Legislature(2005 - 2006)BUTROVICH 205

02/28/2006 03:30 PM RESOURCES

Download Mp3. <- Right click and save file as

Audio Topic
03:34:36 PM Start
03:38:33 PM SB305
05:56:40 PM British Petroleum Alaska (bp) – Ken Konrad, Vice President; Angus Walker, Vice President, Bp Alaska Gas; Tom Williams, Alaska Tax Counsel
06:12:12 PM Bp – Ray Hall, Senior Tax Economist
07:32:07 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Stakeholder Presentations
               SB 305-OIL AND GAS PRODUCTION TAX                                                                            
CHAIR WAGONER  announced SB  305 to be  up for  consideration and                                                               
that this  was the  second day of  the stakeholders  meeting. The                                                               
first presenters would  be from ExxonMobil -  Richard Owen, Marty                                                               
Massey and Dan Seckers.                                                                                                         
RICHARD OWEN,  Production Manager and Vice  President, ExxonMobil                                                               
Alaska,  introduced  Marty  Massey, Joint  Interest  Manager  for                                                               
ExxonMobil   U.S.,  who   was   leading   the  gasline   contract                                                               
negotiations,  and  Dan  Seckers,   ExxonMobil  tax  counsel  for                                                               
Alaska.  He said  if this  measure  were simply  a tax  increase,                                                               
ExxonMobil  would  actively  oppose  it. At  current  prices,  he                                                               
expected ExxonMobil's  production tax payments would  increase by                                                               
$50 million  to $100  million per year.  But the  proposed system                                                               
balances revenues  to the state  and producers across a  range of                                                               
oil  prices.  It  provides incentives  for  new  investments  and                                                               
includes  a transition  provision  for  recent investments.  Most                                                               
importantly,  the  PPT provides  a  predictable  and durable  tax                                                               
system  which, along  with the  appropriate  gas pipeline  fiscal                                                               
contract terms  would allow Alaska  natural gas  pipeline project                                                               
to move to the next phase.                                                                                                      
Specific  concerns about  the bill  centered  around whether  the                                                               
high tax  rate and resulting  increase in taxes would  hinder the                                                               
full  development of  the remaining  oil resources  on the  North                                                               
ExxonMobil in Alaska                                                                                                          
MR. OWEN  said that ExxonMobil has  had a presence in  Alaska for                                                               
over a  century and  has invested  more than  $11 billion  in the                                                               
state's  economy.  Over  the  years,  EM  explored  most  of  the                                                               
hydrocarbon plays  in Alaska and  participated in the  1968 first                                                               
Prudhoe  Bay discovery  well.  He is  proud of  the  role EM  has                                                               
played n Alaska through  exploration, initial field developments,                                                               
construction  of  TAPS, development  of  new  technology and  the                                                               
promotion of efficient reservoir management practices.                                                                          
     Currently,  EM has  working interests  in Prudhoe  Bay,                                                                    
     Kuparuk,  Endicott  and  Granite   Point.  We  are  the                                                                    
     operator  of the  Point Thomson  Unit  and the  largest                                                                    
     interest holder  in the Prudhoe Bay  field. Our current                                                                    
     working  interest production  is approximately  180,000                                                                    
     B/D  and we  are the  largest owner  of discovered  gas                                                                    
     resource.   Our  production   from  Alaska   represents                                                                    
     approximately 4  percent of EM's worldwide  oil and gas                                                                    
     production.  Our Alaskan  production is  primarily from                                                                    
     Prudhoe Bay  and the near-by satellite  fields. Prudhoe                                                                    
     Bay,   along  with   Point  Thomson,   has  significant                                                                    
     remaining potential,  but it  comes at higher  cost and                                                                    
3:38:33 PM                                                                                                                    
SENATOR SEEKINS arrived.                                                                                                        
MR. OWEN continued:                                                                                                             
     Historical Context                                                                                                       
     One  of   ExxonMobil's  objectives  in  both   the  gas                                                                    
     pipeline fiscal contract negotiation  and the debate on                                                                    
     oil taxes has  been to reduce the  risk associated with                                                                    
     fiscal changes by  working with the State  of Alaska to                                                                    
     establish a predictable  and durable fiscal environment                                                                    
     in  which to  make long  term investment  decisions. To                                                                    
     that end, any  change in the fiscal regime  for oil has                                                                    
     a direct  impact on  how we view  the stability  of the                                                                    
     Alaskan fiscal environment, which  in turn, impacts how                                                                    
     we evaluate ongoing investment decisions.                                                                                  
     We understand  the State's desire to  obtain additional                                                                    
     tax  revenue   at  higher  prices.  One   of  the  most                                                                    
     challenging  tasks that  the Legislature  can undertake                                                                    
     is how  to change the  oil tax system  without damaging                                                                    
     the  industry.  As  Governor  Murkowski  has  correctly                                                                    
     stated on  many occasions,  the North  Slope is  one of                                                                    
     the  most  expensive  places   in  which  our  industry                                                                    
     operates. Tax systems need to  be carefully designed to                                                                    
     ensure  that the  desired objectives  are achieved  and                                                                    
     that  any   change  does   not  result   in  unintended                                                                    
     consequences,  such as  reduced  investments and  lower                                                                    
     reserve recovery.                                                                                                          
3:40:33 PM                                                                                                                    
     One of the many questions that  we are asked is why are                                                                    
     ExxonMobil and  other producers Seekins  durability and                                                                    
     predictability for  oil in parallel with  negotiating a                                                                    
     fiscal  contract  for a  gas  pipeline.  The answer  is                                                                    
     fairly simple. The gas on  the North Slope is contained                                                                    
     in  the same  reservoirs  as the  oil  and is  produced                                                                    
     through the  same facilities. For  a gas project  to be                                                                    
     viable, we  need the fields  that produce both  oil and                                                                    
     gas  to  be viable  -  underpinned  by predictable  and                                                                    
     durable  fiscal  terms.  A commitment  of  billions  of                                                                    
     dollars  to build  the  natural  gas pipeline  requires                                                                    
     confidence  that  the  base oil  business  will  remain                                                                    
     healthy for the long term.                                                                                                 
3:41:17 PM                                                                                                                    
     Existing System-ELF                                                                                                      
     With  that context  in mind,  I'd  like to  make a  few                                                                    
     comments  about the  current  oil production  severance                                                                    
     tax system -  the Economic Limit Factor or  ELF and, in                                                                    
     particular, how  it has  been effective  at encouraging                                                                    
     investment and mitigating production decline.                                                                              
     The ELF  was designed  to allow  the state  to increase                                                                    
     the  production tax  while not  stifling investment  in                                                                    
     marginal  fields. The  ELF scared  down the  production                                                                    
     tax rate  when a  field became more  marginal, reducing                                                                    
     the economic limit  to which a field  could be produced                                                                    
     and ultimately allowing more reserves to be recovered.                                                                     
     The  1989  ELF  amendment significantly  increased  the                                                                    
     production  tax  on  Prudhoe   Bay  and  Kuparuk  while                                                                    
     providing an incentive to  encourage the development of                                                                    
     smaller fields. That 1989  amendment worked as intended                                                                    
     with many  small and marginal  fields coming  on stream                                                                    
     over the  past 17 years.  The ELF lowered the  tax rate                                                                    
     on those fields supporting their commercial viability.                                                                     
     While  we would  like to  have more  Prudhoe Bay's  and                                                                    
     Kuparuks, we,  and the rest of  industry, haven't found                                                                    
     any.  Consequently, the  focus for  the past  ten years                                                                    
     has been on the  development of these smaller satellite                                                                    
     fields.  Satellites  are   generally  not  economic  as                                                                    
     stand-alone  developments and  have  required both  new                                                                    
     technology  and connection  to existing  infrastructure                                                                    
     to  be  commercially  viable.   Many  of  these  fields                                                                    
     produce   viscous  oil   contained  in   lower  quality                                                                    
     reservoirs requiring significantly  higher costs, which                                                                    
     adds to  the risks for development.  This is especially                                                                    
     true   for   the   Polaris  and   Orion   viscous   oil                                                                    
     developments  with   oil  that  literally   flows  like                                                                    
     molasses.  Developing  these  fields has  required  new                                                                    
     technology,  more  expensive  drilling  and  completion                                                                    
     techniques,  new   production-equipment  and  extensive                                                                    
     modifications to  existing facilities to  process these                                                                    
     viscous production streams.                                                                                                
     Since 2000,  ExxonMobil has invested over  $250 million                                                                    
     in  the  engineering,   drilling  and  construction  of                                                                    
     associated  facilities for  the development  of Aurora,                                                                    
     Borealis, Midnight Sun,  Polaris and Orion. Significant                                                                    
     additional capital  is required  over the  next several                                                                    
     years to  fully develop  these resources.  These fields                                                                    
     are  mitigating the  decline of  oil production  on the                                                                    
     North  Slope, contributing  50,000  B/D  gross and  are                                                                    
     expected to recover over 500 million barrels gross.                                                                        
     Under the  ELF formula many of  these smaller satellite                                                                    
     fields paid  little or no  production tax.  Even though                                                                    
     these fields  were paying  little production  tax, they                                                                    
     did and continue to  and contribute substantial amounts                                                                    
     to the  state in  royalties, property taxes  and income                                                                    
     taxes, and in jobs for Alaskans.                                                                                           
     Over  the  past  five  years,   we  and  other  working                                                                    
     interest owners have also  extended the primary Prudhoe                                                                    
     Bay enhanced  oil recovery (EOR) technology  to some of                                                                    
     these  satellite fields.  Since 1998,  Since ExxonMobil                                                                    
     has  invested over  $30  million  in tertiary  recovery                                                                    
     projects  at  Point  McIntyre,   Eileen  West  End  and                                                                    
     Borealis, which  are expected to produce  an additional                                                                    
     60  million  barrels  gross.  While  tertiary  projects                                                                    
