                                                                    
     joint-interest billings if it chooses to do so.                                                                            
9:37:11 AM                                                                                                                    
Ms.  Moriarty concluded  with slides  16  through 17:  "AOGA                                                                    
Supports  Components of  CSSB  21(RES)"  and "AOGA  Concerns                                                                    
with  CSSB 21(RES)."  She  read  from page  12  of the  AOGA                                                                    
     We support  the proposed elimination  of progressivity,                                                                    
     but  we have  great concern  with the  increase in  the                                                                    
     base tax rate to 35%,  and with the mixed proposals for                                                                    
     tax credits  allowing a  new $5  per barrel  credit but                                                                    
     removing  qualified  capital   credits.  The  trade-off                                                                    
     between  repealing  progressivity  and losing  the  QCE                                                                    
     credit is  not a  net benefit for  industry at  low oil                                                                    
     prices,   and  will   create  a   greater  barrier   to                                                                    
     investment from existing and new independent players.                                                                      
     We  also   agree  with  the  comment   by  Roger  Marks                                                                    
     yesterday  when in  one slide  he pointed  out the  tax                                                                    
     system  should  not  favor investing  in  certain  cost                                                                    
     fields over  others, which in  our view is the  same as                                                                    
     saying  we encourage  the legislature  not to  devise a                                                                    
     tax system that creates "winners" and "losers".                                                                            
     The  concept   of  the  Gross  Revenue   Exclusion  has                                                                    
     considerable potential, but its  narrow focus misses 80                                                                    
     -90  percent of  the opportunity  in the  central North                                                                    
     Slope described by  Econ One. We will  continue to work                                                                    
     with  you and  the Administration  to find  a fair  and                                                                    
     reasonable  way to  expand  its scope,  or  to find  an                                                                    
     alternative that  will address the central  North Slope                                                                    
     The reasons  that led  the State  to create  the small-                                                                    
     producer  tax   credit  under  AS  43.55.024   and  the                                                                    
     exploration  tax  credits  under  AS  43.55.025  remain                                                                    
     valid today.  We are pleased  that CSSB21  will provide                                                                    
     some  minimum  extension to  the  sunset  date for  the                                                                    
     small-producer and exploration tax credits.                                                                                
     We believe it is up to  you, and the Governor, to shape                                                                    
     a competitive  oil fiscal policy  that is  supported by                                                                    
     strong principles that will work  to arrest North Slope                                                                    
     production  decline  and  will lead  Alaska  towards  a                                                                    
     prosperous future for the  long-term. Overall, the Bill                                                                    
     represents  a  base  for significant  and  crucial  tax                                                                    
     structure  reform that  move toward  Governor Parnell's                                                                    
     four  "core   principles"  -  fairness   for  Alaskans,                                                                    
     encouraging  new production,  simplicity with  balance,                                                                    
     and  durability  for  the  long term,  but  as  I  have                                                                    
     outlined  today, AOGA  members believe  there is  still                                                                    
     many  structural changes  that should  be included  for                                                                    
     this bill  to truly change investment  behaviors to the                                                                    
     benefit of  Alaskans. You have  a difficult  task ahead                                                                    
     and  AOGA stands  ready to  assist you  throughout this                                                                    
9:38:39 AM                                                                                                                    
Co-Chair  Meyer   recognized  that  AOGA  did   not  support                                                                    
progressivity  and surmised  that the  organization did  not                                                                    
support   a   bracketed   progressivity.  He   opined   that                                                                    
progressivity  was  currently  out   of  control.  He  asked                                                                    
whether  AOGA would  want a  mechanism in  place to  address                                                                    
high  oil prices.  He believed  the failure  to address  the                                                                    
issue currently  meant it  would need to  be addressed  at a                                                                    
later time, which may not  be advantageous. He believed that                                                                    
oil companies  would take comfort that  Alaska had addressed                                                                    
prices  on the  high-end with  the bracketed  progressivity,                                                                    
showing  that it  had a  more stable  tax policy  than other                                                                    
investment locations.                                                                                                           
Ms. Moriarty responded that the  challenge was for the state                                                                    
to create  the policy it wanted  for a range of  prices. She                                                                    
stated    that   AOGA    supported   the    elimination   of                                                                    
progressivity,   but   the    organization   had   supported                                                                    
bracketing in the  past depending on the  tax structure. She                                                                    
added that AOGA's preference would  be no progressivity. She                                                                    
recognized that the policy call was difficult to make.                                                                          
9:41:03 AM                                                                                                                    
Co-Chair Meyer  asked which of  AOGA's suggestions  was more                                                                    
apt to achieve  the goal of increasing oil  in the pipeline.                                                                    
Ms. Moriarty  responded that  the best  strategy was  a more                                                                    
competitive tax  system. She relayed  that it  was difficult                                                                    
to  pick  one  component  of a  tax  system  and  encouraged                                                                    
relying on  the legislature's  consultants. She  shared that                                                                    
AOGA   members   had    communicated   the   importance   of                                                                    
competitiveness   with  other   investment  locations.   She                                                                    
pointed  to  several   challenges  facing  Alaska  including                                                                    
distance-to-market,  high cost  environment, and  other. She                                                                    
stressed that the most  competitive environment would result                                                                    
in the most production.                                                                                                         
Senator  Dunleavy  asked  whether the  AOGA  membership  had                                                                    
discussed  other  policies that  may  impact  the desire  to                                                                    
invest in Alaska. He wondered  if AOGA members believed that                                                                    
the state's  spending policy or  any other behaviors  were a                                                                    
deterrent to investment.                                                                                                        
Ms. Moriarty responded that several  factors were out of the                                                                    
state's  control   including  the  high   cost  environment,                                                                    
distance-to-market,   and   other;    however,   taxes   and                                                                    
regulation   were  controllable.   She  relayed   that  AOGA                                                                    
member's  felt  that  the  current  tax  structure  was  the                                                                    
largest impediment to  increasing investment and production.                                                                    
She  noted   that  other  issues  could   be  improved,  but                                                                    
increasing the  competitiveness of  the tax  structure would                                                                    
make the most significant difference.                                                                                           
9:44:56 AM                                                                                                                    
Senator   Bishop  requested   a  copy   of  Ms.   Moriarty's                                                                    
testimony. Ms.  Moriarty replied that she  would provide the                                                                    
testimony to the committee.                                                                                                     
Senator Bishop  asked for upcoming  testifiers to  show what                                                                    
increased  investment  and  production would  look  like  if                                                                    
competitiveness increased.                                                                                                      
9:45:58 AM                                                                                                                    
Senator Hoffman  discussed that most  members felt  the need                                                                    
to  examine  the  progressivity  aspects  of  the  bill.  He                                                                    
