Legislature(2007 - 2008)BUTROVICH 205

10/22/2007 11:30 AM RESOURCES

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11:33:33 AM Start
11:34:28 AM SB2001
04:53:04 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Meeting Delayed until 11:30 a.m. --
Heard & Held
Legislative Advisors/Consultants
-- Testimony <Invitation Only> --
                SB2001-OIL & GAS TAX AMENDMENTS                                                                             
11:34:51 AM                                                                                                                   
CHAIR HUGGINS announced SB 2001 to be up for consideration.                                                                     
ROBERT MINTZ,  Kirkpatrick Lockhart Preston Gates  LLP, began his                                                               
presentation on SB  2001 tax issues. He said he  has been working                                                               
with the  Department of Revenue  on drafting this  production tax                                                               
legislation. He mentioned that  Marsha Davis, Deputy Commissioner                                                               
of the  Department of Revenue  (DOR), would arrive soon.  He said                                                               
he called this presentation a  topical analysis simply because he                                                               
doesn't intend  to go  through in numerical  order. He  said that                                                               
quite a number  of sections of the bill  are basically conforming                                                               
or technical  types of amendments. He  said that sections 3  - 9,                                                               
11, 12, 23,  30, 33 - 35, and 41  are conforming amendments often                                                               
with  only a  paragraph number  reference changing.  Sections 24,                                                               
25,  29, 32,  42,  53 and  60  are non-substantive  improvements,                                                               
clarifications  or  corrections  in  the  existing  language  and                                                               
sometimes also conforming amendments.                                                                                           
MR. MINTZ turned  to the substantive part of  the presentation on                                                               
oil and gas production tax.                                                                                                     
11:35:28 AM                                                                                                                   
CHAIR HUGGINS  interrupted to  ask when  he and  his organization                                                               
became involved in this process.                                                                                                
MR. MINTZ  replied that he  worked with  the Oil, Gas  and Mining                                                               
Section of  Department of Law  (DOL), until  May 1, 2006  when he                                                               
retired.  He had  worked on  drafting production  tax legislation                                                               
law. He joined the law firm of  Preston Gates & Ellis, but at the                                                               
beginning of 2007 it joined with  another law firm. He had worked                                                               
with the Department of Revenue  on implementing regulations after                                                               
the PPT was  enacted. More recently he has been  working with the                                                               
department on drafting this new legislation.                                                                                    
CHAIR HUGGINS asked when he completed the PPT regulations.                                                                      
MR. MINTZ  replied that phase 1  of the regulations was  done and                                                               
adopted in March.  It encompassed the more  urgent regulations so                                                               
that taxpayers  could calculate  their taxes  and fill  out their                                                               
returns  by  the  deadlines.  Phase   2,  which  is  still  under                                                               
development,   addresses   giving   more  specific   content   to                                                               
deductible  lease   expenditures.  The   initial  PPT   bill  was                                                               
retroactive  to April  1, 2006.  The  legislature authorized  the                                                               
department  to  make  the  implementing  regulations  retroactive                                                               
also,  which  is  essential  if  one  is  going  to  implement  a                                                               
retroactive piece  of legislation. He  said there is  some detail                                                               
that may  or may  not require  retroactive adjustments  after the                                                               
regulations  are  adopted.  There  is  nothing  unusual  in  that                                                               
because it  is typical for  producers to file amended  returns as                                                               
they get  additional information  that relates  back to  the time                                                               
when the initial return was filed.                                                                                              
11:39:33 AM                                                                                                                   
CHAIR HUGGINS  said his  interest in  the case  on behalf  of the                                                               
committee  is  how  coherent  the return  factors  based  on  the                                                               
timeliness of phase 1 are and  how quickly they could be digested                                                               
and reported. He asked what the reporting date was for phase 1.                                                                 
MR. MINTZ replied  March 31. He said there is  generally a 30-day                                                               
lag  between  when  regulations   are  filed  by  the  lieutenant                                                               
governor and  when they  become effective,  but the  producers at                                                               
least had  notice of what  the regulations  were going to  be. He                                                               
said,  "I think  that it's  fair to  say that  they were  able to                                                               
implement  or follow  the regs  in time  to file  their March  31                                                               
11:40:19 AM                                                                                                                   
CHAIR  HUGGINS  said  he  portrayed  phase  2  as  the  deduction                                                               
criterion and that is ongoing.                                                                                                  
MR. MINTZ replied yes.                                                                                                          
SENATOR STEDMAN  asked if he  is representing  the administration                                                               
as Preston Gates.                                                                                                               
MR. MINTZ responded affirmatively.                                                                                              
SENATOR STEDMAN asked  why the administration doesn't  do its own                                                               
sectional review.                                                                                                               
CHAIR HUGGINS  said that  was a  good point and  he called  an at                                                               
11:41:30 AM at ease 12:05:36 PM                                                                                             
CHAIR HUGGINS  called the meeting  back to order saying  that the                                                               
committee  thought   it  important  to  have   an  administrative                                                               
official present at the hearing.                                                                                                
MARCIA DAVIS,  Deputy Commissioner, Department of  Revenue (DOR),                                                               
joined the committee.                                                                                                           
MR. MINTZ  continued by  explaining that Title  43 of  the Alaska                                                               
Statutes has a  number of different taxes and  the production tax                                                               
is in  Chapter 55. He said  the production tax is  in addition to                                                               
other substantial  revenue producing mechanisms based  on oil and                                                               
gas including royalties on state oil  and gas leases, oil and gas                                                               
property tax and the corporate income tax.                                                                                      
He explained  that the state  has had  an oil and  gas production                                                               
tax  since   before  statehood  (starting   maybe  in   1955).  A                                                               
production tax  generally imposes a  percentage tax rate  on some                                                               
measure of the value  of oil and gas produced -  an idea that has                                                               
evolved  over  time. It's  important  to  remember that  this  is                                                               
regarding  the  taxing authority  that  applies  to oil  and  gas                                                               
produced  from land  any where  in the  state -  whether that  is                                                               
state  oil and  gas leases  or  private land  or onshore  federal                                                               
leases;  it   does  not  include   authority  to  tax   on  outer                                                               
continental  shelf (OCS)  federal leases  that are  outside state                                                               
12:07:35 PM                                                                                                                   
MR. MINTZ  said the core provisions  of the current PPT  law have                                                               
not been changed  by the ACES bill. AS 43.55.011(e)  - (i) is the                                                               
fundamental  provision   that  imposes   the  tax  that   is  the                                                               
production tax value of oil and  gas produced in the state. Under                                                               
the current  system it is a  net value. That value  is determined                                                               
by  deducting   upstream  costs  (exploration,   development  and                                                               
production  costs)  from a  value,  which  has been  an  existing                                                               
feature of the  production tax law - gross value  at the point of                                                               
production. Gross value  has been in the law for  a long time and                                                               
has  a   lot  of  settled  interpretation   and  regulations  and                                                               
everything else.  "We don't  fool with that.  We start  with that                                                               
and then deduct the upstream costs."                                                                                            
12:08:51 PM                                                                                                                   
The PPT law  introduced several categories of new  tax credits in                                                               
AS 43.55.023 -  .024 and changed the production  tax from monthly                                                               
to  an  annual tax,  but  with  monthly estimated  tax  payments.                                                               
Because it's an annual tax, there is one annual return.                                                                         
The current  PPT has a  22.5 percent  rate on the  production tax                                                               
value of oil  and gas. In order to figure  out the production tax                                                               
value  (net  value),  one  must go  to  AS  43.55.160.  Important                                                               
exceptions to  note are that the  tax doesn't apply to  the state                                                               
or federal royalty  share - as has always been  the case. It also                                                               
does  not apply  to  the  land owners'  royalty  share. In  other                                                               
words, the  PPT does not  apply to a  private lease, which  has a                                                               
separate tax provision under AS  43.55.011(i). The reason for the                                                               
difference is because a royalty share  by definition is a kind of                                                               
gross value and  it just doesn't make sense to  apply a net value                                                               
tax to the royalty share.                                                                                                       
12:10:23 PM                                                                                                                   
MR.  MINTZ  said  two  other important  exceptions  are  the  tax                                                               
ceilings on  Cook Inlet  oil and gas  production and  the minimum                                                               
tax floor  on Alaska  North Slope  (ANS) production,  which under                                                               
current  law is  a sliding  percentage  based on  the west  coast                                                               
price of the ANS.                                                                                                               
12:10:41 PM                                                                                                                   
He recapped that  AS 43.55.011(e) establishes a base  tax rate of                                                               
22.5 percent.  Section (g) has  the progressivity factor  that is                                                               
currently calculated  on a monthly  basis. When the net  value of                                                               
oil and gas  on a Btu equivalent barrel  basis exceeds $40/barrel                                                               
the  tax rate  increases  by quarter  percentage  point for  each                                                               
dollar the  value goes over  $40. He  mentioned that gas  and oil                                                               
are  added together  and  are  referred to  on  a Btu  equivalent                                                               