     recover additional oil,  the production profile results                                                                    
     in  a slower  oil recovery  and longer  payout periods.                                                                    
     These satellite  EOR projects are  in the  early stages                                                                    
     of development.  The major investments have  been made,                                                                    
     but the  oil production  benefits will not  be received                                                                    
     until  many  years  out.  The   ELF  provision  of  the                                                                    
     existing   production   severance    tax   made   these                                                                    
     economically challenged projects commercially viable.                                                                      
3:44:40 PM                                                                                                                    
     Taken together,  the recent  Prudhoe Bay  satellite and                                                                    
     EOR  development projects  developed  over 560  million                                                                    
     barrels.  While the  resulting  state's production  tax                                                                    
     under  ELF was  relatively minor,  the state's  royalty                                                                    
     oil  would total  70 million  barrels, what  at today's                                                                    
     oil price is worth roughly  $4 billion. The bottom line                                                                    
     is that  the ELF  system has  worked well  for industry                                                                    
     and for the state  of Alaska by encouraging significant                                                                    
     new investment.                                                                                                            
     However,  it  is  also  recognized   that  ELF  can  be                                                                    
     considered  a somewhat  regressive  system  in that  it                                                                    
     does not reflect profitability or  cost in the division                                                                    
     of gross  revenues between the  state and  producers as                                                                    
     oil prices  rise and fall.  The assumption that  a well                                                                    
     is marginal  at 300  B/D does  not necessarily  hold in                                                                    
     the  current  high  oil  price  environment.  Yet  this                                                                    
     assumption  typically  contributes  to  a  reduced  ELF                                                                    
     factor based  on the current  formula. As a  global oil                                                                    
     and gas  producer, ExxonModbil  operates across  a wide                                                                    
     array of fiscal systems. It  is most important that the                                                                    
     system recognize  the quality  of the resource  so that                                                                    
     the potential  development will be  commercially viable                                                                    
     and  attract capital.  When I  say the  quality of  the                                                                    
     resource, I  mean the  size and nature  of the  oil and                                                                    
     gas  reservoirs, the  cost and  technology required  to                                                                    
     develop those  reservoirs, the  distance to  market, as                                                                    
     well  as  the  tax  and  royalty  system  that  applies                                                                    
     including  the  long-term  stability  of  that  system.                                                                    
     Countries   that    are   re-experiencing   significant                                                                    
     industry  investment have  achieved the  proper balance                                                                    
     in their fiscal regimes.                                                                                                   
     ExxonMobil's assessment  of the remaining  oil resource                                                                    
     suggests  future growth  opportunities  will come  from                                                                    
     complex enhanced oil  recovery projects, development of                                                                    
     smaller,  more  marginal   oil  accumulations  and  the                                                                    
     innovative  development   of  viscous  and   heavy  oil                                                                    
     resources.   These  opportunities   will  require   the                                                                    
     development and  application of new  technology, higher                                                                    
     unit development  costs and more complex  operations to                                                                    
     deliver a  given production  rate. These  resources are                                                                    
     much lower  in quality as  compared to Prudhoe  Bay and                                                                    
     Kuparuk,  though  they   face  the  similar  challenges                                                                    
     associated  with  arctic  conditions  and  distance  to                                                                    
     market. Therefore, as stated  earlier, we are concerned                                                                    
     that the administration's  proposal is weighted towards                                                                    
     a  higher  tax,  which  may prevent  some  of  Alaska's                                                                    
     challenged resources from being developed.                                                                                 
3:47:14 PM                                                                                                                    
MR. OWEN continued to comment on the PPT proposal:                                                                              
     This proposal  represents a tax based  on profits,                                                                         
     which results  in a sharing  of the risks  and the                                                                         
     rewards across  a range of prices.  The state will                                                                         
     receive  a  higher  share  of  the  revenues  when                                                                         
     prices  are  high  and  will  accept  lower  taxes                                                                         
     during periods  of low prices. The  proposal moves                                                                         
     from the  regressive ELF  system to  a progressive                                                                         
     system.  ExxonMobil  affiliates  have  significant                                                                         
     experience  in  profit-based  progressive  systems                                                                         
     around the  world and  they work  well as  long as                                                                         
     they are  properly taking into account  the nature                                                                         
     of the resource base.                                                                                                      
     PPT system: Transition                                                                                                   
     This bill  represents a  major-step change  in Alaska's                                                                    
     current production  tax system. The  bill appropriately                                                                    
     addresses  this step-change  by including  a transition                                                                    
     plan  so  that  recent  investment  decisions  are  not                                                                    
     adversely  impacted. This  bill  provides a  transition                                                                    
     allowance  over the  next six  years  based on  capital                                                                    
     investments  made in  the last  five years.  We believe                                                                    
     this  transition   plan  is  appropriate   because  the                                                                    
     benefits  from these  recent  investments  have no  yet                                                                    
     been  fully  received.  Oil and  gas  companies  invest                                                                    
     large  sums of  money years  ahead of  first production                                                                    
     and   are  at   risk  for   price,  development   cost,                                                                    
     production  rates  and  ultimate reserve  recovery.  In                                                                    
     most cases  it takes many  years, often more  than five                                                                    
     years, for a return on oil or gas investment to occur.                                                                     
3:49:10 PM                                                                                                                    
     For   example,   satellite    and   tertiary   recovery                                                                    
     investment decisions  made during  the last  five years                                                                    
     were made under the  ELF structure anticipating a lower                                                                    
     tax relative to  that proposed under the  PPT bill. The                                                                    
     state appropriately  provided this incentive,  the ELF,                                                                    
     so that  these challenged and costly  projects could be                                                                    
     made  commercially viable.  It  is  not appropriate  to                                                                    
     suddenly  increase  the   taxes  on  these  investments                                                                    
     without  providing  some  form  of  consideration.  The                                                                    
     transition provisions  recognize that  past investments                                                                    
     were made under the  ELF structure and somewhat reduces                                                                    
     the  increased tax  treatment to  which these  projects                                                                    
     will  now  be  subjected.  To  avoid  penalizing  these                                                                    
     recent investments, the  transition provisions included                                                                    
     in this bill are essential.                                                                                                
3:50:17 PM                                                                                                                    
CHAIR WAGONER  asked for examples  of any other state  or country                                                               
that have transition provisions for a change in taxation.                                                                       
DAN  SECKERS, Tax  Counsel for  ExxonMobil  Alaska, replied  with                                                               
several  examples. One  example  was our  own federal  government                                                               
that repealed  percentage depletion for integrated  oil companies                                                               
in  its 1975  Tax  Reform Act.  It  provided provisions  allowing                                                               
those with contracts to continue  to use percentage depletion for                                                               
the duration of those contracts.                                                                                                
Another example was when investment  tax credits were repealed by                                                               
the federal  government in  the 1980s  - at  first a  company was                                                               
allowed to  recover an  investment over five  years and  then the                                                               
law  was  changed to  three  years.  That  tax credit  was  still                                                               
allowed  for  five  years, but  additional  investments  were  no                                                               
longer eligible for them and got less favorable depreciation.                                                                   
3:52:15 PM                                                                                                                    
SENATOR STEDMAN  said he  didn't hear an  answer to  the question                                                               
and  asked  again what  countries  use  transition provisions  in                                                               
relation to the oil industry.                                                                                                   
MR.  OWEN   replied  that   ExxonMobil  has   production  sharing                                                               
contracts around the  world and tax changes don't  apply to them,                                                               
because their activities are covered  by those contracts. He said                                                               
he  would   look  for  examples   of  this  type   of  transition                                                               
3:53:15 PM                                                                                                                    
SENATOR  BEN  STEVENS  asked  if  he meant  the  terms  of  their                                                               
contracts around the  world locked in their  royalty payments and                                                               
severance taxes  for a  period of time  so that  any modification                                                               
wouldn't apply to them.                                                                                                         
MR.  OWEN  replied  yes;  most  of  those  contracts  are  single                                                               
government-type  arrangements  with  severance tax,  royalty  and                                                               
income tax built-in and, "It doesn't change over time."                                                                         
SENATOR BEN STEVENS asked how long a typical contract ran.                                                                      
MARTY  MASSEY,  Joint Interest  Manager  for  the United  States,                                                               
ExxonMobil Corporation,  replied that it varied  across the board                                                               
and depended  largely on the quality  and life of the  resource -                                                               
but  some are  for 50  to 60  years. Some  contracts are  written                                                               
until every barrel has been produced out of the entire block.                                                                   
SENATOR  BEN STEVENS  asked  if the  contractual  terms that  are                                                               
entered into  prior to production  are locked in during  the life                                                               
of that contract.                                                                                                               
MR. MASSEY replied yes.                                                                                                         
SENATOR  STEDMAN asked  if  reopeners are  a  standard clause  in                                                               
those contracts.                                                                                                                
MR.  MASSEY   replied  that  ExxonMobil's  contracts   have  been                                                               
negotiated  around the  world and  their terms  vary accordingly.                                                               
Some of  them have reopeners and  some of them don't  - depending                                                               