referred to  prior testimony by  PFC Energy that  there were                                                                    
jurisdictions looking  at forms of  progressivity, primarily                                                                    
to  address times  when oil  prices were  high. He  believed                                                                    
there was value  in considering the issue in  order to avoid                                                                    
further  deliberation  about oil  taxes  in  the future.  He                                                                    
recalled that  changes had  been made  to the  tax structure                                                                    
many times in  the past. He believed there  was potential to                                                                    
consider  progressivity; he  was dismayed  to see  that AOGA                                                                    
did not support any forms  of progressivity. He believed the                                                                    
option could  help to avoid revisiting  tax structure issues                                                                    
in the  future. He  pointed to numerous  slides in  the AOGA                                                                    
presentation that  expressed various forms of  opposition to                                                                    
the  current  and  proposed   tax  structures.  He  wondered                                                                    
whether AOGA believed  there were components in  the CS that                                                                    
would work.                                                                                                                     
Ms.   Moriarty  replied   that  slide   16  summarized   the                                                                    
components of the legislation that  AOGA supported; slide 17                                                                    
outlined its concerns. The  organization recognized that the                                                                    
legislature would  make changes  and form  what it  felt was                                                                    
the best policy for the state.                                                                                                  
Senator Hoffman  observed that the  governor and  the Senate                                                                    
Resources  Committee had  both  presented a  bill that  they                                                                    
believed  represented   the  best  policy  for   Alaska.  He                                                                    
perceived that AOGA was vastly  opposed to major portions of                                                                    
the current version of the bill.                                                                                                
Ms. Moriarty agreed that AOGA  had concerns with some of the                                                                    
components included  in the  current bill.  The organization                                                                    
believed  that  there  were structural  changes  that  would                                                                    
allow a  more competitive environment for  oil production in                                                                    
Alaska; AOGA  did not  believe the  current bill  would meet                                                                    
the  legislature's expectation  of a  significant change  in                                                                    
investment  behavior.  The  organization  had  concern  over                                                                    
portions of the original bill  as well. She stated that AOGA                                                                    
looked  forward  to  working  with  the  committee  and  the                                                                    
legislature to create the best tax policy for Alaska.                                                                           
9:50:02 AM                                                                                                                    
Senator  Hoffman wondered  whether  AOGA  had addressed  how                                                                    
much   investment  would   be  required   to  increase   oil                                                                    
production and  what the  range would  be. He  recalled that                                                                    
the legislature had discussed making  similar changes to the                                                                    
tax  structure on  April 16  of the  prior year.  He relayed                                                                    
that Dale  Pittman of ExxonMobil  had testified; he  cited a                                                                    
question that had been posed to Mr. Pittman:                                                                                    
     Taking  into   consideration  the  bottleneck   in  the                                                                    
     processing    facilities   and    other   technological                                                                    
     challenges  in recovering  more oil  regardless of  the                                                                    
     tax rate, how much investment  do you believe is needed                                                                    
     to increase production so we  can stabilize the flow in                                                                    
     the pipeline  and if possible  reach 600,000  barrels a                                                                    
Senator Hoffman shared  that Mr. Pittman had  stated that it                                                                    
would require an investment of  $3 billion to $5 billion per                                                                    
year to  have enough  new production  to stabilize  the flow                                                                    
Ms.  Moriarty stated  that AOGA  was unable  to weigh  in on                                                                    
some  issues  on  investment levels,  price  forecasts,  and                                                                    
other due  to antitrust  reasons. She  relayed that  the two                                                                    
most  recent  fields  (Oooguruk  and  Nikaitchuq)  had  cost                                                                    
approximately $1  billion; the fields were  producing 10,000                                                                    
to 15,000 barrels  per day. She had heard  Mr. Pittman state                                                                    
that  three  or four  fields  like  Oooguruk and  Nikaitchuq                                                                    
would  need  to come  online  each  year if  the  production                                                                    
decline was 40,000 barrels per day per year.                                                                                    
9:53:22 AM                                                                                                                    
Senator Hoffman  believed that  a cost of  $3 billion  to $5                                                                    
billion in  order to increase production  to 600,000 barrels                                                                    
per day  was a  staggering number.  He did  not know  if the                                                                    
amount would be achievable through any legislation.                                                                             
Co-Chair  Meyer  offered  that Senator  Hoffman's  questions                                                                    
would be good  to pose to the industry  during its testimony                                                                    
throughout the day.                                                                                                             
Senator  Olson discussed  testimony from  a consultant  that                                                                    
the  continuation of  the 20  percent  capital credit  would                                                                    
provide  more investment  incentive than  the GRE.  He asked                                                                    
for  AOGA's perspective.  Ms. Moriarty  replied that  if the                                                                    
GRE was expanded it would work  like a 20 percent tax credit                                                                    
in some ways. She stated that  it was difficult to say which                                                                    
option  would be  preferable without  seeing  the other  tax                                                                    
structure components as well.                                                                                                   
9:55:30 AM                                                                                                                    
Senator Dunleavy stated that one  of the cornerstones of the                                                                    
governor's  proposal  was  to   allow  durability  into  the                                                                    
future.  He  wondered how  AOGA  would  construct a  durable                                                                    
policy without some form of progressivity and flexibility.                                                                      
Ms.  Moriarty answered  that  it was  important  to take  an                                                                    
entire policy into consideration.  She stated that other tax                                                                    
regimes that AOGA's members competed  against did not change                                                                    
from year  to year.  She referenced  the effectiveness  of a                                                                    
prior  Econ One  slide showing  how current  investments had                                                                    
changed   in   Alaska  compared   to   the   Lower  48   and                                                                    
internationally  as   the  price   of  oil   increased.  She                                                                    
communicated that  the other regions  were seeing  major new                                                                    
investment,   whereas  investment   levels  in   Alaska  had                                                                    
remained  relatively flat.  She  stated that  a durable  tax                                                                    
policy would offer  the industry a return  on its investment                                                                    
and a steady cash flow to the state for the long-term.                                                                          
9:57:59 AM                                                                                                                    
Co-Chair  Kelly discussed  slide 59  of a  prior PFC  Energy                                                                    
presentation that focused on reimbursing  the royalty and ad                                                                    
valorum  tax   related  to   government  take   [PFC  Energy                                                                    
presentation:  "Senate  Finance   Committee:  Alaska  Fiscal                                                                    
System  Discussion   Slides"  dated   March  4,   2013].  He                                                                    
suggested  that Alaskans  wanted predictable  and reasonable                                                                    
systems  that allowed  for a  generous  government take.  He                                                                    
asked  AOGA to  analyze the  slide  and follow  up with  the                                                                    
Ms. Moriarty agreed.                                                                                                            
9:59:26 AM                                                                                                                    
Vice-Chair Fairclough  echoed an earlier request  for a copy                                                                    