12:11:33 PM                                                                                                                   
CHAIR HUGGINS asked if SB 2001 addresses gas versus oil.                                                                        
MR. MINTZ  replied that SB  2001 doesn't change the  treatment of                                                               
gas versus  oil. In  general the percentage  tax, whatever  it is                                                               
under  the current  law or  the bill,  applies to  the total  net                                                               
value of oil and gas.  However, Cook Inlet is treated differently                                                               
because it  has separate tax ceilings  for oil and for  gas - but                                                               
that is not changed either.                                                                                                     
CHAIR HUGGINS said he intended  to ask the administration when it                                                               
intends  to address  that -  because  based on  the rationale  of                                                               
corruption he has heard, if one  is tainted, he assumed the other                                                               
is tainted  too. He  said no  matter how  that is  described, the                                                               
question remains because the strategic  objective is to get a gas                                                               
pipeline. The  legislature needs to  have an expectation  of what                                                               
time period that will be addressed.                                                                                             
MS. DAVIS responded  that he raised a good point.  She said, "Gas                                                               
is sort of not right in  our face. We're not really talking about                                                               
gas; we're  talking about  oil. So  what does  it mean  for gas?"                                                               
Because the earlier  PPT law dealt with both of  them at the same                                                               
time,   she  said   her  assumption   would  be   that  as   this                                                               
administration  and legislature  looks  at the  proposals, it  is                                                               
still happening for  gas at the same time. However,  they are not                                                               
being given  proposals for gas;  that's a separate  question. She                                                               
     As  we've  mentioned  earlier,  we  recognize  it's  an                                                                    
     important thing we have to  do and it is something that                                                                    
     needs to  be done  because there  is some  concern that                                                                    
     the way PPT  was passed before by treating  oil and gas                                                                    
     the same  and the way  it's being approached  now which                                                                    
     is to  not carve gas  out and treat it  any differently                                                                    
     than before, we  still have that issue  coming down the                                                                    
     pike at  us. And certainly the  administration wants to                                                                    
     address it, but  our recommendation is to  wait and get                                                                    
     a  little  closer  -  once  we've  seen  what  the  gas                                                                    
     proposals  are. Because  what  those  proposals are  is                                                                    
     going  to tell  us something  about what  types of  gas                                                                    
     projects we would be looking  at, needing to insure our                                                                    
     economic,  and needing  to insure  that our  tax system                                                                    
     doesn't  serve  as a  deterrent  to.  So, there  is  no                                                                    
     question  that important  dialogue  needs  to come  and                                                                    
     needs  to  be  brought   before  the  legislature.  Our                                                                    
     preference is to bring it  after we have had a look-see                                                                    
     at the  proposals that come  in at the end  of November                                                                    
     and  have  a  sense   of  whether  there  are  economic                                                                    
     proposals and what they are  - because that will inform                                                                    
     your understanding  and your debate about  how you need                                                                    
     to  adjust the  tax system  - to  insure that  we as  a                                                                    
     state  have  done  everything  we  can  to  insure  the                                                                    
     economic viability  of whatever those projects  or that                                                                    
     project might be.                                                                                                          
     But  I think  you raise  a  very good  point that  this                                                                    
     assurance  to the  public that  we've looked  at it  is                                                                    
     half way there in the  sense that before PPT dealt with                                                                    
     oil and  gas the same  way. We're doing the  same thing                                                                    
     here, but we recognize there's  one more job to do. And                                                                    
     we are putting it off to a little later date.                                                                              
12:16:01 PM                                                                                                                   
CHAIR HUGGINS said  he understood this to be  event-driven and he                                                               
agreed with  her. But he  said they know  what the next  event is                                                               
and it  will ask  the question  of what the  state will  do about                                                               
gas. He  said he  started asking this  question last  January and                                                               
they  need an  answer. "I  think it's  important for  Alaskans to                                                               
understand that - and for the legislature."                                                                                     
SENATOR STEVENS asked if Ms. Davis was comfortable with waiting                                                                 
until after the proposals are in to address the gas tax.                                                                        
MS. DAVIS replied yes:                                                                                                          
     We are  comfortable because the application  process is                                                                    
     going to  be about  building a  pipeline or  building a                                                                    
     line that  includes an  LNG plant or  it may  include a                                                                    
     variety of  things. And the economic  viability of that                                                                    
     is going to  depend in part on what's the  price of gas                                                                    
     at the  North Slope  and part  of what  is going  to be                                                                    
     sold  often   times,  a   majority  of   times,  owners                                                                    
     essentially either  - they pass  through that  tax. And                                                                    
     so in  looking at what  the tax is currently,  the only                                                                    
     statements from Commissioner Galvin  on this topic have                                                                    
     been that  we're not  looking to  increase tax  on gas.                                                                    
     What  we  recognize  is there  actually  is  a  sort-of                                                                    
     built-in  disadvantage  to  gas under  this  system  by                                                                    
     treating  it the  same as  oil  and gas.  At least  our                                                                    
     understanding of  the economics  now are  that treating                                                                    
     it on  an economic  equivalent basis -  this Btu/barrel                                                                    
     basis -  is not  tracking market  pricing -  that we're                                                                    
     going to have to give some more benefits.                                                                                  
     We're going  to have  to be more  favorable -  in other                                                                    
     words cutting back  on how we approach tax  for gas. So                                                                    
     right  now  as they  look  at  the analysis,  it  would                                                                    
     probably be a  worse-case scenario as far  as what they                                                                    
     are looking  at for  the tax on  gas and  our intention                                                                    
     would be  to look at how  we make it more  favorable to                                                                    
     insure  a project  goes.  So, they  have  right now  in                                                                    
     terms  of their  economic  modeling  what a  worse-case                                                                    
     would be,  but we're looking  to improve that  down the                                                                    
     road.  With  that  said,  because   it's  going  to  be                                                                    
     pipeline  companies,  at   least  companies  wearing  a                                                                    
     pipeline  hat,  the lion's  share  of  what's going  to                                                                    
     happen  is going  to be  how economic  is a  project to                                                                    
     build a  pipeline and they  will take  some assumptions                                                                    
     and some  givens with respect  to the  commodity price.                                                                    
     Wearing  your oil  company hat  and whether  you do  or                                                                    
     don't want  to sell gas  isn't going to  necessarily be                                                                    
     the  hat you're  wearing  when you're  putting in  your                                                                    
     application for the pipeline part.                                                                                         
12:18:53 PM                                                                                                                   
MR. MINTZ  moved on to  explain how  the bill proposes  to change                                                               
the current law.  He said section 15 of SB  2001 would repeal and                                                               
reenact AS  43.55.011(e). Since progressivity  is proposed  to be                                                               
handled  on an  annual basis,  all  the department  needs is  one                                                               
single percentage rate  that applies to the  production tax value                                                               
of  oil and  gas, so  section 15  actually makes  it quite  a bit                                                               
simpler. It says you start with  the tax value under AS 43.55.160                                                               
(under  current law)  and multiply  that by  a tax  rate that  is                                                               
determined  under AS  43.55.011(g). Subsection  (g) says  the tax                                                               
rate  is 25  percent plus  the progressivity  tax rate,  which is                                                               
determined under  AS 43.55.011(h). The progressivity  tax rate is                                                               
similar  [in SB  2001], but  slightly different  numerically from                                                               
the current  formula and starts  with a  trigger of when  the net                                                               
value exceeds  $30/barrel instead of the  current $40/barrel, but                                                               
it goes up  at a slower rate  - 1/5 of a  percentage point rather                                                               
than  ¼ percentage  point  for  each dollar  -  over the  trigger                                                               
value. And this is calculated on  an annual rather than a monthly                                                               
CHAIR HUGGINS asked why they should like this.                                                                                  
MR. MINTZ  replied everything  else being  equal, it  is simpler;                                                               
but what  should drive the  legislature's decision is  the policy                                                               
behind it.                                                                                                                      
CHAIR HUGGINS asked if the  difference in calculating the two has                                                               
nothing to do with  the fact that one is so  complex they may not                                                               
understand it. It's just that one calculation is a bit simpler.                                                                 
MR.  MINTZ replied:  "Let's put  it this  way. It's  happenstance                                                               
that  the policy  call that  the administration  is proposing  in                                                               
this case also  has the benefit of being a  little bit simpler in                                                               
terms of drafting and applying and understanding it."                                                                           
12:21:30 PM                                                                                                                   
He said as with current law,  there are two big exceptions to the                                                               
general tax mechanism of a percentage  of value. One is the North                                                               
Slope tax floor.  Bill section 16 replaces the  current tax floor                                                               