on what allowed the investment to go forward.                                                                                   
3:55:50 PM                                                                                                                    
SENATOR SEEKINS remarked, "Some of  those reopeners, I think, are                                                               
called revolutions, Senator Stedman - regime changes."                                                                          
3:56:08 PM                                                                                                                    
SENATOR THERRIAULT arrived.                                                                                                     
3:56:59 PM                                                                                                                    
SENATOR  SEEKINS  recapped   his  understanding  of  ExxonMobil's                                                               
     I  made  this  investment  decision  when  I  knew  the                                                                    
     severance tax was  going to be an average  of 7 percent                                                                    
     based on  the ELF or  however it came down.  Now, we're                                                                    
     going to  go to  14.5 percent  with the  20/20 program,                                                                    
     roughly. That's  a rough  approximation from  what I've                                                                    
     heard.  So...I'd like  to have  some consideration  for                                                                    
     that.  I'm  not entitled  to  it  under any  government                                                                    
     program. It  isn't that  I'm going to  lose some  of my                                                                    
     other standard  deductions in  either state  or federal                                                                    
     income tax. It's just good faith.... Am I correct?                                                                         
MR. OWEN replied yes. It is  just a mechanism by which to achieve                                                               
some  consideration   for  previous  investments.   However  that                                                               
concept  may be  deceptive, because  some  of them  were made  in                                                               
fields, which may  have been paying no production tax  at all and                                                               
would now  be paying  20 percent.  Part of  it is  the underlying                                                               
health of  the investment climate  and if they would  regret some                                                               
of  the investments  they made.  They want  a transition  plan so                                                               
they can move from one tax regime to another.                                                                                   
SENATOR SEEKINS remarked that they  wouldn't regret it as much if                                                               
oil stays  at $60-plus a barrel  as they would if  it declined to                                                               
what more people are predicting will be the long-term rate.                                                                     
MR. OWEN replied that was  right. When those decisions were made,                                                               
the focus was  on what the price  risk would be, not  on what the                                                               
tax structure would be.                                                                                                         
3:59:15 PM                                                                                                                    
MR. OWEN said that he was  also concerned that the 20/20 rate may                                                               
not  support development  of all  opportunities remaining  on the                                                               
North  Slope,  which are  now  primarily  complex development  of                                                               
viscous and heavy oil. He explained:                                                                                            
     These opportunities have  challenged economics and with                                                                    
     investment  credits  of  20 percent  will  enhance  the                                                                    
     present  value economics  of  new  investments. The  20                                                                    
     percent tax  rate will result  in a lower  overall cash                                                                    
     flow.  The impact  on all  of  the economic  parameters                                                                    
     must  be   carefully  weighed  before  a   decision  to                                                                    
     progress an  investment is made.  The combination  of a                                                                    
     20 percent credit along with  a 20 percent tax rate may                                                                    
     not be  adequate to support  the development of  all of                                                                    
     the  remaining opportunities.  It's with  this in  mind                                                                    
     that  we recommend  that the  legislature not  increase                                                                    
     the  proposed  tax  rate or  reduce  the  proposed  tax                                                                    
MR. OWEN  said that this  bill also  addressed many of  the long-                                                               
standing  issues that  have divided  the state  and the  industry                                                               
over the years. He said:                                                                                                        
     It  made little  sense  in the  past  and makes  little                                                                    
     sense today  for the state  to have  separate divisions                                                                    
     determining the value of oil  and gas - one for royalty                                                                    
     and one  for taxes. There  is only  one value -  in the                                                                    
     marketplace.  SB  305  allows  the  state  to  value  a                                                                    
     producer's  oil and  gas using  the producer's  royalty                                                                    
     settlement  agreement, which  was  negotiated with  and                                                                    
     approved by  the Department of Natural  Resources. This                                                                    
     will provide  certainty to a  producer on the  value in                                                                    
     which to pay its royalty  and production taxes and will                                                                    
     reduce the  administrative and audit costs  to both the                                                                    
     state and industry.                                                                                                        
     Under current prices, ExxonMobil  and industry will pay                                                                    
     more  in taxes  as compared  to the  current production                                                                    
     tax system. However, as I  said in my opening comments,                                                                    
     we need  predictability and  durability under  which to                                                                    
     gauge  investment decisions.  No  one  wants to  invest                                                                    
     money  in a  project only  to have  the rules  changed,                                                                    
     reducing  the  attractiveness  of the  investment.  The                                                                    
     transition  provision is  an important  feature of  the                                                                    
     bill necessary to provide relief  for the abrupt change                                                                    
     caused by the new PPT system.                                                                                              
     The administration decided to  weight the proposal to a                                                                    
     higher  tax, which  may make  it difficult  to progress                                                                    
     the remaining  future development opportunities.  It is                                                                    
     most  important that  the quality  of the  resources be                                                                    
     factored into the  design of the tax  system. Given our                                                                    
     view of  the resources, we  would not support  a higher                                                                    
     tax rate or lower credits than proposed in the bill.                                                                       
     SB 305 seeks  to balance revenues to the  state and the                                                                    
     producers  across a  range of  oil prices  and provides                                                                    
     incentives  for  new  investments,  which  is  a  clear                                                                    
     objective of the State of  Alaska. And most importantly                                                                    
     for  ExxonMobil, we  believe  the  new system,  coupled                                                                    
     with  appropriate gas  pipeline  fiscal contract  terms                                                                    
     will  lead  to a  predictable  and  durable tax  system                                                                    
     which  will  enable  the Alaska  Gas  project  to  move                                                                    
     forward  to the  next  phase. Potential  changes to  he                                                                    
     features of  the PPT bill must  be carefully considered                                                                    
     to  avoid upsetting  the balance  contained within  the                                                                    
     In conclusion,  this bill is  important for  Alaska and                                                                    
     the producers. It  is one part - a  very important part                                                                    
     of  a series  of  related issues  that the  legislature                                                                    
     will  need   to  address  to  ultimately   provide  the                                                                    
     necessary   fiscal   environment   to   stimulate   oil                                                                    
     production  and to  progress  the  Alaska gas  pipeline                                                                    
     The fiscal  contract that is being  finalized under the                                                                    
     authority  of the  Stranded  Gas  Development Act  will                                                                    
     incorporate this PPT legislation  by reference in order                                                                    
     to provide  fiscal stability. We are  currently working                                                                    
     with  the Administration  on  how  best to  incorporate                                                                    
     this bill into the fiscal contract.                                                                                        
4:03:33 PM                                                                                                                    
CHAIR WAGONER stated  that some people have said  the tax credits                                                               
aren't high enough and asked if  he would support a higher credit                                                               
MR.  OWEN  replied  that  he understood  the  balance  this  bill                                                               
created between  the tax  rate, the  credit rate,  the transition                                                               
and other  provisions. Higher tax  credits would change  the bill                                                               
and  its  impacts  would  need scrutiny.  However,  he  said,  in                                                               
general, incentives help investment.                                                                                            
4:04:45 PM                                                                                                                    
SENATOR  STEDMAN  said  he  has  heard a  lot  of  discussion  on                                                               
predictability and durability  of the tax regime  for business in                                                               
the state  and he  understands that  the proposal  is progressive                                                               
and the royalty  and property taxes are  regressive, but together                                                               
they are fairly neutral. He asked Mr. Owen to comment on that.                                                                  
MR. OWEN  stated that he would  have to review a  new proposal to                                                               
see if it provided the same balance this bill has.                                                                              
SENATOR STEDMAN  asked if  it was  in the  best interest  of both                                                               
parties to  have a fair  system that would  not put one  party or                                                               
another at a disadvantage in the long run.                                                                                      
MR.  OWEN replied  yes  and  ExxonMobil wants  a  system that  is                                                               
viewed as fair and equitable  by all parties. He thought everyone                                                               
was looking at the proposal across  a wide range of prices to see                                                               
whether they believe it achieves that end.                                                                                      
4:08:18 PM                                                                                                                    
SENATOR  ELTON  said  he  struggles   with  some  of  Mr.  Owen's                                                               
conclusions. A major one is what  the state does now with the oil                                                               
tax will  enable the Alaska  gas project  to move forward  to the                                                               
next phase  and, "We don't  know what the  next phase is  on this                                                               
side of the table."                                                                                                             
Senator Elton elaborated that Mr.  Owen has testified that he was                                                               
working  with  the  administration   currently  on  how  to  best                                                               
incorporate this bill into a fiscal  contract he felt like he was                                                               
being asked to make a decision  without knowing what Plan B was -                                                               
assuming the  oil tax was Plan  A. That situation compels  him to                                                               
look  at  the tax  as  a  stand-alone  issue.  He asked  if  they                                                               
wouldn't prefer  the legislature to  just consider a  fair stand-                                                               
alone oil tax that could be rolled into a gas pipeline contract.                                                                
MR. MASSEY replied  yes, the legislature should look  at how this                                                               
tax  would  do  what  the  State of  Alaska  wants  in  terms  of                                                               
encouraging investment  and allowing the  remaining opportunities                                                               
to come on stream. He explained:                                                                                                
     What we  want to communicate  with you is that  as part                                                                    
     of the  gas pipeline  fiscal contract  negotiations, we                                                                    
     believe  this bill,  if incorporated  in the  contract,                                                                    