of  Ms. Moriarty's  prepared remarks.  She pointed  to slide                                                                    
[15] titled "Components Not Addressed  in CSSB 21(RES)." She                                                                    
asked  the department  to provide  its understanding  of the                                                                    
reliance  on the  joint interest  billing. She  believed the                                                                    
goal was to  save the department from  reinventing the wheel                                                                    
every time it audited a  particular section of findings. She                                                                    
spoke to  statutory limitations and  cautioned that  DOR had                                                                    
provided  an  example related  to  the  transition from  the                                                                    
Petroleum  Production  Tax  (PPT) to  ACES;  Federal  Energy                                                                    
Regulatory  Commission  (FERC) findings  and  transportation                                                                    
costs had changed. Additionally,  in 2010 structural changes                                                                    
related to  amounts owed continued  to result from  the 2007                                                                    
tax return.  She communicated that  if the  system continued                                                                    
on  a   net  profit   tax,  the  auditing   division  needed                                                                    
sufficient  time  for the  work.  She  believed that  unless                                                                    
there was  a move to a  gross system, moving the  number was                                                                    
Vice-Chair  Fairclough addressed  slide  14  related to  the                                                                    
competitiveness  review  board.  She  wondered  whether  the                                                                    
Alaska Oil and Gas  Conservation Commission (AOGCC) would be                                                                    
an appropriate venue for the  board. She had envisioned that                                                                    
the entity would  be an investment board that  would look at                                                                    
beneficial  partnerships for  Alaska versus  looking at  the                                                                    
state's global competitiveness. She  believed that AOGCC had                                                                    
the  confidence  of  the industry  and  legislature  in  its                                                                    
review of  oil and  gas statistics and  the function  of how                                                                    
wells  operate. She  was interested  to know  whether varied                                                                    
production  in the  scenarios skewed  data  to make  smaller                                                                    
producers less  viable. She noted  that the  legislature had                                                                    
not been  shown a  significant number  of models  on various                                                                    
production  levels. She  wondered whether  varied production                                                                    
levels would  skew the 35  percent and $5 per  barrel credit                                                                    
10:03:39 AM                                                                                                                   
Co-Chair  Meyer  stated that  PFC  Energy  and Roger  Marks,                                                                    
Legislative   Consultant,  Legislative   Budget  and   Audit                                                                    
Committee  would look  at the  issues  raised by  Vice-Chair                                                                    
Senator  Olson   asked  whether   AOGA  would   support  the                                                                    
competitiveness review board if  it included an AOGA member.                                                                    
Ms. Moriarty  responded that the  current bill  allowed AOGA                                                                    
to  hold  a   seat  on  the  board.  She   stated  that  the                                                                    
organization  had   too  many  concerns  with   the  current                                                                    
structure of the board.                                                                                                         
DAMIAN  BILBAO,  DIRECTOR  OF  FINANCE,  BRITISH  PETROLEUM,                                                                    
introduced  himself   and  expressed  appreciation   to  the                                                                    
committee for  the invitation  to participate.  He presented                                                                    
the  PowerPoint:  "BP  Testimony to  Senate  Finance"  dated                                                                    
March 5, 2013. He relayed  that the presentation would focus                                                                    
on how Alaska  did or did not compete for  investment in the                                                                    
global marketplace. He spoke to  BP's history in Alaska; the                                                                    
company had operated production on  the North Slope for over                                                                    
35  years. He  discussed  the company's  makeup and  relayed                                                                    
that over 80 percent of  its employees in Alaska were Alaska                                                                    
residents.  He discussed  that Prudhoe  Bay continued  to be                                                                    
the largest oil  field in North America; when  the field had                                                                    
begun   producing  experts   estimated  that   it  contained                                                                    
approximately 9  billion barrels  of oil. He  furthered that                                                                    
the company  had produced over  12 billion barrels  from the                                                                    
area and saw  potential for the production  of an additional                                                                    
2 billion  barrels. He  stated that the  CS took  a positive                                                                    
step forward  in defining  the policy  that would  allow the                                                                    
additional  production to  occur. He  furthered that  the CS                                                                    
provided    an    opportunity     to    increase    Alaska's                                                                    
competitiveness by  decreasing the  base rate  and including                                                                    
the GRE, which did not apply  to legacy fields. He felt that                                                                    
SB 21 would make Alaska more  competitive in the oil and gas                                                                    
10:07:57 AM                                                                                                                   
Mr. Bilbao looked  at slide 3 titled "Decline  is Enemy #1,"                                                                    
which  showed DOR's  December 2012  production forecast.  He                                                                    
noted that  production had declined  at a rate of  6 percent                                                                    
to 8 percent  since 2000. He stated that  the graph depicted                                                                    
two  different  futures:  the first  showed  a  continued  7                                                                    
percent decline  in production, the second  included new oil                                                                    
and production.  He stressed that  Alaska was  not currently                                                                    
competing  for investment  on the  global level;  investment                                                                    
was flowing to other jurisdictions.                                                                                             
10:09:19 AM                                                                                                                   
Mr.   Bilbao  highlighted   slide   4  from   an  Econ   One                                                                    
presentation   titled   "Estimated  Capital   Spending   for                                                                    
Exploration and  Development Alaska  North Slope  vs. United                                                                    
States  and  Worldwide  Spending  2003 -  2012."  The  graph                                                                    
compared  total  spending on  the  Alaska  North Slope,  the                                                                    
United States,  and Worldwide from  2003 to 2012.  The slide                                                                    
also  included  the WC  ANS  Crude  index  to show  how  the                                                                    
jurisdictions  compared  over  time. He  stressed  that  the                                                                    
price  of oil  had  the greatest  impact  on investment.  He                                                                    
pointed  out  that  the  different  investment  alternatives                                                                    
increased  together as  the price  of oil  increased between                                                                    
2003  and  2007.  He  stated that  investment  in  2006  was                                                                    
approximately  twice what  it had  been in  2003; the  other                                                                    
jurisdictions were  largely aligned at the  time. He relayed                                                                    
that the alignment had stopped  in 2007. He pointed out that                                                                    
the  price of  oil continued  to  increase in  2008, but  as                                                                    
worldwide spending  continued to  increase, the  spending in                                                                    
Alaska  began  to flatten.  He  communicated  that when  the                                                                    
price of  oil dropped  to an  average of  $60 per  barrel in                                                                    
2009, global  investment fell back into  alignment; however,                                                                    
as  the price  of oil  began to  increase investment  in the                                                                    
Lower 48  and worldwide  surpassed investment in  Alaska. He                                                                    
reiterated  that  despite the  increase  in  oil prices  and                                                                    
increased  investment  globally,   spending  in  Alaska  had                                                                    
remained   flat.   He   emphasized  that   BP   looked   for                                                                    
opportunities  that  delivered   the  greatest  return  when                                                                    
considering where to invest.                                                                                                    
10:12:33 AM                                                                                                                   
Mr.  Bilbao  continued  with  slide   5  from  an  Econ  One                                                                    
presentation  titled:  "Crude  Oil Production  Alaska  North                                                                    