with a  different one  that applies to  legacy fields.  These are                                                               
units  for, just  to  cover all  bases,  in the  case  of a  non-                                                               
unitized reservoir  that meets two criteria:  total production to                                                               
date of  at least 1  billion barrels and recent  daily production                                                               
of at  least 100,000  barrels/day. For  these units,  the minimum                                                               
tax is 10 percent of the  gross value at the point of production.                                                               
The other  big exception  is the Cook  Inlet tax  ceilings, which                                                               
are dealt with in Sections 19 and 20.                                                                                           
CHAIR HUGGINS asked him to give them an example.                                                                                
MR. MINTZ imagined  legacy field A, which meets  the criteria for                                                               
the 10  percent floor. In  any given  year, he supposed  that the                                                               
progressivity was not triggered that year;  so the tax rate is 25                                                               
percent of net value.                                                                                                           
CHAIR HUGGINS  interrupted to ask  what circumstance  would cause                                                               
progressivity to not be triggered.                                                                                              
MR. MINTZ  replied if the net  value of the oil  and gas produced                                                               
from this legacy field didn't exceed $30 per barrel.                                                                            
CHAIR  HUGGINS  said   that  is  important  for   the  public  to                                                               
MR. MINTZ went back to his  example and supposed that this legacy                                                               
field generated a  total production tax value of  over $2 billion                                                               
in that calendar year. A 25  percent tax rate times $2 billion is                                                               
$500 million. That would be the  tax that would be paid using the                                                               
percentage of value.  If you compare that to 10  percent of gross                                                               
value and  the point of  production - hypothetically  suppose you                                                               
do that calculation - and get  $400 million, in this case the tax                                                               
paid  under the  percentage of  value formula  ($500 million)  is                                                               
greater  than  the  tax  floor  so the  company  would  pay  $500                                                               
million. Now  one of the rules  to implement the tax  floor which                                                               
comes  later in  the  bill is  that if  you're  producing from  a                                                               
legacy field, you cannot apply  tax credits to reduce your actual                                                               
tax paid  below the  floor. So  in this case,  the tax  levied is                                                               
$500 million.  If the  producer had $200  million of  tax credits                                                               
available, he  could only apply  $100 million that year  to bring                                                               
the actual tax paid down to $400 million.                                                                                       
He took  another example that  supposed either prices  were lower                                                               
or that costs were higher and the  total net value of oil and gas                                                               
produced during  the calendar year  from legacy field A  was only                                                               
$1.2  billion. With  the 25  percent tax  rate, the  tax is  $300                                                               
million. If  that is  compared to  the $400  million which  is 10                                                               
percent of the gross value, they  have fallen below the floor, so                                                               
they have to pay what the floor says - $400 million.                                                                            
12:25:58 PM                                                                                                                   
MR. MINTZ  went on to the  second major exception to  the general                                                               
tax mechanism - the Cook Inlet  tax ceilings, which have not been                                                               
changed;  there are  just conforming  amendments. Section  21 has                                                               
technical  language  that  is  probably  almost  inexplicable  by                                                               
itself, he  said. It is  essentially a conforming amendment  to a                                                               
later provision  of the bill  which has to  do with the  rules on                                                               
deducting lease expenditures.                                                                                                   
He explained that  the existing law has  an "anti-double dipping"                                                               
provision for  use of tax credits  in Cook Inlet. It  is intended                                                               
to prevent, in  some cases, exporting tax credits  that a company                                                               
would  otherwise  use, but  not  because  of  the tax  floor.  It                                                               
prevents exporting those credits  elsewhere in the state, because                                                               
that would  be getting  a double  benefit from  the tax  floor or                                                               
Later  on   in  the  bill,   section  55  has  rules   how  lease                                                               
expenditures are  deducted, which also implements  an anti-double                                                               
dipping concept.  This technical  language in  section 21  of the                                                               
bill  basically  is  meant  to make  sure  that  the  anti-double                                                               
dipping under section 55 isn't  applied twice against a producer.                                                               
He clarified:                                                                                                                   
     In other  words, if  you've used  up your  excess lease                                                                    
     expenditures on  your section 55,  then you  don't have                                                                    
     to do it again under section  21. It's kind of an anti-                                                                    
     double   dipping   from   the  state   standpoint   and                                                                    
     qualification  to  the  anti-double  dipping  from  the                                                                    
     producers' standpoint.  It's just basically  a fairness                                                                    
     - a  little twist  to insure that  it works  fairly and                                                                    
     doesn't overly  penalize producers. And we  can go into                                                                    
     more detail  if you want  later when we get  to section                                                                    
     55, but I  should mention this basically  is already in                                                                    
     the  current  implementing   regulations.  But  because                                                                    
     there  are  a  lot   of  unanswered  questions  in  the                                                                    
     existing law  about how all these  different provisions                                                                    
     fit together,  we thought it  best to make  it explicit                                                                    
     in the statute.                                                                                                            
12:28:25 PM                                                                                                                   
MS.  DAVIS said  because it  was very  complicated she  wanted to                                                               
test this with the Cook Inlet piece and she explained:                                                                          
     What  essentially  happens  at  Cook Inlet  is  if  you                                                                    
     calculate their  tax under PPT,  you would  apply lease                                                                    
     hold  expenditure deductions  of  your  Capex and  your                                                                    
     Opex  and draw  down your  number; and  then you  would                                                                    
     apply capital  credits and  then be  able to  draw down                                                                    
     the number  yet again. But  we have this other  rule on                                                                    
     the side  that says 'Oh, by  the way, you never  ever -                                                                    
     you pay the ELF ceiling.'  I mean essentially that will                                                                    
     be the lowest you can  drag your tax. So the assumption                                                                    
     is to the  extent that you had your PPT  up here and it                                                                    
     drew down with  expenses and it drew  down with capital                                                                    
     credits  and somewhere  you crossed  the line  and said                                                                    
     'Whoop, there's my  ELF ceiling. I can  stop now.' What                                                                    
     it's saying is that you  as a producer can't say 'Well,                                                                    
     this was  my tax I  paid; so now  I'm going to  go back                                                                    
     and  grab these  capital costs  and these  expenditures                                                                    
     and  they technically  didn't get  used because  I paid                                                                    
     this rate and now I'm going  to take them and throw 'em                                                                    
     up to  North Slope or  throw them somewhere  else.' And                                                                    
     they're  saying  no;  those are  considered  used  even                                                                    
     though  you may  have ended  up paying  this rate.  So,                                                                    
     that's the theory. But if  you had capital credits that                                                                    
     didn't get  used to  get you down  to there,  you still                                                                    
     had some  more left, then  you can still use  those and                                                                    
     go  throw them  up to  the  North Slope  if that  makes                                                                    
12:30:07 PM                                                                                                                   
MR. MINTZ moved on to AS  43.55.160 (bill sections 52 - 55) which                                                               
tells how to calculate actual  taxable value that one applies the                                                               
percentage tax rate  to. He said the basic  principal remains the                                                               
same n the bill and explained:                                                                                                  
     You  start  with  the  gross  value  at  the  point  of                                                                    
     production  and subtract  your lease  expenditures. And                                                                    
     there have been  some changes in the  wording. First of                                                                    
     all we  can throw out half  of it because we  no longer                                                                    
     need to calculate  monthly values because progressivity                                                                    
     is now an annual concept.                                                                                                  
     And second, the bill expresses  a number of rules about                                                                    
     when  and  how  lease   expenditures  can  or  must  be                                                                    
     deducted.  These are  rules which  are implicit  in the                                                                    
     current law, but  they're not spelled out.  And I think                                                                    
     the reason  for that is you  go back to the  history of                                                                    
     the  current   law.  The  initial  proposal   that  the                                                                    
     previous  administration submitted  to the  legislature                                                                    
     was  very  uniform  in  how  it  treated  oil  and  gas                                                                    
     statewide to  the extent that  if you're a  producer in                                                                    
     Alaska, in order  to calculate your tax,  you could add                                                                    
     up the  gross value  of all your  oil and  gas produced                                                                    
     anywhere  in the  state, get  a single  number, add  up                                                                    
     your  lease  expenditures   incurred  anywhere  in  the                                                                    
     state, get a  single number, and subtract  one from the                                                                    
     other. That's your production tax  value - you multiply                                                                    
     it by a percentage and that's your tax.                                                                                    
     Over time, various  exceptions and different treatments                                                                    
     were  introduced  -  specifically the  Cook  Inlet  tax                                                                    
     ceilings,  the  North Slope  tax  floor  and a  special                                                                    
     credit for production taxes outside  of either the Cook                                                                    