     will provide the predictability  and durability we need                                                                    
     to  advance  to  the  next  phase  of  a  gas  pipeline                                                                    
     project.  I know  at this  point in  time, many  of you                                                                    
     don't have  the terms... of what  we've negotiated with                                                                    
     the  fiscal contract.  And I  hopeful  within the  next                                                                    
     couple of  weeks here  we're able  for everyone  to see                                                                    
     what  the gas  pipeline  contract  terms look  like....                                                                    
     That was the reason for our comments.                                                                                      
SENATOR ELTON  asked if he  is suggesting  that he doesn't  see a                                                               
gas pipeline contract happening without this bill.                                                                              
MR. MASSEY replied  that this bill provides on the  oil side what                                                               
they need  to progress the  gas pipeline.  If it were  changed in                                                               
some way,  it would  have to be  reevaluated. He  also speculated                                                               
that  if   the  legislature   determined  what   would  encourage                                                               
investment and  maintain a  healthy oil  business for  the state,                                                               
that would probably work for the fiscal contract. He said:                                                                      
     We're on  the verge of commercializing  this gas. We're                                                                    
     going to invest  billions of dollars for  this thing to                                                                    
     go  forward. We  need to  make sure  we understand  the                                                                    
     fiscal  regime under  which we're  going to  make those                                                                    
4:13:55 PM                                                                                                                    
SENATOR DYSON asked if he meant  to imply that if the legislature                                                               
and the governor  offered them a 30-year  contract under existing                                                               
oil tax  law, ExxonMobil  wouldn't have been  able to  go forward                                                               
with the contract.                                                                                                              
MR. MASSEY  replied that  the governor never  made that  offer to                                                               
ExxonMobil, but  he recognized  that the  state's oil  tax system                                                               
needed to be overhauled.                                                                                                        
SENATOR DYSON  said, "I  think you  just said  no," and  asked if                                                               
this  bill  did   anything,  particularly  concerning  investment                                                               
credits, to make a gas pipeline contract more probable.                                                                         
MR. OWEN  replied that  one aspect  of it that  does help  is the                                                               
credits  and  how  they  apply  to  Pt.  Thompson,  particularly,                                                               
because  it  would be  a  major  contributor  of  the gas  for  a                                                               
pipeline project.                                                                                                               
SENATOR  DYSON asked  if  it would  be clearer  to  say this  tax                                                               
system  is  necessary  to  progress  the  pipeline  if  it  is  a                                                               
provision in the contract that extends for 20 or 30 years.                                                                      
MR. OWEN replied  that is exactly what he is  saying. He wants to                                                               
incorporate  this bill  in with  the contract  because alone,  it                                                               
provides no certainty  that the tax won't be changed  in the near                                                               
4:16:51 PM                                                                                                                    
SENATOR THERRIAULT referred to page  10 of Mr. Owen's comments on                                                               
the  valuation  issue and  said  he  understands that  there  are                                                               
different  systems   -  the  Department  of   Revenue's  and  the                                                               
Department  of Natural  Resources' -  and they  may result  in as                                                               
much as a $1  difference in the value of a barrel  of oil and the                                                               
PPT  proposal  is the  lower  of  them.  He  asked if  the  price                                                               
differences in the methodologies are correct.                                                                                   
MR. OWEN  replied that small  differences do occur and  those are                                                               
largely due to  whether prices are rising or falling  and are not                                                               
a fault of the formula, itself.                                                                                                 
SENATOR THERRIAULT  said he thought  this part of the  bill still                                                               
wasn't  clear to  him and  the committee  might want  to consider                                                               
using the higher number of  the different methodologies. He asked                                                               
if  Mr.  Owen  had  an   opinion  on  the  $73  million  tax-free                                                               
MR.  OWEN  replied  no.  He elaborated  that  he  understood  the                                                               
administration proposed  a $73 million allowance  to address some                                                               
of the  barriers for new entrants  into the market and  he agrees                                                               
that  there  are  barriers  to  exploration  and  development  in                                                               
Alaska, but he  does have some concerns about  whether that would                                                               
create   an  unlevel   playing  field,   especially  in   forming                                                               
partnerships.  He   felt  it  was  the   administration's  policy                                                               
4:20:11 PM                                                                                                                    
CHAIR WAGONER said the allowance  doesn't impact big corporations                                                               
the same as small  ones and asked if there are  other ways to put                                                               
that incentive in the bill.                                                                                                     
MR. OWEN replied that should be addressed by the administration.                                                                
4:21:08 PM                                                                                                                    
CHAIR  WAGONER   asked  if  the   $73  million   allowance  would                                                               
incentivize ExxonMobil to do more.                                                                                              
MR.  OWEN replied  that the  $73 million  would be  the first  of                                                               
their deductions. It wouldn't play in the exploration step.                                                                     
SENATOR  THERRIAULT said,  relative to  the look  back provision,                                                               
that yesterday  BP used a  graph of expenditures  for development                                                               
of one  of their fields that  was relatively flat for  four years                                                               
and  then spiked  in the  fifth  year. He  asked if  ExxonMobil's                                                               
expenditures had been flat or had peaks, as well.                                                                               
MR.  OWEN replied  about their  expenditures over  the last  five                                                               
years had been relatively flat at about $190 million per year.                                                                  
MR. MASSEY added  that it's important to understand  not only the                                                               
level  of investment,  but  also  the kinds  of  things they  are                                                               
investing  in.  ExxonMobil  has   been  investing  in  developing                                                               
viscous oil  fields and  those take  a long  time to  receive the                                                               
benefits  from  those  investments.  That's  why  the  transition                                                               
provision is so important.                                                                                                      
4:23:18 PM                                                                                                                    
CHAIR  WAGONER asked  what additional  incentive  would help  for                                                               
developing viscous oil.                                                                                                         
MR. OWEN  replied that an  increase in credit would  help improve                                                               
the  cash  flow  of  any investment  because  it  represents  the                                                               
ability to  offset some of  the upfront investment.  High credits                                                               
help  the cash  flow economics,  although  that is  not the  only                                                               
parameter they look at when  making decisions. The tax rate takes                                                               
a lot of cash out of the project.                                                                                               
4:24:55 PM                                                                                                                    
SENATOR  THERRIAULT  asked if  this  level  of credit  encourages                                                               
ExxonMobil to spend additional dollars  on the gas pipeline. What                                                               
level of incentive causes them to change their decision.                                                                        
MR. OWEN  replied that it is  very complex question. They  have a                                                               
whole range  of resource opportunities, some  are more challenged                                                               
than  others.  They  also  have   a  whole  range  of  investment                                                               
parameters  in  looking  at whether  a  project  is  commercially                                                               
viable or not.  "We are that the tax rate  that is being proposed                                                               
at the  moment and  the credit  rate -  that combination  may not                                                               
allow us to develop all of the resource on the North Slope."                                                                    
4:28:23 PM                                                                                                                    
SENATOR STEDMAN  asked if  the industry is  sensitive to  how the                                                               
government  take is  sliced up,  because consultants  have lumped                                                               
them together in one category.                                                                                                  
MR. OWEN  replied that they are  focused on what their  return is                                                               
and are less focused on how  the government take might be divided                                                               
MR. MASSEY  added that  there are varying  levels of  take across                                                               
the globe  and there is a  good reason. They look  at the quality                                                               
of the  resource that is within  a basin and figure  out how much                                                               
the  government  could take  and  still  attract investment.  The                                                               
countries  that  have  a  lot of  investment  activity  have  the                                                               
balance right.                                                                                                                  
4:29:54 PM                                                                                                                    
SENATOR STEDMAN  said they  would have  more debate  on comparing                                                               
investment climates. He asked how unique he thought Alaska is.                                                                  
MR.  OWEN  replied  that  is  the  heart  of  the  question.  The                                                               
resources are becoming more unique.  Kuparuk and Prudhoe Bay have                                                               
been  developed  and  the remaining  resources  are  smaller  and                                                               
challenged opportunities in a harsh environment.                                                                                
SENATOR  STEDMAN said  Norway  and Britain  come up  a  lot as  a                                                               
comparison and asked if those are  just a rabbit trail. As policy                                                               
makers,  they  are  trying  to   strike  a  balance.  He  stated,                                                               
"Clearly, we want  the oil industry to stay here  and we want you                                                               
to expand.  We've got  the same  general goals."  But, he  felt a                                                               
real hesitation  in their willingness  to share  information with                                                               
the legislature.                                                                                                                
MR.  OWEN  replied   that  you  can  find   different  levels  of                                                               
government  take  around  the  world.  Some  of  those  have  low                                                               
government  take   and  are  struggling  and   others  have  high                                                               
government  take and  are doing  well.  The ones  that work  have                                                               
found  the  right balance  between  their  tax system  and  their                                                               
resources. Alaskans need to find  the right system that will work                                                               
in Alaska. He wasn't sure  that studying more countries over seas                                                               
would help in those deliberations.                                                                                              
SENATOR ELTON  asked if tradability  of the credits makes  this a                                                               
better bill than if they weren't  there from the perspective of a                                                               
major producer on the North Slope and of a smaller company.                                                                     
MR.  OWEN replied  that tradability  of credits  is an  important                                                               
feature, especially  for the smaller  companies that have  to get                                                               
through the first expensive years.  It's less important for large                                                               
companies  with  lots  of  assets.  He would  hope  to  have  the                                                               
production to offset the credits.                                                                                               
4:36:11 PM                                                                                                                    