Slope vs.  United and OECD  Countries 2003-2012."  The graph                                                                    
showed that  production in  the North  Slope, the  Lower 48,                                                                    
and Organisation  for Economic Co-operation  and Development                                                                    
(OECD) countries  was all in  alignment in  2003. Production                                                                    
began to  decline over  time; however, as  the price  of oil                                                                    
and  investment increased,  production and  investment began                                                                    
to flatten and increase in  the Lower 48 and OECD countries.                                                                    
Production in Alaska continued to  decline at a 6 percent to                                                                    
8  percent  rate and  was  approximately  half of  the  2003                                                                    
level.  He  addressed  why  Alaska  had  fallen  behind.  He                                                                    
emphasized that  Alaska had rich  resources and  talent, but                                                                    
lacked competition because of current policy.                                                                                   
10:14:59 AM                                                                                                                   
Mr.  Bilbao discussed  a PFC  Energy  slide titled:  "Alaska                                                                    
Peer Group Government Take at  $110/bbl Market Price" (slide                                                                    
6).  The slide  showed  various  investment locations  (e.g.                                                                    
U.S.  Gulf  of  Mexico,   Brazil,  and  other)  compared  by                                                                    
government  take (including  all taxes  and royalties).  The                                                                    
slide placed  Alaska just behind  of Norway as  the location                                                                    
with the  second highest government  take. He  stressed that                                                                    
the policy did  not attract investment. He  stated that when                                                                    
investment  options were  considered,  Alaska was  discussed                                                                    
last.  He relayed  that an  average  government take  placed                                                                    
Alaska in  the "middle  of the pack,"  but did  not overcome                                                                    
the unique geographic and cost  challenges. He stressed that                                                                    
under the  current circumstances  Alaska failed  to compete.                                                                    
He emphasized that  Alaska needed to be in  the top quartile                                                                    
in order for companies to  consider investment in the state.                                                                    
He communicated  that the conversation  needed to  center on                                                                    
the appropriate  policy that would make  Alaska a preeminent                                                                    
destination for investment.                                                                                                     
Mr. Bilbao detailed slide 7 titled "In Summary":                                                                                
     · Alaska currently fails to compete globally for                                                                           
     · Positive shift in the conversation to a policy that                                                                      
        focuses on Alaska's future                                                                                              
    · The CSSB 21 (RES) structure could work, however:                                                                          
          o the base rate is too high                                                                                           
          o the GRE does not apply to legacy fields                                                                             
Mr. Bilbao  elaborated that  BP did not  see any  benefit to                                                                    
the proposed  GRE in the current  CS. He stated that  the CS                                                                    
continued to  reflect a tax  increase in the prices  BP used                                                                    
to model its business and opportunities.                                                                                        
10:19:14 AM                                                                                                                   
Co-Chair Meyer responded to Mr.  Bilbao's statement that the                                                                    
base rate  in the CS was  too high. He pointed  out that the                                                                    
base  rate was  tied to  the $5  per barrel  tax credit.  He                                                                    
stated that the finance committee  model showed that the two                                                                    
items offset each other.                                                                                                        
Mr. Bilbao responded  that slide 4 showed the  impact that a                                                                    
25 percent base  rate with the credits had  on investment in                                                                    
Alaska relative  to other jurisdictions.  He stated  that 25                                                                    
percent was  a high base  rate; BP understood that  it would                                                                    
be offset by credit. The  company also recognized that under                                                                    
the  CS the  burden of  earning the  credits shifted  to the                                                                    
producers  related to  production. He  communicated that  BP                                                                    
saw the CS as a tax increase.                                                                                                   
Co-Chair Meyer asked for the  dollar amount of investment in                                                                    
the  state by  BP and  overall.  He guessed  the number  was                                                                    
close to $100  billion. Mr. Bilbao would follow  up with the                                                                    
Co-Chair Meyer believed the information would be valuable.                                                                      
Senator Dunleavy  asked if BP  would increase  investment in                                                                    
Alaska if  the base  tax rate was  lowered and  the proposed                                                                    
GRE  was extended  to legacy  fields.  Mr. Bilbao  responded                                                                    
that the final legislation  would be reviewed, the company's                                                                    
current model  focused on the  CS. He relayed that  the base                                                                    
rate was the company's primary  concern. He pointed to slide                                                                    
4  and highlighted  that the  investment profile  for Alaska                                                                    
was uncompetitive.  He furthered that  if a new  policy made                                                                    
Alaska  globally  competitive,   investment  would  flow  to                                                                    
destinations   that  competed   most  effectively   for  the                                                                    
Senator  Dunleavy asked  if  BP would  invest  if the  right                                                                    
policy was in place.                                                                                                            
10:22:28 AM                                                                                                                   
Mr.  Bilbao responded  that BP  would  absolutely invest  if                                                                    
Alaska was  competitive. He stated that  Alaska's subsurface                                                                    
certainty, talent,  and infrastructure  were not  present in                                                                    
many global  locations. He communicated that  policy was the                                                                    
only reason  Alaska was not  competing with the rest  of the                                                                    
world.  He relayed  that  if the  policy  was corrected  and                                                                    
Alaska became  competitive, an increase in  investment would                                                                    
Vice-Chair  Fairclough had  heard  from  media that  capital                                                                    
investment on the  North Slope was currently  at an all-time                                                                    
high. She asked for comment on the statement.                                                                                   
Mr. Bilbao replied that the  current level of investment and                                                                    
employment was  very high  on the  North Slope.  He detailed                                                                    
that  5 out  of 6  people working  on the  North Slope  were                                                                    
focused  on   projects  that  sustained  rate   rather  than                                                                    
bringing  on new  rate. He  furthered that  the majority  of                                                                    
investment   was  aimed   at   renewing   the  30-year   old                                                                    
infrastructure.  He  expounded  that before  ACES  had  been                                                                    
implemented, BP's  rig fleet rate was  approximately 11 rigs                                                                    
per  year; subsequent  to the  implementation of  ACES, BP's                                                                    
rig  rate decreased  to approximately  5 or  6 per  year. He                                                                    
added that production levels had been impacted as a result.                                                                     
10:24:46 AM                                                                                                                   
Vice-Chair Fairclough referred to  BP's regular and contract                                                                    
employees in Alaska and Mr.  Bilbao's testimony that over 80                                                                    
percent  of  BP's  employees  were  Alaskan  residents.  She                                                                    
wondered if the  contract employees were included  in the 80                                                                    
percent figure.                                                                                                                 
Mr. Bilbao  replied that  the 80  percent figure  applied to                                                                    
BP's employees. He stated that  some of BP's contractors had                                                                    
a similar  ratio, but  others did not.  He relayed  that the                                                                    
company   was  committed   to  continuously   improving  the                                                                    
figures;   contractors  were   encouraged   to  follow   the                                                                    
company's lead.                                                                                                                 