     Inlet  or  the  North  Slope. And  that  required  some                                                                    
     degree  of   what  we  call  ring-fencing   -  that  is                                                                    
     separately  calculating  the  taxable  value  in  these                                                                    
     different  areas. And  to reconcile  those ring-fencing                                                                    
     concepts  with the  general concept  that  you want  to                                                                    
     basically  deduct all  your  available expenditures  in                                                                    
     that  year  rather  than carrying  them  forward  is  a                                                                    
     little bit complicated  and the rules had  to be worked                                                                    
     out  and they've  been worked  out  in regulation.  But                                                                    
     since we  have an  opportunity to revisit  the statute,                                                                    
     we feel it's  much more desirable to  state these basic                                                                    
     rules  in  the  bill.  And in  addition,  now  that  we                                                                    
     realize  more what  the challenges  are of  reconciling                                                                    
     these  two principles,  I think  the language  has been                                                                    
     made clearer  and simpler and  that's the  other reason                                                                    
     for the change in the language in section 160.                                                                             
12:33:34 PM                                                                                                                   
SENATOR ELLIS joined the committee.                                                                                             
12:34:39 PM                                                                                                                   
MR. MINTZ said as an example  of why these rules are needed going                                                               
back to the  case of the legacy field, you  calculate the taxable                                                               
value and  multiply that by the  tax rate and compare  the result                                                               
to  the floor.  If  you're down  to the  floor,  then you're  not                                                               
getting any  benefit from  deducting further  lease expenditures.                                                               
So  if  you had  your  druthers,  you  would export  those  lease                                                               
expenditures and deduct them somewhere  else; that would undercut                                                               
the  whole point  of the  floor.  So basically  you can't  export                                                               
lease expenditures from a legacy field to somewhere else.                                                                       
He said another  example of one of these rules  based on what Ms.                                                               
Davis just  explained is if  you have lease expenditures  in Cook                                                               
Inlet that  you don't need  (because you're already down  to zero                                                               
or perhaps  you're still  exploring and  not producing  yet), and                                                               
you  would rather  export those  somewhere else  and reduce  your                                                               
taxes,  for  instance,  on  the   North  Slope,  but  that  would                                                               
basically constitute double dipping  if you're not required first                                                               
to deduct them in Cook Inlet.                                                                                                   
12:35:12 PM                                                                                                                   
SENATOR THERRIAULT joined the committee.                                                                                        
CHAIR HUGGINS  mentioned that there  are some  exceptions between                                                               
Kuparuk and Prudhoe, for instance.                                                                                              
MS.  DAVIS  replied  that  the  different  treatment  for  legacy                                                               
fields, which are now by  definition Prudhoe and Kuparuk (and are                                                               
in AS 43.55.160(f),  is they have the same PPT  rate and the same                                                               
productivity rate,  but they have a  floor. Before there was  a 4                                                               
percent  floor  applying to  everything  and  now that  has  been                                                               
contracted to  just those two fields  and it's a higher  floor at                                                               
10 percent.  The other piece that  has changed is that  the ring-                                                               
fence  runs  around both  Prudhoe  and  Kuparuk. So  now  capital                                                               
credits can move  across those two units. So,  the prohibition on                                                               
exporting  is  really a  prohibition  from  exporting outside  of                                                               
either of those two units.                                                                                                      
CHAIR HUGGINS asked if that was the only difference.                                                                            
MS. DAVIS replied yes.                                                                                                          
CHAIR  HUGGINS  asked  the  rationale for  that  change  and  who                                                               
developed it.                                                                                                                   
MS. DAVIS replied the rationale of  that change was when the bill                                                               
was first drafted,  they analyzed when a field would  kick in for                                                               
each unit as a standalone unit.  So as they ran their modeling on                                                               
what the margin  tax rate is, and therefore,  what the government                                                               
take at  each unit  is, it  was found  to be  too high  for their                                                               
comfort level.  It was too aggressive  in terms of applying  a 10                                                               
percent  floor to  just  Prudhoe or  just  Kuparuk and  companies                                                               
needed to  be able to  move the funds  across the units  to bring                                                               
down the financial impact of  having that floor. "That 10 percent                                                               
floor wouldn't  kick in unless on  a blended basis the  oil price                                                               
on the west coast was $40 or less."                                                                                             
CHAIR HUGGINS asked  if industry was consulted on  the effects of                                                               
this provision.                                                                                                                 
MS.   DAVIS  replied   that  she   had   one  conversation   with                                                               
ConocoPhillips  letting them  know that  is how  she saw  it. Her                                                               
sense was  they were listening to  what she was saying  and doing                                                               
their analysis. She didn't ask  them what they thought the cross-                                                               
over was. They shared some information on heavy oil in Kuparuk.                                                                 
12:38:29 PM                                                                                                                   
MR. MINTZ  clarified that the  final bill still has  ring fencing                                                               
separately for legacy  field deductions, but what  was changed is                                                               
that  capital credits  can be  transferred from  legacy field  to                                                               
another. That's in AS 43.55.023(a) and  they would get to that in                                                               
a minute.                                                                                                                       
12:38:58 PM                                                                                                                   
He summarized  they had  just dealt with  AS 43.55.160  that says                                                               
that  basically to  get your  taxable value,  you subtract  lease                                                               
expenditures from gross value. AS  43.55.165 tells you what lease                                                               
expenditures  are  and  what  qualifies   and  what  doesn't.  AS                                                               
43.55.165  (a)  and  (b)  (bill  sections  56  -  59)  have  been                                                               
rewritten and  reorganized for more  clarity. An example  is that                                                               
the current law defines lease  expenditures as being direct costs                                                               
and it  defines direct costs  as including certain  overhead. The                                                               
problem  with that  is just  terminologically everywhere  else in                                                               
accounting  and  taxing  where   overhead  by  definition  is  an                                                               
indirect cost. So  it is confusing. They just no  longer call the                                                               
overhead  allowance a  direct cost;  it's just  a separate  item.                                                               
Substantively there is no change.                                                                                               
MR. MINTZ  said the more  substantive change is that  current law                                                               
allows,  but  does  not  require,   that  the  concept  of  lease                                                               
expenditure   be   implemented   by  regulation.   It   was   the                                                               
department's judgment  that to  insure basically  greater control                                                               
by  the department  and greater  transparency and  predictability                                                               
that lease expenditures are expressly  provided "that in order to                                                               
be   deductible   lease   expenditures,   the   department   must                                                               
affirmatively allow them by regulation."                                                                                        
12:40:53 PM                                                                                                                   
MR. MINTZ  said the other  substantive change to AS  43.55.165 is                                                               
the repeal of  current subsections (c) and  (d). These provisions                                                               
basically provided  kind of a  second track for  determining what                                                               
allowable lease expenditures are. He said:                                                                                      
     The first  track is the general  concept as implemented                                                                    
     by the  department either by  regulation or by  case by                                                                    
     case interpretation.  But the  second track was  that -                                                                    
     let's  say you  have a  unit operating  agreement under                                                                    
     which an  operator sends monthly bills  to its partners                                                                    
     for  the  costs  of  running   the  unit.  And  if  the                                                                    
     department under subsection (c)  or (d) determined that                                                                    
     the   rules   in    that   operating   agreement   were                                                                    
     substantially consistent with  the rules defining lease                                                                    
     expenditures  in  general,  then the  department  could                                                                    
     allow  or  require  the  producers   in  that  unit  to                                                                    
     basically substitute  the billings  or what  is allowed                                                                    
     to  be billed  under  the operating  agreement for  the                                                                    
     general concept of lease expenditures.                                                                                     
     There   are   some    advantages   and   there's   some                                                                    
     disadvantages   to  doing   that,   but   it  was   the                                                                    
     department's  judgment after  reviewing  this and  also                                                                    
     after  grappling with  the  implementation problems  in                                                                    
     the course of trying  to develop implementing regs that                                                                    
     the disadvantages  outweighed the advantages and  it is                                                                    
     better  to  have  a  single   uniform  definition  -  a                                                                    
     specification  of   allowable  lease   expenditures  in                                                                    
     regulation.  So  this  bill   does  propose  to  repeal                                                                    
     subsections (c) and (d).                                                                                                   
CHAIR HUGGINS asked for an example of that provision.                                                                           
12:42:41 PM                                                                                                                   
MR. MINTZ said sure:                                                                                                            
     Let's take -  let's just call it unit A  where you have                                                                    