SENATOR  THERRIAULT said  the legislature  doesn't  want the  tax                                                               
system to become  destabilized with changing gas  and oil prices,                                                               
because that would drive investment  away or create pressure from                                                               
constituents to  change the  system, which  is what  is happening                                                               
with ELF today. He understood  that at least one company advanced                                                               
a tax proposal that was progressive  with regards to price and he                                                               
asked  what opinion  Mr. Owen  had about  the currently  proposed                                                               
flat 20 percent tax whatever the price of oil and gas goes to.                                                                  
MR. OWEN agreed that they are  after a system that would create a                                                               
healthy  industry that  is  fair to  all parties  at  a range  of                                                               
prices and the  legislature needs to make sure the  PPT meets the                                                               
needs of  both parties. The question  of increased progressivity,                                                               
price tiers and things like  that have been discussed, but aren't                                                               
in  the proposed  bill from  the administration.  Producers would                                                               
have to  look at any  other proposals and  ask if it  would still                                                               
allow them to move forward with predictability and durability.                                                                  
SENATOR THERRIAULT  asked if  tax incentives  are constitutional.                                                               
He mentioned the Kuno v.  Daimler Chrysler case that is currently                                                               
before the  U.S. Supreme Court  could turn tax  incentives across                                                               
the nation on its head.                                                                                                         
MR.  OWEN responded  that  he  was not  familiar  with the  case,                                                               
neither was Mr. Seckers.                                                                                                        
SENATOR THERRIAULT  said one of the  legislative consultants said                                                               
that shut down  costs would be part  of the life of  a field, but                                                               
the bill  allows shut  down and removal  of facilities  that have                                                               
been in place  for 30 years to be against  the production tax. He                                                               
wasn't sure of the legitimacy  of something like that or dragging                                                               
the expense  forward to the  point where production  starts going                                                               
down naturally  and any revenue  the state might receive  goes to                                                               
expenses of shut down costs.                                                                                                    
MR.  OWEN replied  that as  shut down  costs occurred  they would                                                               
flow through lease  expenditures and be a deduction  for the PPT.                                                               
This is  distinct from reserves,  which are usually done  as book                                                               
entries when you haven't actually spent the money.                                                                              
SENATOR THERRIAULT  asked if he  saw differentiating  between new                                                               
facilities they  put in  place under  PPT versus  all of  the old                                                               
infrastructure that has been in production for 30 years.                                                                        
MR. MASSEY replied they are trying  to put a system in place that                                                               
will  be here  for  many  years. He  was  not anticipating  major                                                               
abandonment costs.  They would be paying  tax for 30 to  50 years                                                               
under  this new  system  until abandonment  would  occur. So,  he                                                               
thought  it would  be  appropriate for  those  investments to  be                                                               
included under this bill.                                                                                                       
CHAIR  WAGONER   explained  that  one  of   the  reasons  Senator                                                               
Therriault asked  that question  is while  his field  is younger,                                                               
Cook  Inlet has  four platforms  that are  currently shut  in and                                                               
they  are   concerned  about  how  those   expenditures  will  be                                                               
MR. MASSEY responded  that his comments were  directed to Prudhoe                                                               
Bay that would be there for a long time.                                                                                        
4:46:05 PM                                                                                                                    
SENATOR  ELTON  asked  if he  deducted  demobilization  from  net                                                               
MR. OWEN  replied that  he didn't  think abandonment  costs would                                                               
generate  a  credit; rather  they  would  be lease  expenditures.                                                               
Reserves are  usually carried  as book entries  and this  bill is                                                               
about modeling cash investments.                                                                                                
SENATOR  ELTON asked  on  if the  demobilization  deposits to  an                                                               
account would be deducted from gross profit.                                                                                    
MR. MASSEY replied when earnings are  set aside, the money has to                                                               
be set  aside from earnings  in a  particular year. Money  is not                                                               
set-aside in  an account,  it comes  out of your  cash flow  in a                                                               
given year.                                                                                                                     
MR. SECKERS  added from a  federal tax  point of view,  you can't                                                               
take an  expense for  dismantlement on the  tax return  until the                                                               
expense was actually incurred.                                                                                                  
4:48:52 PM                                                                                                                    
SENATOR ELTON  asked if  the state  determines net  profits under                                                               
PPT,  they would  not include  anything  that was  set aside  for                                                               
future abandonment.                                                                                                             
MR. OWEN replied yes.                                                                                                           
SENATOR STEDMAN  asked if  there is anywhere  else on  the planet                                                               
with which to compare Alaska  and how can legislators establish a                                                               
comfort range without doing that.                                                                                               
MR.  OWEN  replied  that the  legislature's  and  the  governor's                                                               
consultants have  provided a large  data base  showing government                                                               
take  across a  range  of countries  and different  environments.                                                               
Going  through  the  committee  hearings  is  exactly  the  right                                                               
process. He  thought that once  the legislature goes  through the                                                               
same deliberations  the governor did,  they would come up  with a                                                               
similar conclusion.                                                                                                             
4:52:53 PM                                                                                                                    
SENATOR  THERRIAULT said  that he  tried  to get  people who  had                                                               
worked for the industry to be  part of the legislature's team for                                                               
perspective. One of  the things they have told them  to expect is                                                               
when people  are in a deal-making  mood to put everything  on the                                                               
table and see  what you can add  to it. He asked  what they asked                                                               
to have added to the deal.                                                                                                      
MR. MASSEY replied  nothing was added after  the major provisions                                                               
of the gas contract were completed on Saturday.                                                                                 
     As Richard said,  we think it will give  us the balance                                                                    
     we  need, the  predictability  and  durability we  need                                                                    
     when we write it into  the fiscal contract to allow the                                                                    
     gas to  go. When you think  about it, that's got  to be                                                                    
      the major thing that we're working on - getting the                                                                       
     gas to go. And in the end we got comfortable with it.                                                                      
SENATOR THERRIAULT  asked how  many dollars  are spent  in Alaska                                                               
procuring equipment as opposed to spent out-of-state.                                                                           
MR. OWEN  replied that  most of their  investments in  Alaska are                                                               
operated  by   others  and   those  procurement   activities  are                                                               
conducted by  others. Most  of their  dollars flow  through joint                                                               
venture accounts to operators in Alaska.                                                                                        
SENATOR THERRIAULT said  he was trying to  understand the economy                                                               
that  would  come into  being  with  the  buying and  selling  of                                                               
credits  and  said  the  smaller  independents  that  don't  have                                                               
production on  which to offset  their credits would  be marketing                                                               
them. They  would be bought at  somewhat of a discount,  so there                                                               
would be  some leakage  of the investment  money that  would have                                                               
occurred to the  state treasury. He asked if they  should rely on                                                               
the market or should the state  have a refund so the treasury has                                                               
no loss.                                                                                                                        
MR. OWEN replied  that he thought any leakage would  be lost from                                                               
the new  entrant who  wasn't able  to capture  the full  value of                                                               
their credit.                                                                                                                   
SENATOR THERRIAULT  explained that the  new company would  get 90                                                               
cents on the dollar and the  company that bought it gets the full                                                               
dollar.  But the  dollar gets  expensed back  to what  would have                                                               
accrued as PPT tax. So it,  in effect, comes out of the treasury.                                                               
Instead,  an explorer  could make  their  investment. They  don't                                                               
have PPT tax to offset, so they  would just come to the state for                                                               
a rebate directly from the treasury.                                                                                            
MR. OWEN replied  that could probably be done, but  that would be                                                               
a policy question for the legislature.                                                                                          
SENATOR THERRIAULT  asked if they  got into a low  price scenario                                                               
where  the  state  wasn't  generating   a  lot  of  taxes,  would                                                               
producers likely stop playing in the credit-buying market.                                                                      
MR. OWEN replied  that that was a hypothetical  question that was                                                               
difficult to  answer, because  he wouldn't  know what  the market                                                               
would look like or any number of other things.                                                                                  
SENATOR THERRIAULT asked if they  currently buy credits under the                                                               
existing system.                                                                                                                
MR. OWEN replied yes.                                                                                                           
SENATOR THERRIAULT said he wanted  the department to give them an                                                               
idea of what the going rate is for credits.                                                                                     
CHAIR WAGONER asked if those  credits had been purchased under SB                                                               
185, exploration credits.                                                                                                       
MR. OWEN replied yes.                                                                                                           
5:01:10 PM Recess 5:49:41 PM                                                                                                
^British  Petroleum Alaska  (BP)  - Ken  Konrad, Vice  President;                                                             
Angus  Walker,  Vice  President,  BP Alaska  Gas;  Tom  Williams,                                                             
Alaska Tax Counsel                                                                                                            
CHAIR   WAGONER  announce   that  BP   Alaska  would   start  its                                                               
presentation with Current Realities on the North Slope                                                                        
Ken Konrad, Vice President of  Gas for BP Alaska introduced ANGUS                                                               
WALKER,  Commercial Vice  President,  BP  Alaska, who  recognized                                                               
that the  PPT and the  subsequent gas  contract were some  of the                                                               
most  important   things  coming   before  the   legislature.  He                                                               
introduced Ray Hall, Senior Tax  Economist, and Tom Williams, Tax                                                               
Counsel, who  is widely credited  as the creator of  the economic                                                               
limit factor (ELF).                                                                                                             