Vice-Chair  Fairclough asked  about  local  hire related  to                                                                    
BP's contractors. Mr. Bilbao responded  that he would follow                                                                    
up with the information.                                                                                                        
Vice-Chair  Fairclough asked  why  the company's  investment                                                                    
costs  had  increased,  while production  had  remained  the                                                                    
same.   She  referred   to  Mr.   Bilbao's  testimony   that                                                                    
investment  equaled  production.  Mr.  Bilbao  replied  that                                                                    
inflation pressures  were factored  into costs  of operating                                                                    
on the  North Slope.  He did not  have a  specific breakdown                                                                    
related to cost increases.                                                                                                      
10:27:14 AM                                                                                                                   
Vice-Chair  Fairclough  asked  whether the  capital  credits                                                                    
were  part of  the  scenario. Mr.  Bilbao  replied that  the                                                                    
spending   reflected  the   direct  contribution   from  the                                                                    
corporations.  He  expounded that  there  was  a tax  result                                                                    
related  to   where  credits  were  obtained   and  how  the                                                                    
company's tax payment  was calculated. He did  not know what                                                                    
percentage of  the total spending  was a capital  credit. He                                                                    
explained  that the  company  looked at  its  cash flow  and                                                                    
spending  on  an absolute  basis;  BP  looked at  the  total                                                                    
impact  on  the  business  of  what it  believed  to  be  an                                                                    
excessively high tax.                                                                                                           
Vice-Chair  Fairclough wondered  whether the  company looked                                                                    
at the  total take  on a  project, the base  tax rate,  or a                                                                    
spread  on the  tax  rate when  considering investment.  Mr.                                                                    
Bilbao  responded  that BP  looked  at  the economics  of  a                                                                    
project and the cumulative impacts  of the tax policy on the                                                                    
project.  The company  also considered  what the  cumulative                                                                    
impact  would be  on  the  cash flow  of  the business.  The                                                                    
company considered the quality  of an individual opportunity                                                                    
and the impact to the overall business.                                                                                         
10:29:10 AM                                                                                                                   
Senator  Dunleavy   asked  whether  BP's   ideal  investment                                                                    
portfolio  would  consist  of   exploration  or  if  a  vast                                                                    
majority  focused on  accessing discovered  oil. Mr.  Bilbao                                                                    
responded  that BP's  focus  was on  legacy  oil fields.  He                                                                    
elaborated that most  of the opportunity on  the North Slope                                                                    
existed  in currently  producing areas.  He stated  that the                                                                    
greatest opportunity for locating a  new oil field was in an                                                                    
existing field.  He furthered that  the company's  rig fleet                                                                    
produced the  equivalent of multiple new  smaller satellites                                                                    
each year. He communicated that  it was important to include                                                                    
the continuing source of production  in order to offset what                                                                    
otherwise would be a decline  of much greater than 6 percent                                                                    
to  8 percent.  He  remarked that  a  significant amount  of                                                                    
investment was needed to maintain the current decline rate.                                                                     
Senator Dunleavy asked for  verification that an exploration                                                                    
credit  would   not  currently   interest  BP.   Mr.  Bilbao                                                                    
responded  that BP  did  not engage  in  exploration on  the                                                                    
North Slope.                                                                                                                    
Senator Bishop  requested an example of  capital investments                                                                    
that  could improve  production  on the  North  Slope in  an                                                                    
amenable investment climate. Mr.  Bilbao replied that BP had                                                                    
more resources  in Alaska  than it  did anywhere  else other                                                                    
than the  Lower 48. He  emphasized that the company  was not                                                                    
lacking in opportunity;  BP did not have a  policy that made                                                                    
the opportunities competitive globally.                                                                                         
10:31:31 AM                                                                                                                   
Senator Dunleavy  asked when the uptick  in investment would                                                                    
occur following  the implementation  of new  legislation. He                                                                    
wondered  if durability  and flexibility  factored into  the                                                                    
decision to increase investment.                                                                                                
Mr.  Bilbao  responded  that  the  right  policy  should  be                                                                    
applicable  at any  oil price.  For example,  if the  policy                                                                    
returned 65  percent to the government  the percentage would                                                                    
remain the same  regardless of the cost of  oil. He reminded                                                                    
the  committee that  the  price of  oil  had never  averaged                                                                    
greater than $110 dollars per  barrel. He pointed to slide 4                                                                    
related  to spending  and noted  that the  price of  oil had                                                                    
increased from 2008 to 2010.  He stated that given the right                                                                    
policy  BP could  respond  relatively quickly,  particularly                                                                    
around drilling  opportunities. He  elaborated that  some of                                                                    
the  larger  scale  infrastructure expansion  would  take  a                                                                    
couple more  years, but activity  should be expected  in the                                                                    
10:34:05 AM                                                                                                                   
Senator Hoffman  wondered whether BP  (as a member  of AOGA)                                                                    
was concerned  about what would  happen in  5 to 7  years if                                                                    
the tax  policy was  not successful  and Alaskans  felt that                                                                    
oil revenues had  been given away. He noted that  BP did not                                                                    
explore  in  the North  Slope.  He  stated that  given  data                                                                    
provided to  the committee by  DOR it was  contemplating the                                                                    
removal of the current  progressivity clause. He stated that                                                                    
from FY 11 to FY  15 there were estimates that progressivity                                                                    
would bring  in $11.3 billion  to the state,  which averaged                                                                    
to $2.25  billion per year.  He noted  that he did  not vote                                                                    
for ACES, but believed  that eliminating progressivity would                                                                    
lead to  great expectations  for Alaskans  to level  off oil                                                                    
production to 600,000 barrels per  day (or to the governor's                                                                    
expectation of 1,000,000 barrels per day).                                                                                      
10:36:27 AM                                                                                                                   
Mr. Bilbao  directed attention  to slide  3. He  stated that                                                                    
BP's greatest concern was that  production would continue to                                                                    
decline. He  pointed to slide  4 and stated that  Alaska was                                                                    
competing for the  great opportunity on the  North Slope. He                                                                    
stated  that the  status quo  was not  attracting investment                                                                    
and that a  new policy was necessary to  deliver a different                                                                    
future for the state.                                                                                                           
Senator  Hoffman repeated  his  question.  He believed  that                                                                    
giving up  $2.25 billion  per year for  5 years  created the                                                                    
expectation that  more oil would  be added to  the pipeline.                                                                    
He stated  that many Alaskans  felt that there should  be no                                                                    
reduction  without new  production. He  wondered whether  BP                                                                    
was concerned about what would  happen if new production did                                                                    
not occur. He reiterated that  giving up over $11 billion in                                                                    
a 5-year period raised expectations by Alaskans.                                                                                