     several producers  that have interest in  a unit. Well,                                                                    
     let's go  back a step. A  unit is basically a  group of                                                                    
     oil  and  gas  leases  or tracts  that  have  different                                                                    
     ownership. And  when you have different  ownership over                                                                    
     an oil  or gas reservoir,  it can basically  impede the                                                                    
     efficient development of the reservoir.                                                                                    
     The  easiest  way  to  see   this  is  to  think  about                                                                    
     sometimes the most efficient way  to produce oil from a                                                                    
     reservoir is to inject water  into some parts of it and                                                                    
     drive  the  oil  into  other parts  of  it  where  it's                                                                    
     produced. Well,  if you  own leases  in the  area where                                                                    
     water  is  being  injected,   you're  not  getting  any                                                                    
     production, so  that's not going  to appeal to  you. So                                                                    
     in order  to overcome  that problem,  you treat  all of                                                                    
     the leases as if they're a  single lease and if you own                                                                    
     a  lease on  the  outside instead  of  getting the  oil                                                                    
     that's produced  from your  lease, you  get a  share of                                                                    
     the oil  that's produced  from everywhere in  the unit.                                                                    
     So,  basically, that's  why we  have units.  Typically,                                                                    
     the  lessees, the  producers, have  one of  their group                                                                    
     actually operate the unit and  that operator incurs the                                                                    
     expenses and  bills the other producers,  its partners,                                                                    
     for  their  share.  And  the  thought  was  -  and  the                                                                    
     operating  agreement typically  defines the  costs that                                                                    
     are  allowed to  be billed.  The thought  was that  the                                                                    
     partners are  not interested in  paying more  than they                                                                    
     need to any more than  the state is interested in their                                                                    
     deducting more than they want them to.                                                                                     
     And  so  if the  department  looked  at this  operating                                                                    
     agreement -  looked at the  rules for what  costs could                                                                    
     be billed  and determined that those  rules pretty much                                                                    
     conform to what  would be allowed to  be deducted, then                                                                    
     the thought  was instead of  having kind of  a two-step                                                                    
     process, where  the producers get billed  and then they                                                                    
     look  - when  it  comes to  determining  what they  can                                                                    
     deduct for  the taxes  - they  look somewhere  else and                                                                    
     see what  the department  allowed, that  the department                                                                    
     said  you  can deduct  what  can  be billed  under  the                                                                    
     operating agreement. So that's how it would work.                                                                          
     I say  there are implementation problems  with that. In                                                                    
     addition, even  though once  you get  to that  point of                                                                    
     approving  the agreement,  you could  say there's  some                                                                    
     administrative savings,  the fact  is that you  have to                                                                    
     have these  two separate tracts in  order to administer                                                                    
     the two subsections along  with the general definition.                                                                    
     It didn't seem  that it was going to be  in the state's                                                                    
     interest to implement these separate tracts.                                                                               
12:45:45 PM                                                                                                                   
CHAIR HUGGINS asked in his  estimation as a professional, if what                                                               
is being used  as a concept of operation is  functional and if he                                                               
supported the repeal.                                                                                                           
MR. MINTZ  replied that is  a policy  call that he  doesn't make.                                                               
"But  in terms  of implementation  and  what makes  sense in  tax                                                               
administration, that there's no problem  in repealing it. I mean,                                                               
it's  kind of  a novel  approach,  but it's  certainly worthy  of                                                               
MS. DAVIS said this is a  slightly different view of this issue -                                                               
from more  of an administrative  side - than this  body discussed                                                               
before. She  said she approached  the issue from a  background of                                                               
nine years of  working in big oil  and when she came  to work for                                                               
the   state,  she   recognized   how   dysfunctional  the   audit                                                               
proceedings can sometimes be on  the owner's side. The time frame                                                               
for resolving these  issues can take from one to  seven years and                                                               
they can be on a item-specific basis.                                                                                           
She  said  that often  operating  owners  don't agree  and  their                                                               
agreements  change as  they  are resolved.  It's  such a  dynamic                                                               
process for the  working interest owners that the  amount of time                                                               
it  would  take  for  the   state's  auditing  staff  to  revisit                                                               
challenged issues  and rethink whether  it is appropriate  or not                                                               
would be  lot. So, she  decided to  put weight on  the industry's                                                               
resolution  of what  expenditures should  be in  or out  of lease                                                               
hold  expenditures  and backed  it  into  a different  provision,                                                               
section 57,  which mandates for  the department to  consider what                                                               
the operating agreement provides  is an appropriate expense. That                                                               
can be used on a item by  item basis. So, the department gets the                                                               
benefit of the operating agreement,  but isn't "tied whole hog to                                                               
the whole process - either in  or out." Where it seems fair, they                                                               
can lock that in  and move on. When new things  come up the state                                                               
can take its time,  let the owners sort it out,  and then look at                                                               
it and see  if it's sorted out and  matches reasonable accounting                                                               
practices - boom - that's  locked in. "It recognizes frankly, the                                                               
reality of how  much time and how much dynamic  changes there are                                                               
in  the way  operating  owners  work out  their  costs with  each                                                               
12:50:39 PM                                                                                                                   
CHAIR HUGGINS  remarked that this  is a novel approach  and there                                                               
are two litmus tests  that run through his mind. One  is if it is                                                               
operationally sound and if it is durable.                                                                                       
MS. DAVIS replied  that her approach is  more operationally sound                                                               
and it's more durable.                                                                                                          
MR. MINTZ  went on  to the  list of  fraud and  wilful misconduct                                                               
over  gross negligence  exclusions in  current law  and how  this                                                               
bill adds a couple of  categories - costs arising from violations                                                               
of law or from noncompliance with lease or permit obligations.                                                                  
MS.  DAVIS  noted  that  this  change  came  from  an  interested                                                               
citizen's note  of concern and  she hoped this  encouraged people                                                               
to send in their good comments.                                                                                                 
12:53:14 PM                                                                                                                   
MR.  MINTZ   continued  to  the   second  category   of  expanded                                                               
exclusions in paragraph  15 and said at the end  of a field life,                                                               
there  can be  quite extensive  costs involved  in dismantlement,                                                               
removal and restoration and these  are typically called DR&R. The                                                               
current law allows those costs to  be deducted to the extent they                                                               
are attributable  to future production, but  not past production.                                                               
Upon  revisiting this,  the department  decided it  was not  good                                                               
policy for the  state to, in effect, subsidize  shutting down and                                                               
what  it is  really  talking  about sharing  in  is  the cost  of                                                               
exploring and  producing. This provision would  basically say any                                                               
DR&R costs are not deductible.                                                                                                  
MS. DAVIS  added that under  the lease, the owners  are obligated                                                               
to  do this  from the  very  beginning. Generally,  she said  the                                                               
state wants to incentivize that  which someone isn't obligated to                                                               
do.  So, in  this  case the  state's dollars  are  being used  to                                                               
support something they are already legally required to do.                                                                      
12:54:16 PM                                                                                                                   
MR. MINTZ said paragraph 19 deals  with issues in SB 80 from last                                                               
session. It has to do with  whether or not the state should share                                                               
in  the cost  (including in  the  case of  capital costs)  giving                                                               
credits for  repairing or replacing facilities  or equipment such                                                               
as  pipelines that  may  not  have been  maintained  the way  the                                                               
department  hoped.   It  addresses  that  issue   in  a  slightly                                                               
different way. Rather  than look at the conduct  of the producer,                                                               
it looks more objectively with  the event that is associated with                                                               
the  need  for  the  repair  or replacement.  If  the  repair  or                                                               
replacement  was  necessitated  by  some event  which  causes  an                                                               
unscheduled  interruption of  oil  or gas  production  or if  the                                                               
repair or  replacement causes  a unscheduled drop  in oil  or gas                                                               
production, then those  repair or replacement costs  would not be                                                               
deductible.  Similarly   if  the   repair  or   replacement  were                                                               
necessitated by an  oil spill or some other kind  of release of a                                                               
hazardous  substance, then  the state  would not  share in  those                                                               
costs either.                                                                                                                   
12:55:38 PM                                                                                                                   
SENATOR WAGONER  asked Ms. Davis if  she knows yet how  much Opex                                                               
BP  billed  against the  state's  credits  for  its work  on  the                                                               
MS. DAVIS replied no. She didn't know yet.                                                                                      
SENATOR  WAGONER remarked  that BP  had sent  a letter  saying it                                                               