MR. WALKER  started on slide  6, which  was a view  of production                                                               
from the  North Slope  since 1977 through  2005. It  has produced                                                               
over  15 billion  barrels of  oil to  date. BP  has invested  $24                                                               
billion  creating the  business it  has  today and  has paid  $32                                                               
billion in tax to  the state of Alaska and $24  billion in tax to                                                               
the federal government.                                                                                                         
Since peaking in  1988, production has declined on  an average of                                                               
6  percent per  year.  The ELF  has worked  as  intended and  the                                                               
production profile  shows small  wedges that come  from satellite                                                               
fields that would have otherwise  been challenged to develop. ELF                                                               
has and continues to encourage  investment in these small or less                                                               
productive fields and  has played a significant  role in stemming                                                               
overall North Slope decline.                                                                                                    
He  referenced slide  8  that  shows two  DOR  scenarios for  oil                                                               
development on  the North  Slope. One was  production if  the gas                                                               
line  wasn't  built and  the  other  showing  a forecast  of  oil                                                               
production assuming a gas pipeline is built.                                                                                    
He  agreed  with DOR  that  the  future  without gas  looks  very                                                               
different than  with it.  Without gas,  the future  is definitely                                                               
shorter and  less exciting.  "But, it's clear,  also, to  us that                                                               
the foundations  of the gas  business will be  on top of  the oil                                                               
business and to have a healthy  gas business, we need to maintain                                                               
a healthy oil  business for the next 45 years.  Both parts of the                                                               
business must be health."                                                                                                       
5:56:40 PM                                                                                                                    
To keep  the business healthy,  Mr. Walker said the  decline must                                                               
be  stemmed. If  BP were  to stop  investing on  the North  Slope                                                               
today, the  fields that have  been developed would decline  at 15                                                               
percent or  greater per year.  But, BP and industry  is investing                                                               
as an  industry $1 billion to  $1.5 billion per year  in existing                                                               
5:59:43 PM                                                                                                                    
CHAIR WAGONER  asked at what  point in  barrels per day  does the                                                               
pipeline cease to be economically viable to operate.                                                                            
MR.   WALKER  replied   that  is   not  known,   but  significant                                                               
investments  will have  to  be  made as  certain  flow rates  get                                                               
reached. He said that 17.5 billion  barrels are left of known oil                                                               
and gas resource, but the  challenge is developing it and getting                                                               
to  market.  He  emphasized  that  nothing  in  his  presentation                                                               
relates  to ANWR  and that  the impact  of the  tax on  the major                                                               
producers  should be  an important  part  of their  consideration                                                               
along  with  the  smaller  investors.   He  said  that  the  real                                                               
opportunity is to exploit the  known resource on the North Slope,                                                               
which is three times larger than  the estimate of what is left to                                                               
be found.                                                                                                                       
6:04:43 PM                                                                                                                    
He concluded with a picture  of their 50-year vision, which shows                                                               
that the future  is very different than the  past. The challenges                                                               
of the  decline on the North  Slope and development of  a viscous                                                               
resource are enormous, but a good fiscal regime is key.                                                                         
^BP - Ray Hall, Senior Tax Economist                                                                                          
RAYMOND HALL, Senior Tax Economist,  BP Alaska, said he would try                                                               
to put Alaska  in a global context and compare  it to similar tax                                                               
regimes around  the world. He  said it is critical  to understand                                                               
the context  in which it  was designed. Critical factors  are the                                                               
basin  maturity,   basin  cost  structure,  the   nature  of  the                                                               
opportunities themselves, where is the  basin located in terms of                                                               
markets.  In general,  a higher  tax burden  will result  in less                                                               
investment  and,  conversely, lower  tax  burden  will result  in                                                               
greater  investment. The  regime should  be equitable  and should                                                               
provide returns to  the investor consistent with the  risks he is                                                               
undertaking. It should  be simple, although most  are not simple.                                                               
The PPT  is a  step in  the right  direction, being  simpler than                                                               
ELF.  Stability  is  another important  characteristic.  The  tax                                                               
should  be levied  on profits  and not  revenues. He  pointed out                                                               
that royalty is a tax on revenue.                                                                                               
Trends can  be noticed in  mature basins that the  royalty burden                                                               
is alleviated  or removed altogether. Perhaps  the most important                                                               
feature is that the regime  must be competitive and efficient. It                                                               
should reflect the nature of  the opportunities that are present.                                                               
Context is critical.                                                                                                            
6:12:12 PM                                                                                                                    
Slide 4  indicated that the  United States is the  second largest                                                               
producer of  oil and gas  in the world with  the vast bulk  of it                                                               
coming  from the  Lower 48  states. Norway  is the  sixth largest                                                               
producer of oil  and gas and UK  comes in at ninth.  The tax rate                                                               
comparison slide showed  the ELF at 56 percent and  the PPT at 61                                                               
SENATOR FRENCH  clarified that those figures  accounted for total                                                               
government  take  including  federal;  and  in  reality  the  PPT                                                               
accounted for a 5 percent  increase in total government take, but                                                               
the federal tax would go down.                                                                                                  
6:15:27 PM                                                                                                                    
SENATOR BEN STEVENS clarified that  they are referencing industry                                                               
financials, not just BP.                                                                                                        
MR. HALL agreed.                                                                                                                
SENATOR THERRIAULT  reflected that ConocoPhillips said  the total                                                               
government take went  up to 67 percent under the  PPT and some of                                                               
Dr. van  Meurs' graphs indicate  just under 60 percent.  He asked                                                               
if  BP had  conferred with  other companies  and if  they have  a                                                               
disagreement on the total government take.                                                                                      
MR. HALL  replied that  there are  different numbers.  This graph                                                               
represents  marginal take,  which is  the take  on the  extreme -                                                               
meaning if a  company made an extra $100, how  much of that would                                                               
go  to  the government.  He  said  he  could check  them  against                                                               
ConocoPhillips' numbers.                                                                                                        
6:17:20 PM                                                                                                                    
MR.  HALL said  the  marginal tax  rates tell  only  part of  the                                                               
story. One should also contemplate  the treatment of capital cost                                                               
relief. For example,  in the UK, following tax reform  in 2002, a                                                               
company  gets 100  percent relief  for  capital investment.  This                                                               
translates into no  tax whatsoever until the  project has secured                                                               
payback on the  investment. Norway has a  combination of "uplift"                                                               
and a high  tax rate that results in 93  percent relief for every                                                               
$1.00 spent.  The UK has  no royalty at  all. Both UK  and Norway                                                               
levy  all their  taxes on  profit. He  reiterated that  companies                                                               
look for tax based on profit rather than revenue.                                                                               
MR. HALL  said the UK wants  to be self-sufficient in  its energy                                                               
needs. So,  the initial development  of the basin  proceeded very                                                               
rapidly in  the 1970s. Self-sufficiency  was secured by  1980 and                                                               
has endured until  now. But, UK will need to  start importing oil                                                               
and gas  within the  next few years.  Government policy  has been                                                               
focused on maximizing development and exploration in the Basin.                                                                 
He said in 1993 the  tax was substantially reformed which reduced                                                               
the  marginal rate  on  new  developments from  in  excess of  80                                                               
percent down to  30 percent. That attracted  more investment than                                                               
any other basin in the world,  142 licensees. The 30 percent rate                                                               
has endured for nearly 10 years.                                                                                                
6:23:15 PM                                                                                                                    
CHAIR WAGONER  asked if there  was a lag between  development and                                                               
production when the UK tax cut took place in 1993.                                                                              
MR.  HALL replied  he yes,  but the  rate at  which it  increased                                                               
subsequent to the tax change in 1993.                                                                                           
SENATOR ELTON  asked when the  marginal tax  rate in the  UK went                                                               
from 30 to 40  in 2002 did that include a  claw back provision on                                                               
the 100 percent capital allowances.                                                                                             
MR.  HALL  replied  that  the   important  change  in  2002  that                                                               
accompanied  that increase  was that  the government  changed the                                                               
way it  allowed depreciation. Prior  to 2002, only 25  percent of                                                               
investments could be written off  per year. It took a significant                                                               
number  of years  for that  investment to  secure relief  against                                                               
tax. The UK  government gave the companies the  ability to offset                                                               
their investments  fully in  the year  it occurred.  He clarified                                                               
     There was  no need  for a transitional  arrangement. If                                                                    
     you make an investment in a  new project in the UK, you                                                                    
     pay  no  tax on  that  project  until you  have  secure                                                                    
     paper,  which  is to  say,  very  unusual if  you  look                                                                    
     around the world.                                                                                                          
CHAIR  WAGONER   said  that  is   similar  to   Alaska's  royalty                                                               
6:27:14 PM                                                                                                                    
SENATOR  SEEKINS   disclosed  that  his  daughter's   husband  is                                                               
employed by BP.                                                                                                                 
MR. HALL  explained regarding  slide 9  that indicated  lower tax                                                               
created much more development and production. In short, he said:                                                                
     The  government  reduced  it  share  of  the  pie,  but                                                                    
     produced  a  much-increased  pie   that  it  more  than                                                                    
     compensated  for the  reduction in  the headline  rate.                                                                    
     So, it just  sort of demonstrates that if  we can focus                                                                    
     on making  the pie  as big as  possible, that's  a much                                                                    
     more  productive  conversation   than  getting  into  a                                                                    
     discussion around who gets what slice.                                                                                     