Mr. Bilbao  understood the  challenge facing  the committee.                                                                    
The company's concern was that  the production decline would                                                                    
continue. He  detailed that declining production  raised the                                                                    
costs  of operations  and made  opportunities such  as heavy                                                                    
oil difficult  to impossible. He stressed  the importance of                                                                    
creating a  policy that would  attract investment.  He noted                                                                    
that the current future under ACES was continued decline.                                                                       
10:40:29 AM                                                                                                                   
Senator  Bishop requested  commitment from  the industry  to                                                                    
provide   information  on   projects  that   would  increase                                                                    
Co-Chair Kelly remarked on  the production decline occurring                                                                    
under  ACES.  He stated  that  the  current system  was  too                                                                    
complicated and took too much.  He surmised that the goal of                                                                    
the former policy  makers had been to extract  more from the                                                                    
producers.  He believed  it was  important to  look at  what                                                                    
would be  best for Alaska and  how to fill the  pipeline. He                                                                    
was  comfortable reducing  the government  take in  order to                                                                    
achieve increased  production. He  stressed his  interest in                                                                    
increasing productivity.                                                                                                        
Co-Chair Meyer discussed  slide 3 and testimony  that BP was                                                                    
not  exploring on  the  North Slope.  He  surmised that  any                                                                    
increased  investment by  BP would  involve extracting  more                                                                    
oil out of the existing  Prudhoe Bay reservoir. He looked at                                                                    
slide  2,  which  indicated   that  cumulative  Prudhoe  Bay                                                                    
production had exceeded 12 billion  barrels. He wondered how                                                                    
much oil BP  believed was still remaining.  He wondered what                                                                    
incentive  would  allow for  more  oil  extraction from  the                                                                    
10:44:29 AM                                                                                                                   
Mr.  Bilbao  responded  that recent  assessments  showed  $2                                                                    
billion  barrels of  recoverable  oil  remaining in  Prudhoe                                                                    
Bay. He shared that the  remaining oil was more difficult to                                                                    
extract. He  stated that  the legislature's  consultants had                                                                    
shared  information   about  the   impact  of   higher  cost                                                                    
developments relative  to the different  tax considerations.                                                                    
He expounded that investment would  flow to Alaska in a more                                                                    
competitive  nature  if a  policy  was  in place  that  made                                                                    
Alaska competitive.  He communicated  that the  CS structure                                                                    
could  work; however,  BP  believed the  base  rate was  too                                                                    
high. He  suggested that the committee  consider the decline                                                                    
that was occurring with the  25 percent base rate under ACES                                                                    
and credits that  would be necessary to offset  the high tax                                                                    
rate.  He relayed  that the  company would  provide a  model                                                                    
once a policy had been decided upon.                                                                                            
10:46:12 AM                                                                                                                   
Senator  Dunleavy discussed  the  history  of production  in                                                                    
Prudhoe Bay. He pointed to a  peak in production in the late                                                                    
1990s  followed  by a  natural  decline  that had  not  been                                                                    
stopped by  an increase  in investment. He  wondered whether                                                                    
there had  been any investment  at the time to  produce more                                                                    
oil.  He  referred  to  Mr.   Bilbao's  testimony  that  the                                                                    
environment was a function of  price. He pointed to ACES and                                                                    
the  current price  and tax  policy  increases. He  surmised                                                                    
that it  was necessary to  examine what had occurred  in the                                                                    
past 5 years  under ACES. He asked for  verification that BP                                                                    
believed the  decline could be  stemmed or increased  for an                                                                    
undetermined    period   with    investment   and    current                                                                    
Mr.  Bilbao  replied  that investment  flowed  to  the  best                                                                    
opportunities. He  stated that more production  would result                                                                    
if Alaska was  competitive on a global  level. He emphasized                                                                    
that  the tax  policy  needed to  incentivize all  potential                                                                    
Senator Dunleavy pointed out that  decline had existed under                                                                    
prior tax  structures. He  surmised that  the prices  at the                                                                    
time   had   not   warranted  investment.   He   asked   for                                                                    
verification  that   the  current  price   environment  made                                                                    
investment worthy to BP.                                                                                                        
Mr.  Bilbao  responded  that there  had  been  opportunities                                                                    
taken  at lower  prices because  costs had  also been  lower                                                                    
(e.g.  North Star  and Prudhoe  Bay satellite  developments,                                                                    
which  had  been  competitive globally).  He  stressed  that                                                                    
investment would  flow towards opportunities when  they were                                                                    
competitive and the economics worked.  He pointed to slide 5                                                                    
that  showed spending  compared to  other jurisdictions.  He                                                                    
emphasized  that  Alaska  was  not  competing  globally  for                                                                    
investment; therefore, production continued to decline.                                                                         
10:50:06 AM                                                                                                                   
AT EASE                                                                                                                         
11:01:55 AM                                                                                                                   
DAN  SECKERS, TAX  COUNSEL,  EXXONMOBIL, provided  testimony                                                                    
regarding  SB 21.  Exxon  supported the  prior  AOGA and  BP                                                                    
testimony.  He stated  that Alaska's  fiscal regime  was not                                                                    
competitive.  The   company  believed  it  was   up  to  the                                                                    
legislature to decide  whether ACES or a  revised tax system                                                                    
was the  right course for  Alaska in the near-term  and into                                                                    
the future.  He stated  that a  revised tax  structure could                                                                    
enable Alaska  to compete globally for  capital investments;                                                                    
Exxon  hoped  the  legislature would  chose  to  revise  the                                                                    
system.  He relayed  that  Exxon  believed the  legislation,                                                                    
including   the    elimination   of    progressivity,   made                                                                    
significant    progress    towards    increasing    Alaska's                                                                    
competitiveness.  He stated  that  the  high marginal  rates                                                                    
resulting   from   progressivity  adversely   affected   the                                                                    
investment climate, capital  intensive investments needed in                                                                    
the state, and  the optimization of operations  on the North                                                                    
Mr. Seckers stated that  eliminating progressivity would fix                                                                    
one  of  the  most  penalizing aspects  of  Alaska's  fiscal                                                                    
policy.  He   mentioned  the  GRE  and   shared  that  Exxon                                                                    
supported  tying  incentives  to increasing  production.  He                                                                    
communicated that  most of the  near-term investment  in the                                                                    
legacy fields  would not  be in  new exploration  or benefit                                                                    
from the GRE. He emphasized  that the legacy fields were the                                                                    
cornerstone   of  Alaska's   future.  Exxon   believed  that                                                                    
increasing investment  to maintain  the health  and strength                                                                    
of  the  legacy  fields  was  as  important  as  encouraging                                                                    
development and exploration in any new field.                                                                                   
Mr. Seckers addressed  the $5 per barrel  credit included in                                                                    
the  legislation.  He  relayed that  Exxon  supported  tying                                                                    