would deduct those expenses.                                                                                                    
SENATOR WIELECHOWSKI said  the difference between this  and SB 80                                                               
is that  a company could have  been negligent for decades  on the                                                               
North Slope and  this kind of gives them a  pass if they schedule                                                               
to fix their negligence.                                                                                                        
MS. DAVIS responded:                                                                                                            
     Unless  that  negligence rise  to  the  level of  gross                                                                    
     negligence whereby  it would  be excluded under  one of                                                                    
     the  other  provisions.  If someone  were  not  grossly                                                                    
     negligent, but simply negligent,  then what we're doing                                                                    
     is  we're  saying -  we  will  not participate  in  the                                                                    
     repair  costs  and  the replacement  costs  where  that                                                                    
     negligence  has caused  unscheduled production  impacts                                                                    
     or  releases -  contamination. So,  to the  extent that                                                                    
     negligence is something  that doesn't impact production                                                                    
     or doesn't  impact the contamination, then  we're still                                                                    
     allowing the credits and the deductions to occur.                                                                          
SENATOR  WIELECHOWSKI asked  if  she has  other  examples of  how                                                               
other  regimes treat  this issue  - as  far as  placing a  strict                                                               
liability based on scheduled or unscheduled drops in production.                                                                
MS.  DAVIS  relied  that  she  hadn't  asked  because  it's  only                                                               
relevant in regimes that have tax and royalty credits. She said:                                                                
     Production  sharing countries  generally  sort of  lock                                                                    
     down all  of their provisions  in contract, and  we can                                                                    
     look at  that, but it's  not as informative as  if we'd                                                                    
     looked  at statute  in tax  and  royalty countries.  In                                                                    
     thinking off the  top of my head, it's  really going to                                                                    
     be relevant only in those  tax and royalty regimes that                                                                    
     have credits....                                                                                                           
She said she would ask her experts about that.                                                                                  
12:58:44 PM                                                                                                                   
SENATOR WAGONER  asked when  the department  would know  how much                                                               
expense BP is writing off.                                                                                                      
MS.  DAVIS replied  that the  state has  a couple  of initiatives                                                               
going on  different tracks - one  is a legal enquiry  in the AG's                                                               
office, which  allows the discovery  process which  would provide                                                               
the opportunity to  develop that number. BP's 2007  filing is due                                                               
with the  state on October 15;  October 31 is when  their federal                                                               
returns  are  due.  This  allows  the state  to  begin  an  audit                                                               
process. Her  goal would be to  do one of these  pretty quickly -                                                               
within  a year  after  that.  She said  the  legal efforts  might                                                               
produce an answer sooner than that.                                                                                             
1:01:10 PM                                                                                                                    
MR. MINTZ  said the final addition  to the list of  exclusions is                                                               
paragraph 20 that relates to  the cost of acquiring, constructing                                                               
or  operating  a   crude  oil  topping  plant   or  refinery.  He                                                               
     This has  to do with  the fact that sometimes  right in                                                                    
     the field  producers want to producer  their own diesel                                                                    
     - it  would be the  best example -  for use as  fuel or                                                                    
     otherwise and  sometimes they choose to  obtain that by                                                                    
     building  their own  little topping  plant rather  than                                                                    
     just  buying  the  fuel.   And  it's  the  department's                                                                    
     judgment  as expressed  in paragraph  20  that that  is                                                                    
     really  not is  meant by  direct costs.  That's getting                                                                    
     pretty  indirect  when  you  make  your  own  plant  to                                                                    
     produce a product that you then use in operations.                                                                         
     Paragraph 20 would  exclude deductions for constructing                                                                    
     or operating  the plant, itself. However  it does allow                                                                    
     for  essentially deducting  the  value  of the  product                                                                    
     whether or not you build the  plant or buy it - because                                                                    
     that does look like a  direct cost of producing oil and                                                                    
     Now there's a little twist  on here which I just wanted                                                                    
     to  explain  for  the  record.  What's  allowed  to  be                                                                    
     deducted is the difference  between the market value of                                                                    
     the product and the value  of the oil that's going into                                                                    
     it. The  reason is  because the  oil is  being produced                                                                    
     from that  field and its  tax exempt. So, if  you allow                                                                    
     the deduction  of that value,  the tax then -  you'd be                                                                    
     double dipping  - double counting.  So, it's  the value                                                                    
     added between the  value of the oil that  goes into the                                                                    
     plant and the product that  comes out of the plant that                                                                    
     you can deduct. If you  think about, if you were buying                                                                    
     the  fuel  on  the  market  then  the  oil  that  you'd                                                                    
     otherwise use to  refine into it, you'd  be selling and                                                                    
     getting the  value of  that. So,  that's why  just that                                                                    
     detail is - you deduct  the value-added rather than the                                                                    
     gross value of the product.                                                                                                
1:03:06 PM                                                                                                                    
SENATOR STEVENS asked what the value added is.                                                                                  
MS. DAVIS explained that this complicated language allows an                                                                    
     to  deduct the  value of  the  diesel that  they use  -                                                                    
     either because the bought it and  shipped it up - or if                                                                    
     they  go ahead  and say  even  though we  don't have  a                                                                    
     credit, we're  still going to  be making our  diesel on                                                                    
     the Slope with  out crude oil topping  plant. When they                                                                    
     reach in  and grab  the barrel  of the  oil out  of the                                                                    
     ground and throw it into  the plant, they're allowed to                                                                    
     take that barrel  out and not have to  pay tax, because                                                                    
     it's being used on the lease.                                                                                              
     So what we're doing is  saying since you didn't have to                                                                    
     pay tax on  it, when you go to deduct  it from your tax                                                                    
     because  of the  fair  market value  of  what a  diesel                                                                    
     thing is,  we're going to  make you take out  the piece                                                                    
     you   didn't  pay   tax  on.   That's  all.   So,  it's                                                                    
     essentially  not letting  them  get a  free barrel  and                                                                    
     then deducting it from us.                                                                                                 
1:04:38 PM                                                                                                                    
CHAIR HUGGINS asked if you build a facility or truck it north.                                                                  
MS. DAVIS replied:                                                                                                              
     It's  whether  you build  the  facility  and incur  the                                                                    
     cost, build  the facility  and have  the state  incur -                                                                    
     what is it  - 25 and 20  - 42.5 percent of  the cost or                                                                    
     do you truck  it - is the frame of  reference. And what                                                                    
     we're trying to do is  make one of those options, which                                                                    
     is  build the  facility  and have  the  state pay  42.5                                                                    
     percent of the costs not one of the options.                                                                               
CHAIR HUGGINS  said his  concern from  a practical  standpoint is                                                               
that causing more trucking activity  might not be the right thing                                                               
to do because it requires  more road maintenance and carries more                                                               
MS. DAVIS agreed that they  need to understand the economic trade                                                               
off. She  said that modifying  the Kuparuk plant is  estimated to                                                               
cost $300 million -  let alone what it would cost  to build a new                                                               
one. She  is hearing that they  have two plants up  there neither                                                               
of which  conforms for sulphur.  Both of those  would potentially                                                               
create a  $300 million  bill, plus potentially  a third  plant as                                                               
they step  out and do  remote work.  "These are not  small ticket                                                               
SENATOR   WAGONER  said   he  remembered   that  Tesoro's   plant                                                               
modification and  expansion for its  low sulphur unit  was around                                                               
$50 million  and he thought  it was producing enough  low sulphur                                                               
fuel for the state at this  time. He didn't think the North Slope                                                               
was taken  into consideration and  he also didn't  understand why                                                               
it would cost  $300 million to modify the plant  up there to give                                                               
them the low sulphur diesel.                                                                                                    
MS. DAVIS responded  that she didn't know, but she  did know that                                                               
the Slope has environmental challenges  relative to air emissions                                                               
and other standards.                                                                                                            
1:08:53 PM                                                                                                                    
MR. MINTZ recapped that they  had gone through the calculation of                                                               
the percentage of value, the  question of credits and determining                                                               
how  much  actually tax  has  to  be paid.  And  so  a number  of                                                               
provisions of SB 2001 amend  the current tax credit provisions of                                                               
the production tax law.                                                                                                         
He  explained that  AS 43.55.023  (a) is  the existing  provision                                                               
that provides for  a 20 percent tax credit  for qualified capital                                                               
expenditures. A  few changes  are proposed to  it in  the current                                                               