6:30:19 PM                                                                                                                    
He thought  there were  far more  differences between  Alaska and                                                               
Norway  than there  are similarities.  Norway has  some wonderful                                                               
large fields  that have  been discovered and  they are  much less                                                               
mature than in the UK.                                                                                                          
In  Norway, oil  production  has peaked,  but  gas production  is                                                               
growing rapidly and  will probably keep going for  the next three                                                               
or four  years before it starts  to flatten out. However,  one of                                                               
the big  differences in Norway  is the  role of the  state, which                                                               
directly owns  one-third of the  resource and owns  a significant                                                               
stake in  the two largest players.  It is able to  sustain a high                                                               
tax rate because  it is essentially going from one  pocket of the                                                               
state  to  the  other  pocket  of the  state.  "This  is  a  very                                                               
important distinction and I think it explains a lot...."                                                                        
Norway  is also  trying  to encourage  new  companies into  their                                                               
basin and  has recently introduced  an incentive  for exploration                                                               
such that if you are a  newcomer and not currently paying tax and                                                               
you spend $100 on exploration, they  will send you a check at the                                                               
end of  the year for $78.  They are also trying  get more acreage                                                               
to  new entrants  to  encourage  them. But  if  you  talk to  new                                                               
entrants, the 78  percent tax rate is a  major continuing barrier                                                               
to attract  new entrants  into the basin  when just  next-door at                                                               
the UK, they would pay a much lower tax.                                                                                        
The Gulf of  Mexico (GOM) had the most  active global exploration                                                               
in  1993 to  2004 and  the  second highest  volume of  discovered                                                               
reserves  of  any  basin  the  world.  It  had  rapid  growth  in                                                               
production despite  a challenging deep-water environment.  A key-                                                               
enabling factor  has been  the low  tax rate  of 45  percent that                                                               
applies there.  The deep-water royalty  relief is 35  percent. He                                                               
emphasized that  production of oil  is very leading  edge because                                                               
of the depth  and extreme weather conditions there.  But, this is                                                               
an  example of  a low  tax  rate encouraging  and promoting  high                                                               
activity levels.                                                                                                                
6:35:33 PM                                                                                                                    
SENATOR ELTON said that previous  testimony has acknowledged that                                                               
nobody expects to find any more  big fields in Alaska. He thought                                                               
it might  be easier to make  an investment decision in  the Gulf,                                                               
not because  of the tax rate,  but because of the  possibility of                                                               
finding larger quantities of oil.                                                                                               
MR. WALKER responded  that the Alaska resource base  is huge, but                                                               
it is  challenged by  comparison. It  is that  challenge combined                                                               
with the fiscal terms that not attracting investment.                                                                           
SENATOR ELTON  restated that he  heard before that Alaska  has no                                                               
other  huge  bodies  of  gas  and oil  and  he  asked  if  larger                                                               
companies  weigh the  possibility  of finding  a larger  resource                                                               
base in their decision on where to develop.                                                                                     
MR.  WALKER replied  that he  was right.  There is  a fundamental                                                               
difference between the resource base  in the Gulf of Mexico where                                                               
there  is a  good chance  of  finding some  large fields  through                                                               
exploration.  In Alaska,  the fields  that can  be found  will be                                                               
small and possible  marginal. Activity needs to  be stimulated on                                                               
the 14 billion barrels of oil they know exists.                                                                                 
     It's a  different resource base, but  we would advocate                                                                    
     the  principal is  the same.  We still  need investment                                                                    
     dollars and  they need  to be  spent on  developing the                                                                    
     oil  and  gas  that's discovered  already  rather  than                                                                    
     exploring for  new oil and  gas, which is  clearly more                                                                    
     appropriate in the Gulf of Mexico.                                                                                         
6:38:01 PM                                                                                                                    
MR. HALL continued by comparing  Alaska to Alberta, Canada, where                                                               
an investment boom  is taking place in their  heavy oil industry,                                                               
about  $10 billion  annually. Alaska's  investment is  between $1                                                               
billion and $1.5  billion. In Alberta, production  is expected to                                                               
exceed 2  million barrels a day  in a few  years and go on  to in                                                               
excess of 3 million barrels a day within the next 10 years.                                                                     
To   encourage   that   development,  the   Canadian   government                                                               
introduced a major fiscal reform  in 1995 consisting of 1 percent                                                               
royalty  until  a project  achieves  payback,  which includes  an                                                               
allowance for  a nominal return  based on the  risk-free Canadian                                                               
bond rate.  Federal and state taxes  have to be paid  in addition                                                               
and those take the marginal rate  to 39 percent; post payback the                                                               
rate would increase because of  the higher royalty to 54 percent.                                                               
The federal  tax rate  already has a  phased reduction  that will                                                               
reduce the marginal  tax rate further so that by  2007 it will be                                                               
around 35 percent.  The top tax rate post payout  would be around                                                               
50 percent. "This reform has had  a major impact in stimulating a                                                               
huge amount of  investment and a huge amount of  activity in this                                                               
heavy oil province."                                                                                                            
6:41:41 PM                                                                                                                    
MR. HALL  said that slide 13  compared tax rates in  other states                                                               
and Canada. Albert  heavy oil has 39 percent  pre-payout, GOM has                                                               
45 percent and most of the other  48 states are around the low 50                                                               
percents. Alaska with  the proposed changes would  be 61 percent,                                                               
the highest marginal tax rate in North America.                                                                                 
6:42:30 PM                                                                                                                    
SENATOR  FRENCH asked  how BP  is comfortable  with Alaska's  tax                                                               
rate if it's the highest in North America.                                                                                      
MR.  WALKER replied  that is  what concerns  BP. Alaska  needs to                                                               
attract twice as  much capital as it is attracting  today to stem                                                               
the decline  and to extend  the Slope  another 50 years.  The PPT                                                               
structure has  merit and  could serve Alaska  well over  the long                                                               
term, but the  20 percent tax rate  is too high. "That  is one of                                                               
the key points in our testimony today."                                                                                         
6:44:25 PM                                                                                                                    
SENATOR ELTON  asked of how  much of  the government take  in the                                                               
three  states of  Texas, Oklahoma,  California  is attributed  to                                                               
royalty oil. It seems that a  large part of Alaska PPT is royalty                                                               
MR. HALL said he didn't have  those figures with him. In summary,                                                               
he  said  there is  a  clear  correlation between  stable  fiscal                                                               
policy and  basin activity and  Alaska is moving to  the position                                                               
where  it  will have  the  highest  marginal  tax rate  in  North                                                               
America and  in combination  with the  highest cost  structure in                                                               
North American may not be conducive to investment.                                                                              
SENATOR ELTON  said his  whole theme is  higher taxes  mean lower                                                               
production and asked to explain his use of "may."                                                                               
MR. WALKER replied that there is  a hard link between fiscal take                                                               
and activity.                                                                                                                   
MR. KONRAD added  that the PPT has many  positive attributes, and                                                               
BP will stand by  their word on the 20/20, but  he didn't know if                                                               
that would ultimately attract capital to the basin.                                                                             
6:50:01 PM                                                                                                                    
SENATOR  BEN STEVENS  asked to  go to  slides 5,  6 and  13.   He                                                               
explained why the marginal rate that  applies to profit in the UK                                                               
comparison  is not  valid  in Alaska  - because  the  UK has  100                                                               
percent cost  recovery and  that puts it  in another  realm where                                                               
all the  capital costs  have been absorbed.  In Alaska,  the cash                                                               
flow or marginal  revenue is taxed immediately, but in  the UK it                                                               
wouldn't be taxed until all capital costs were fully recovered.                                                                 
MR.  HALL replied  there are  many different  ways of  expressing                                                               
relative taxes  and he  chose to  do it on  a marginal  tax rate,                                                               
because that  is simpler. Another way  to do it would  be to look                                                               
at the average  tax rate or the overall government  take over the                                                               
life of  the project. But  he thought  those would give  the same                                                               
relative positions and Alaska's ranking would be unchanged.                                                                     
6:53:38 PM                                                                                                                    
SENATOR BEN  STEVENS said  the only other  country with  a higher                                                               
cost structure than Alaska is Canada's heavy oil sands.                                                                         
MR. HALL responded  that the example he showed  the committee was                                                               
just  a heavy  oil tax  regime. There  are other  tax regimes  in                                                               
other provinces  of Canada. But  they are less than  the proposed                                                               
change in Alaska.                                                                                                               
SENATOR  BEN STEVENS  didn't disagree,  but wanted  to point  out                                                               
that other  regions with a  higher cost structure appear  to have                                                               
incentivized investment  by deferring royalty until  after payout                                                               
and deferring the  tax rate to prepay out and  basing them on the                                                               
rate of return (ROR), a more complicated system.                                                                                
MR. HALL said the ROR isn't  that complicated and was used widely                                                               
in production  sharing contracts around  the world; a lot  of the                                                               
new  ones are  being negotiated  are based  on an  ROR mechanism.                                                               
"Canada has gone down that road in  a major way and it has proven                                                               
to be very successful."                                                                                                         
SENATOR BEN STEVENS observed:                                                                                                   
     I just find  that the information is  intriguing in the                                                                    
     fact that the areas that  have had the most increase in                                                                    
     production...that are  in the top producing  regions of                                                                    
     the  globe  -  the  areas that  have  had  the  largest                                                                    
     increases  in production  may also  have  a higher  tax                                                                    
     rate,  but  they  have   a  significant  mechanism  for                                                                    