incentives  to increasing  production  and supported  AOGA's                                                                    
concerns that the $5 per  barrel credit may not sufficiently                                                                    
offset the  significant increase  caused by the  increase to                                                                    
the  base  tax rate.  He  stressed  that the  policy  should                                                                    
provide  balance  across  a  wide  spectrum  of  prices.  He                                                                    
reiterated the  company's support  for the  legislation, but                                                                    
noted that it  also had concerns. He  underscored that Exxon                                                                    
believed the base  tax rate was much too  high; the increase                                                                    
from the current 25 percent up  to 35 percent under the bill                                                                    
was "going  in the wrong  direction." He stated  that Alaska                                                                    
faced obstacles  that other markets did  not, including high                                                                    
cost,  Arctic environment,  distance to  market, and  other.                                                                    
The company believed that  global attractiveness was crucial                                                                    
to increasing investment.                                                                                                       
Mr. Seckers spoke to the  company's support for tax credits.                                                                    
He  stated that  credits provided  a useful  tool to  offset                                                                    
costs for expensive investments  needed in Alaska and helped                                                                    
to balance  a fiscal  regime over a  broad range  of prices.                                                                    
The company supported efforts  by the Parnell administration                                                                    
and   the   legislature    to   increase   Alaska's   global                                                                    
competitiveness.  Exxon recognized  the difficult  challenge                                                                    
facing the  legislature to balance long-term  revenue needs,                                                                    
budget  concerns, and  to increase  production. He  stressed                                                                    
that  the  need for  Alaska  to  develop a  competitive  and                                                                    
stable fiscal  system was  one of  the most  critical issues                                                                    
facing the state.  Exxon believed that the  CS represented a                                                                    
crucial step  in the right  direction; however,  it believed                                                                    
more  needed  to  be  done.   He  communicated  that  Alaska                                                                    
remained   an   essential   component  in   Exxon's   global                                                                    
portfolio; it  had done  business in the  state for  over 50                                                                    
years and  looked forward to  many more years.  He concluded                                                                    
that it was up to the  legislature to decide whether ACES or                                                                    
a  new tax  system was  the right  answer to  bring critical                                                                    
investments to the state; Exxon  hoped a new system would be                                                                    
11:09:29 AM                                                                                                                   
Co-Chair  Meyer  agreed  that  ACES  required  changes,  but                                                                    
Alaskans  needed assurance  that increased  production would                                                                    
occur. He stated  that no one had provided  a guarantee that                                                                    
the  changes  would  result   in  increased  production.  He                                                                    
pointed out  that some  individuals believed  making changes                                                                    
was  unnecessary if  production did  not increase.  He asked                                                                    
about Exxon's  current activities  in Alaska;  he understood                                                                    
that the  company was not undertaking  exploration. He asked                                                                    
about  potential prospects  Exxon had  in Alaska  that would                                                                    
promote more production.                                                                                                        
Mr. Seckers  replied that Exxon  remained bullish  in Alaska                                                                    
and  was moving  ahead with  development at  Point Thompson.                                                                    
The company  was also  the largest  lease holder  in Prudhoe                                                                    
Bay and  the largest  owner of known  commercial gas  on the                                                                    
North  Slope. He  stated  that Exxon  was  exploring in  and                                                                    
around  the legacy  fields to  increase overall  recovery in                                                                    
the area. The company believed  that a small increase in the                                                                    
total recovery  from Prudhoe Bay  would dwarf any  new field                                                                    
found  on  the  North  Slope.  Exxon  supported  efforts  by                                                                    
operators going forward  and would work to  do everything it                                                                    
could under the policies  implemented by the legislature. He                                                                    
did not have specifics to  provide, but the company believed                                                                    
that  the  more competitive  the  tax  policy was  the  more                                                                    
investment would increase from existing and new companies.                                                                      
11:12:16 AM                                                                                                                   
Vice-Chair  Fairclough  stated   that  Alaska's  tax  policy                                                                    
changed multiple times  in the past decade. She  asked why a                                                                    
change  to the  current  policy would  incentivize Exxon  to                                                                    
increase  investment.  Mr.  Seckers responded  that  company                                                                    
valued  stability and  agreed that  the  state's history  of                                                                    
reexamining  its   tax  structure   was  troubling   from  a                                                                    
statutory and  regulatory point of  view. The  company hoped                                                                    
that  the legislature  would determine  that Alaska  was not                                                                    
currently  competitive  going  forward and  that  a  durable                                                                    
policy would  be implemented that  was balanced over  a wide                                                                    
range   of   prices.   Exxon  appreciated   the   deliberate                                                                    
examination the legislature had undertaken.                                                                                     
Vice-Chair  Fairclough remarked  that Alaska's  unstable tax                                                                    
structure   would    be   a   ding   against    its   global                                                                    
competitiveness;  however,  she   had  been  convinced  that                                                                    
Alaska was not competitive  in attracting investment capital                                                                    
under the current tax structure.  She noted that she had not                                                                    
supported ACES because of her  belief that it took too much.                                                                    
She recalled that when ACES  had passed, the legislature had                                                                    
not known that  the system would take close  to $1.5 billion                                                                    
per  year  over  what  was expected.  She  asked  about  the                                                                    
difference between  the GRE and  cost recovery.  She pointed                                                                    
to testimony  that the company valued  the qualified capital                                                                    
11:15:39 AM                                                                                                                   
Mr. Seckers replied that tax policy  was just math; it was a                                                                    
way to  get to  a bottom  line. He stated  that a  GRE could                                                                    
work and  is based on  production. The exclusion  included a                                                                    
timing value; making an investment  and recovering the money                                                                    
later through the  GRE. Alternatively, a tax  credit is more                                                                    
immediate; therefore,  the impacts are more  pronounced on a                                                                    
present  value basis.  He opined  that the  goal for  policy                                                                    
makers was to create a policy  that was balanced over a wide                                                                    
range  of  prices.  He  believed there  were  a  variety  of                                                                    
different options that  could work, but it came  down to how                                                                    
competitive the state wanted to be.                                                                                             
11:17:03 AM                                                                                                                   
Co-Chair Meyer stated  that the goal was for  the new policy                                                                    
to  last  10  to  15  years. He  understood  there  was  the                                                                    
potential for  a world crisis  to dramatically  increase the                                                                    
price  of  oil. He  wondered  if  Exxon would  feel  comfort                                                                    
knowing  that a  new  tax policy  addressed the  possibility                                                                    
with a  type of bracketing progressivity.  He discussed that                                                                    
without addressing the potential  for much higher oil prices                                                                    
the policy may need to be revisited again in the future.                                                                        
Mr. Seckers replied that the  policy considered by the state                                                                    