bill.  First, a  limitation that  no more  than 50  percent of  a                                                               
credit may be taken the first year.                                                                                             
CHAIR HUGGINS asked what the value of this provision is.                                                                        
MS. DAVIS replied  it won't save the state total  dollars, but it                                                               
smoothes out the  lumpiness of the swings from year  to year from                                                               
a  budgeting standpoint.  She explained  that  capital spend  may                                                               
have peaks every two or three  years and under the current system                                                               
those  peaks  can  hit  in  a single  year  and  so  the  state's                                                               
budgeting has to absorb it.                                                                                                     
She said that  Norway is considered to have  a highly accelerated                                                               
depreciation schedule at six years  and the federal government is                                                               
at  eight years.  Alaska  is at  one year;  so  she thought  that                                                               
spreading it out over two wouldn't  make a huge difference in the                                                               
state's competitive advantage.                                                                                                  
1:11:33 PM                                                                                                                    
CHAIR HUGGINS asked what "our  business partners'" perspective on                                                               
this is.                                                                                                                        
MS. DAVIS  replied that she  hadn't heard any comments  from them                                                               
on that one. Probably the  smaller companies, like Pioneer, would                                                               
potentially care about having the full  credit to be able to sell                                                               
in one year  versus selling half in one year  and half the other.                                                               
However,  the total  economic benefit  is  still substantial  for                                                               
CHAIR  HUGGINS asked  if she  had  looked at  the implication  to                                                               
Pioneer of having a provision that  accounted for the size of the                                                               
MS. DAVIS  replied that a  legislator raised that issue  once the                                                               
special session started and she would be open to that notion.                                                                   
CHAIR HUGGINS  said he  felt that  Alaska's future  would include                                                               
"the  Pioneers of  the  world" and  if the  state  is looking  at                                                               
incentives,  he  wanted  something  that  would  encourage  those                                                               
SENATOR  WIELECHOWSKI  said  the  Gaffney  Cline  testimony  from                                                               
yesterday was  very compelling especially regarding  the discount                                                               
rate  and  how industry  has  10  percent  and  the state  has  5                                                               
percent. It  seemed to him that  this is one of  those knobs that                                                               
could  be turned  to help  maximize investment  and the  internal                                                               
rates of  return. He  thought upfront credit  to the  industry is                                                               
good  because it  increases investment  pretty significantly.  He                                                               
asked how much the spikes are. Is it hundreds of millions?                                                                      
MS. DAVIS  replied they  would have  to look at  the spikes  on a                                                               
taxpayer basis,  but she would show  him a one-year cycle  to the                                                               
extent she has  the Capex for those years. She  said her concerns                                                               
went into the  future with aging fields  and infrastructure where                                                               
there  may be  wholesale replacement  of systems  every three  or                                                               
four years  which could create  bigger spikes than the  state has                                                               
ever seen.                                                                                                                      
She  agreed  with  Senator   Wielechowski  that  getting  capital                                                               
returned early  makes a huge  difference when a  company assesses                                                               
is deciding whether it wants to invest or not.                                                                                  
1:15:32 PM                                                                                                                    
CHAIR HUGGINS wanted to know  if their quest for information from                                                               
the companies included predicting those spikes.                                                                                 
MS.  DAVIS replied  to some  extent it's  the unknowable  because                                                               
unexpected  things sometimes  create the  spikes. If  any of  the                                                               
heavy   oil  pilot   projects  take   off,  they   would  require                                                               
construction of  large power  plants and  some unique  systems to                                                               
handle sand,  for instance.  Those will  trigger big  spikes. The                                                               
state will  try to anticipate these  projects as much as  it can,                                                               
but the challenge is knowing  the timeframe and knowing what they                                                               
MR.  MINTZ turned  to the  second  change in  the capital  credit                                                               
provision, AS  43.55.023. He said  as Kevin Banks  explained last                                                               
night, there  had been a number  of changes to AS  43.55.025, the                                                               
exploration incentive  credits section -  one group of  which has                                                               
to do  with additional or  clarification of  expanded information                                                               
submission  requirements.  He  said  the  current  law  under  AS                                                               
43.55.023(a)  also provides  that if  you want  a capital  credit                                                               
rather than  an exploration  incentive credit  under .025  for an                                                               
exploration  expenditure, you  also  have to  agree  to the  same                                                               
information  submission  requirements  that  you  would  have  to                                                               
comply with .025. Since those  submission requirements under .025                                                               
have  been  changed, there  is  just  a conforming  change  under                                                               
.023(a)  to  make  sure  that   you  have  to  provide  the  same                                                               
information  to the  state  - whether  you do  it  under .025  or                                                               
CHAIR HUGGINS asked him to walk through a scenario.                                                                             
MR. MINTZ responded that AS  43.55.025, the exploration incentive                                                               
credit  program,  predates  the   PPT  legislation.  That  was  a                                                               
separate targeted  set of credits  with its own  sunset provision                                                               
and   was  targeted   towards   certain   types  of   exploration                                                               
activities. And  depending on the  type of category,  there could                                                               
be  either a  20 percent  or a  40 percent  credit. When  the PPT                                                               
legislation was  enacted, one of  the basic philosophies  was not                                                               
to try and  change parts of the existing law  that didn't need to                                                               
be changed.  So, the exploration  incentive credit  provisions in                                                               
.025 were left alone with the exception of conforming changes.                                                                  
MR. MINTZ there  is a new very broad credit  provision under .023                                                               
which said:                                                                                                                     
     Any   capital  expenditure   that  also   is  a   lease                                                                    
     expenditure -  in other  words - if  you own  a current                                                                    
     expenditure for, develop  or produce oil or  gas and if                                                                    
     it's a capitalized type of  expenditure, they can get a                                                                    
     20 percent credit for that.                                                                                                
     Well,  there's  a  big overlap  between  that  and  the                                                                    
     exploration  expenditure.   The  exploration  incentive                                                                    
     expenditures under .025 are  much narrower, but they're                                                                    
     a subset  of the  broad category under  .023. So,  in a                                                                    
     sense, if  you qualify  for a  20 percent  credit under                                                                    
     .025,   the  existing   exploration  incentive   credit                                                                    
     program,  it's not  that different  whether  you do  it                                                                    
     under that program or under the new program, .023(a).                                                                      
     But what  we want to make  sure if an explorer  does it                                                                    
     under  .023(a)   it's  not  in  order   to  escape  the                                                                    
     obligations  to provide  exploration data  to DNR.  So,                                                                    
     when .023(a)  was enacted it  said basically  if you're                                                                    
     an  explorer, you're  doing  exploration,  you have  to                                                                    
     comply   with    the   same    information   submission                                                                    
     requirements that you would have  to under the existing                                                                    
     exploration  incentive program.  And  since those  have                                                                    
     been changed in  the bill, they are  also changed under                                                                    
1:20:46 PM                                                                                                                    
MR. MINTZ  said the final change  in .023 (a) is  something which                                                               
basically helps to implement the  tax floor for legacy fields and                                                               
it provides  that if  there's a  capital expenditure  incurred in                                                               
the legacy  field that the  credit for that expenditure  can only                                                               
be  applied against  a tax  on a  legacy field.  Other wise  they                                                               
could get  around the  floor by exporting  the credit  to another                                                               
He continued:                                                                                                                   
     A second major  credit provision of the  PPT law, which                                                                    
     is only  slightly changed  is the  carry-forward annual                                                                    
     loss  credit. This  means if  you're a  producer, maybe                                                                    
     you're not producing yet,  but you're still developing,                                                                    
     so  you're  incurring  a  lot of  costs  or  you're  an                                                                    
     explorer that incurs costs or  you're a producer that's                                                                    
     operating at a  loss - there are costs  which you would                                                                    
     otherwise be  able to  deduct, but  you can't  get your                                                                    
     taxable value  below zero. So,  if you can't  deduct in                                                                    
     that  year, instead  you can  carry them  forward. When                                                                    
     you carry  them forward  instead of being  a deduction,                                                                    
     we turn  them into a  credit. It has the  same economic                                                                    
     And again  because of the  floor on the  legacy fields,                                                                    
     in order  to basically make that  floor more effective,                                                                    
     if you  run a loss in  a legacy field, you  can't carry                                                                    
     those forward - under this proposed bill.                                                                                  
     There actually  is a kind  of conforming change  that I                                                                    
     think I neglected to include  in my presentation, but I                                                                    
     should mention it  because the tax rate  under the bill                                                                    
     is under 25  percent - that when you deduct  a cost, in                                                                    
     calculating  your  taxes,  your after-tax  cost  is  75                                                                    