     capital  cost  recovery, whether  it  be  a CCR  or  an                                                                    
     uplift  agreement  or  a  ROR  mechanism  that  is  not                                                                    
     imbedded  in this  proposal. Those  are the  areas that                                                                    
     have attracted  the investment to  increase production.                                                                    
     We  should  consider  that  if   our  objective  is  to                                                                    
     maintain or increase production.                                                                                           
SENATOR STEDMAN asked  if the ROR is a  fairly progressive system                                                               
versus the regressive nature of the royalty and tax scenario.                                                                   
MR. HALL  responded that with  ROR, the  tax burden is  much less                                                               
with low  price than it would  be at high prices.  Also, marginal                                                               
projects would  have a lower  tax burden because the  overall tax                                                               
take  is  based on  the  rate  of  return creating  an  automatic                                                               
balancing mechanism.                                                                                                            
SENATOR STEDMAN asked what kind  of stimulus Alaska should use to                                                               
extend production out 50 years.                                                                                                 
MR. WALKER  replied that the  balance of the PPT  components must                                                               
be right  and only time  will tell.  Basically he feels  that the                                                               
tax  burden is  at the  high  end of  the scale,  but the  credit                                                               
system effectively stimulates investment.                                                                                       
SENATOR  BEN  STEVENS  said  they  have  to  look  at  how  other                                                               
countries attract investment.                                                                                                   
SENATOR THERRIAULT  asked if he  meant they should look  at other                                                               
systems or the overall take.                                                                                                    
SENATOR BEN STEVENS clarified that he  meant they have to keep in                                                               
mind how  different regimes approached adding  production and why                                                               
they may  have had a  higher tax system  as the end  result. They                                                               
offered  greater up-front  incentives than  what Alaska  has ever                                                               
had or what is contained in the bill.                                                                                           
SENATOR THERRIAULT  asked if he  participates in ROR  systems and                                                               
what is the rate of return. Does it vary widely?                                                                                
MR. HALL  replied BP participates  in a number of  ROR production                                                               
sharing contracts - Angola, Azerbaijan,  in particular. They vary                                                               
significantly  and are  matched to  the individual  opportunities                                                               
within  each   of  the  countries.  Government   take  will  vary                                                               
SENATOR THERRIAULT  said the problem  with the current  system is                                                               
because it  wasn't sensitive  to price and  that's unfair  to the                                                               
state. The  system, itself, caused the  instability which brought                                                               
them to changing the tax.                                                                                                       
MR. WALKER remarked  that there is very little profit  to be made                                                               
in  Alaska  at low  prices  and,  therefore,  at medium  to  high                                                               
prices,  they have  to  make  a reasonable  profit.  That is  why                                                               
progressivity in Alaska is very dangerous.                                                                                      
SENATOR  THERRIAULT countered  that at  high prices,  the state's                                                               
take might go down. That's not stable for the government.                                                                       
7:07:36 PM                                                                                                                    
SENATOR FRENCH  said that  earlier he  mentioned BP  had invested                                                               
$24 billion  to create  their Alaska business  and they  had paid                                                               
over $32 billion in  taxes to the state of Alaska  and $24 of tax                                                               
to the  federal government. The  number missing was how  much his                                                               
company had profited.                                                                                                           
MR. WALKER replied,  "We were asked exactly the  same question in                                                               
the House and we said that we'd  go back and look. I think it's a                                                               
public record - our profits. So,  therefore, we would go back and                                                               
make that available."                                                                                                           
SENATOR STEDMAN  said the tax  could be considered unfair  to one                                                               
side or the  other at different times and they  didn't want a tax                                                               
that  would put  the industry  in the  position of  retarding its                                                               
MR.  WALKER responded  that he  shares that  concern. One  of the                                                               
great  things  about profit-based  structures  is  that they  are                                                               
taxes on  profit. He  hoped a  system that  was designed  on that                                                               
would be durable.                                                                                                               
7:10:22 PM                                                                                                                    
MR. WALKER  used his last five  slides to explain the  effects of                                                               
PPT on BP's business in Alaska.                                                                                                 
7:10:56 PM                                                                                                                    
SENATOR  FRENCH  couldn't  resist  mentioning that  part  of  his                                                               
equation  required him  to  calculate their  profit,  but yet  he                                                               
didn't have that figure handy.                                                                                                  
MR. WALKER  responded that he  wanted their profits for  the last                                                               
30 years.                                                                                                                       
SENATOR FRENCH  asked if he had  it for all the  relevant periods                                                               
he was illustrating.                                                                                                            
MR. WALKER replied  that he used real data to  project profit for                                                               
2006. [He explained his graphs  of government take.] The proposal                                                               
allows BP  to make a modest  profit at low prices,  but at medium                                                               
to high  prices, the  government take is  increased. At  $30, the                                                               
government take is 70 percent on BP's business in Alaska.                                                                       
7:13:38 PM                                                                                                                    
SENATOR  ELTON asked  what the  cross-over point  is for  ELF and                                                               
MR. WALKER replied for BP it is $30 - ANS, West Coast.                                                                          
SENATOR ELTON was  startled that BP doesn't make a  profit at $20                                                               
per barrel. "You just need to convince me."                                                                                     
7:15:44 PM                                                                                                                    
MR. WALKER  replied that  he would  be happy to  show him  and he                                                               
wished it were different. Back  at his charts, he reiterated that                                                               
Alaska is  a tough place to  make money at low  to medium prices,                                                               
because  of  the cost  environment  and  the fiscal  regime.  The                                                               
reason people  invest in Alaska is  that in the years  when price                                                               
is higher,  they will make  more. Those  years have to  cover the                                                               
lean  years.  "We need  to  leave  a  reasonable profit  for  the                                                               
industry at  medium and high  prices, because we  certainly don't                                                               
get it at low prices."                                                                                                          
7:16:29 PM                                                                                                                    
SENATOR FRENCH  referenced a  DOR chart that  indicates at  $20 a                                                               
barrel, industry profit is 22  percent. He asked him to reconcile                                                               
those figures with BP's.                                                                                                        
MR.  WALKER replied  they should  check whether  the DOR  figures                                                               
include   capital  depreciation,   a   key   element  in   profit                                                               
7:19:20 PM                                                                                                                    
SENATOR THERRIAULT asked what happens at $100 a barrel.                                                                         
MR.  WALKER answered  that he  would have  to develop  numbers at                                                               
7:21:07 PM                                                                                                                    
MR.  WALKER  concluded  his  remarks saying  that  decline  is  a                                                               
problem and  large increases in  investment are required  to stem                                                               
the tide -  up to $100 billion would be  required in their Alaska                                                               
business. He  believed the  PPT system has  merit and  could work                                                               
well for  Alaska and the  industry for a  long time to  come but,                                                               
"Clearly the  numbers have to  be right." Higher taxes  mean less                                                               
investment  and  the  20  percent  tax  rate  will  not  maximize                                                               
investment and production from ANS.  Finally, he said, "Oil needs                                                               
gas and  gas needs oil.  For gas to work,  we need a  healthy oil                                                               
business and  we need a healthy  oil business that's going  to be                                                               
there for another 40 or 50 years to underpin gas."                                                                              
MR. WALKER thanked the chairman for the opportunity to testify.                                                                 
7:23:15 PM                                                                                                                    
SENATOR  STEDMAN asked  if fiscal  regimes around  the world  are                                                               
upping their take.                                                                                                              
MR. HALL  replied yes, but it's  a bit patchy. It's  important to                                                               
take a  long-term view. Six years  ago the price of  oil was $10.                                                               
History  shows  that you  don't  get  sustained periods  of  high                                                               
commodity prices.  They go in  cycles and prices  will eventually                                                               
go down.                                                                                                                        
7:25:31 PM                                                                                                                    
SENATOR  THERRIAULT said  the PPT  proposes using  the producers'                                                               
royalty settlement  agreement of DNR and  Department of Interior,                                                               
but they can vary as much as  $1. He understands that this is the                                                               
lowest  number.  He  asked  him   to  comment  on  the  different                                                               
valuation methodologies.                                                                                                        
TOM  WILLIAMS, Tax  Counsel,  BP, replied  that  there are  three                                                               
settlements  with DNR  - Arco,  BP and  Exxon. ConocoPhillips  is                                                               
heir to  the Arco  settlement. Everyone else  on the  North Slope                                                               
who has  a royalty settlement has  chosen one of the  three. They                                                               
don't  come to  the  same  netback value,  but  they  all have  a                                                               
provision  that allows  DNR  to reopen  the  methodology that  is                                                               
being used  to calculate the netback  price. The idea for  the BP                                                               
royalty  settlement came  from the  administration and  using the                                                               
Department of Interior settlement is  only available if you don't                                                               
have state  lands. The  point is  that BP  is already  using this                                                               
methodology  to  report  to  the  state so,  "We  don't  have  to                                                               
reinvent a wheel."                                                                                                              
This  legislation  gives  the  Department of  Revenue  a  lot  of                                                               
discretion  about  what methodology  it  would  use. BP  wants  a                                                               
system that  they understand and report  and pay and know  it was                                                               
done right.  The royalty approach in  the PPT has a  mechanism to                                                               
allow for  changing markets and  that is  lacking in some  of the                                                               
other approaches.                                                                                                               
CHAIR WAGONER  thanked them for their  presentation and adjourned                                                               
the meeting at 7:32:07 PM.                                                                                                    

Document Name Date/Time Subjects