should balance  over a wide  range of prices.  He understood                                                                    
that many  other jurisdictions faced  the same  question and                                                                    
had remained  relatively stable for  many years. He  was not                                                                    
convinced that  an immediate  adjustment would  be necessary                                                                    
if  a good  policy  was  put in  place  at  present; it  was                                                                    
difficult to  project for an  unknown global  catastrophe in                                                                    
the distant future,  which could also decrease  the price of                                                                    
oil.  The company  hoped the  legislature  would create  the                                                                    
best policy  for the  present time that  was as  balanced as                                                                    
possible to withstand price fluctuations.                                                                                       
Co-Chair  Meyer surmised  that Exxon  was not  opposed to  a                                                                    
bracketed progressivity  at high oil  prices as long  as the                                                                    
total package  made Alaska's  investment climate  stable and                                                                    
competitive. Mr.  Seckers replied that Exxon  was responding                                                                    
to  the  CS  that  had eliminated  progressivity,  which  it                                                                    
supported. He  communicated that  the company  had supported                                                                    
legislation the  prior year (HB  110), which had  included a                                                                    
bracketed progressivity.  Exxon believed the  elimination of                                                                    
progressivity in  the CS  was a  positive and  critical step                                                                    
forward.  He  reiterated  his prior  comments  that  Exxon's                                                                    
primary  concern was  that the  structure  was balanced  and                                                                    
11:20:52 AM                                                                                                                   
Vice-Chair  Fairclough wondered  whether Exxon  was involved                                                                    
with  any global  tax system  that was  not regressive.  She                                                                    
mentioned  the   regressive  nature   of  past   taxes.  She                                                                    
discussed that  progressivity had  been one answer,  but she                                                                    
did not  believe it  had worked well.  She pointed  to other                                                                    
previous tax legislation; HB 110  would have placed a cap on                                                                    
progressivity. She addressed  the Senate Resources Committee                                                                    
version of SB  21, which had proposed a 35  percent base tax                                                                    
and a  $5 per  barrel credit. She  noted that  the committee                                                                    
had heard  skepticism at best  regarding the  structure. She                                                                    
wanted  to  find  a  non-regressive  taxing  structure.  She                                                                    
stressed  that  committee members  were  working  to find  a                                                                    
solution supported  by constituents,  which included  a fair                                                                    
share for  Alaska. She did  not believe the  state's current                                                                    
share was  helping it compete  for investment.  She believed                                                                    
the  35 percent  base tax/$5  per barrel  credit had  looked                                                                    
like an attractive solution.                                                                                                    
Mr.  Seckers  appreciated   the  struggle  facing  committee                                                                    
members.  He imagined  that Exxon  was  actively engaged  in                                                                    
some locations  with progressive  elements. He  would follow                                                                    
up with detail on the question.                                                                                                 
11:23:25 AM                                                                                                                   
Vice-Chair  Fairclough  wondered   whether  Exxon  would  be                                                                    
supportive if the legislation  allowed the administration to                                                                    
negotiate participating areas for a term of 5 to 15 years.                                                                      
Mr. Seckers asked for clarification on the question.                                                                            
Vice-chair  Fairclough asked  if the  company would  support                                                                    
the contracting of a specific price  for a period of 5 to 15                                                                    
years  to create  increased certainty.  Mr. Seckers  replied                                                                    
that  Exxon valued  long-term stability;  many jurisdictions                                                                    
where the company worked had  the stability. He believed the                                                                    
goal  could  be  accomplished   in  Alaska  without  radical                                                                    
changes. He  furthered that the legislature  had the ability                                                                    
to  make  any proposed  change  prospective  only; it  could                                                                    
grandfather-in   certain   tax    treatments   on   existing                                                                    
investments or fields. He stressed  that the legislature did                                                                    
not  have  to  change  anything  with  respect  to  existing                                                                    
investments. He  noted that many options  existed that would                                                                    
achieve  certainty.  He  stated   that  the  company  valued                                                                    
certainty and durability in any fiscal regime.                                                                                  
11:25:43 AM                                                                                                                   
Senator Hoffman recalled that when  ACES had been considered                                                                    
it had  initially not been  regressive at the lower  end. He                                                                    
pointed  out that  there were  ways  to implement  something                                                                    
similar;  however,  he  believed progressivity  would  still                                                                    
need to be  looked at. He asked if Exxon  was less concerned                                                                    
with the regressive  nature at the low-end than  it was with                                                                    
high progressivity.                                                                                                             
Mr.  Seckers  answered  that   progressivity  was  the  most                                                                    
crippling part of ACES.                                                                                                         
Senator Hoffman  asked whether Exxon would  continue to have                                                                    
major  concerns  about  the   legislation  if  it  was  non-                                                                    
regressive and  minor tweaks were made.  Mr. Seckers replied                                                                    
that the company would look  at any proposal advanced by the                                                                    
legislature. He stated the  company shared the legislature's                                                                    
goal for a globally competitive and attractive system.                                                                          
11:27:17 AM                                                                                                                   
Co-Chair Meyer asked whether the  current CS [(CSSB 21(RES)]                                                                    
made  Alaska  competitive on  a  global  basis. Mr.  Seckers                                                                    
responded that the  CS represented a strong  step forward in                                                                    
improving the  state's competitiveness; however,  there were                                                                    
continued concerns  about the  legislation including  a high                                                                    
base  rate.  He  opined  that the  bill  was  a  significant                                                                    
improvement  over  ACES. Whether  the  bill  made Alaska  as                                                                    
competitive  as it  desired was  a question  the legislature                                                                    
would  need  to  decide.  The   company  sensed  that  given                                                                    
Alaska's  obstacles the  state should  be as  attractive and                                                                    
competitive as possible.                                                                                                        
Co-Chair Meyer  noted that the  committee would  examine the                                                                    
35 percent base rate. He  reminded Mr. Seckers that the base                                                                    
rate  had been  offset  by  the $5  per  barrel credit;  the                                                                    
credit was only  available if oil was  produced. He surmised                                                                    
that in Exxon's opinion, the  $5 credit did not sufficiently                                                                    
offset the higher base rate.                                                                                                    
Mr.  Seckers  replied that  Exxon  believed  the current  25                                                                    
percent  base   rate  was  too  high.   He  emphasized  that                                                                    
increasing the  rate to 35 percent  was a step in  the wrong                                                                    
direction.  He stated  that  the $5  credit  was simple  and                                                                    
creative;  however, Exxon  shared AOGA's  concerns that  the                                                                    
policy may not be as competitive as it should be.                                                                               
Co-Chair Meyer discussed the afternoon's schedule.                                                                              

Document Name Date/Time Subjects
03 05 13 CSSB 21 Senate Finance KM.ppt SFIN 3/5/2013 9:00:00 AM
SB 21
3-5-13 BP-Bilbao Testimony to SFC.pdf SFIN 3/5/2013 9:00:00 AM
SB 21
SB 21 Exxon - ACES - Alaska's Investment Climate Under ACES - PDF Written Testimony Given To Senate Finace -3-5-13.pdf SFIN 3/5/2013 9:00:00 AM
SB 21
SB 21 Moriarty Testimony 030513.pdf SFIN 3/5/2013 9:00:00 AM
SB 21