     percent.  You get  25 percent  deductible. So  when you                                                                    
     turn the  cost into a  credit for carrying  forward, to                                                                    
     get the  same economic  impact, the  credit also  is 25                                                                    
     percent of  the cost.  The current law  has kind  of an                                                                    
     anomaly  in that  respect because  if the  tax rate  is                                                                    
     22.5  percent  it only  provides  for  20 percent  loss                                                                    
     carry forward. Our proposal is  to conform the tax rate                                                                    
     for  the  loss-carry forward  to  the  tax rate  that's                                                                    
     imposed in calculating the tax.  So that's changed from                                                                    
     20 percent to 25 percent in the bill.                                                                                      
MS. DAVIS said that provision came from the smaller players.                                                                    
1:24:43 PM                                                                                                                    
MR.  MINTZ said  that AS  43.55.023(d) provides  for transferable                                                               
tax  credit  certificates. This  is  the  mechanism by  which  an                                                               
explorer producer  that doesn't have  tax liability to  apply the                                                               
credit against  can turn it  into value by getting  a certificate                                                               
and then selling  it - or in  the case of the  new provision that                                                               
proposes having the state purchase it.                                                                                          
He  said the  only  significant  change here  is  to conform  the                                                               
certificates to the  50 percent rule that applies  to the capital                                                               
credits.  There is  a provision  that  says basically  half of  a                                                               
credit can be used immediately and  the other half cannot be used                                                               
until the next year.                                                                                                            
MS. DAVIS added  that Chair Huggins had requested her  to look at                                                               
a cap on the  size of the credit for small  producers and if they                                                               
would allow that small  a class to do all of  theirs in one year,                                                               
they  would have  to modify  this slightly  so their  certificate                                                               
doesn't get split in two.                                                                                                       
1:25:57 PM                                                                                                                    
SENATOR WAGONER said  he concurred with that because  it would be                                                               
simpler  and because  otherwise  the smaller  operators would  be                                                               
penalized by  the value of the  money at issue over  one year. He                                                               
remarked, "I just can't see doing  that. I really can't see doing                                                               
that to a big operator either."                                                                                                 
MS. DAVIS said she has an  evaluation of what the time value cost                                                               
is to the state apart from any revenue planning aspects.                                                                        
1:26:27 PM                                                                                                                    
CHAIR HUGGINS asked what the value of this is.                                                                                  
MS.  DAVIS replied  that it's  relatively small  in terms  of the                                                               
time value difference.                                                                                                          
1:27:11 PM                                                                                                                    
MR. MINTZ  said the next  change clarifies  that if you're  a tax                                                               
exempt  municipality,  you  may  not obtain  a  transferable  tax                                                               
credit certificate and then get money back from the state.                                                                      
CHAIR HUGGINS asked if they  had arm-wrestled over this provision                                                               
MS. DAVIS replied no; it's just a clarification.                                                                                
1:27:50 PM                                                                                                                    
SENATOR STEVENS asked  if this applies only to  a municipality or                                                               
to other tax entities.                                                                                                          
MS. DAVIS replied  she checked with the DNR and  this is the only                                                               
one. "The reason  is there's this constitutional  issue about the                                                               
state taxing  municipalities which is what  creates this anomaly.                                                               
So  that's what  takes them  outside the  tax which  then we  are                                                               
finishing by taking them outside the credits."                                                                                  
SENATOR STEVENS asked, "So a  Native corporation would not be tax                                                               
MS.  DAVIS  replied they  would  not  be  tax exempt  under  this                                                               
1:28:34 PM                                                                                                                    
MR.  MINTZ  added that  the  final  change  to the  AS  43.55.023                                                               
credits  is very  significant.  It's short,  but  it repeals  the                                                               
transitional investment  expenditure credits. It had  a number of                                                               
nicknames but  it basically provided credits  for certain capital                                                               
types  of  expenditures that  were  made  during the  five  years                                                               
before the PPT started on April 1, 2006.                                                                                        
CHAIR HUGGINS asked if this is the infamous claw back provision.                                                                
SENATOR WAGONER  quipped that he  called it  two for one,  but he                                                               
has  since called  it a  kickback, but  whatever it's  called, he                                                               
didn't support it.                                                                                                              
MS.  DAVIS  said  that  Dr.  Pedro van  Meurs  didn't  like  this                                                               
provision either.                                                                                                               
CHAIR HUGGINS  said it is  worth exploring its impact  on smaller                                                               
1:30:49 PM                                                                                                                    
SENATOR WAGONER remembered how some  companies told him last year                                                               
that they wouldn't  have purchased the equipment at  that time to                                                               
do that job if they would  have known this provision was going to                                                               
be adopted;  they would  have waited five  years. And  he thought                                                               
that was most disingenuous of them.                                                                                             
MS.  DAVIS said  they won't  know about  small producers  because                                                               
they haven't incurred credits yet.                                                                                              
1:32:24 PM                                                                                                                    
MR. MINTZ  said the  next slides deal  with bill  sections 36-44,                                                               
which are changes to the  exploration incentive credit program in                                                               
AS 43.55.025. He noted that almost  all of these changes that are                                                               
described on the slides were  described by Kevin Banks last night                                                               
and so he would skip to the ones Kevin didn't mentioned.                                                                        
MR. MINTZ  said the exploration  incentive program in .025  has a                                                               
relatively limited  universe of  costs that are  deductible. This                                                               
bill proposes to  add one more, which is costs  that are incurred                                                               
as a result  of gross negligence or a  violation of health/safety                                                               
environmental laws or regulations.                                                                                              
CHAIR HUGGINS asked what the impetus was for that change.                                                                       
MR.  MINTZ replied  that  there is  some  recent experience  with                                                               
exploration activities that  seem to be more  expensive than they                                                               
should have been - a potential loophole.                                                                                        
CHAIR HUGGINS said he thought  that "this business of health" has                                                               
a tremendously broad connotation.                                                                                               
MS.  DAVIS  agreed   and  explained  that  it's   a  little  more                                                               
constrained  than  the  broad  topic  in the  sense  that  it  is                                                               
confined  to  statutes  or regulations  that  deal  with  health,                                                               
safety or environment.                                                                                                          
CHAIR HUGGINS asked for an example.                                                                                             
MS. DAVIS replied probably it  will concern the DEC environmental                                                               
statutes  and regulations  and OSHA  laws that  operators already                                                               
know about and allegedly already  comply with. The intent here is                                                               
that if  there is  a cost  or an expense  that arises  because an                                                               
operator cut  a corner  violating a  DEC or OSHA  law and  now is                                                               
dealing with  it, the state  wants the legal authority  to delete                                                               
it. She said  it is a mirror provision to  what already exists in                                                               
the capital  expenditure section  which disallows these  types of                                                               
CHAIR  HUGGINS  said he  didn't  want  to  get into  a  "lawyerly                                                               
playground here."                                                                                                               
MR. MINTZ  went to section 39  that makes the 50  percent rule to                                                               
certificates under  the exploration incentive  program consistent                                                               
with how it's  being treated elsewhere. He said this  is just the                                                               
third place where it comes up.                                                                                                  
1:36:47 PM                                                                                                                    
MR. MINTZ said  he was leaving the credit  provisions and turning                                                               
to the  question of how  to monetize  credits if you  can't apply                                                               
them against your  taxes if you are an explorer  or new producer.                                                               
He explained that current law  has a provision in AS 43.55.023(f)                                                               
that establishes some  criteria for getting cash  refunds for the                                                               
state and provides  for no more than $25 million  in cash refunds                                                               
for a  particular applicant for  a particular year. He  said that                                                               
limitation is not in the new proposal.                                                                                          
The new proposal repeals that section  and replaces it with a new                                                               
system,  an oil  and gas  credit tax  fund, in  AS 43.55.028.  It                                                               
provides  for  funding  that  tax   fund  with  a  percentage  of                                                               
production  tax  revenues  -  either 10  percent  or  15  percent                                                               
depending on the  DOR price forecast. Other than  the $25 million                                                               
limitation, the existing criteria for  whether you qualify to get                                                               
what's  now called  a purchase  rather  than a  refund remain  in                                                               
effect. For example,  you can't produce more  than 50,000 barrels                                                               
a day  in order  to qualify.  You can't be  delinquent on  any of                                                               
your tax  obligation and also  you have  to have used  up credits                                                               
against your  tax liability  before you can  get a  refund. There                                                               
are a variety of administrative  reasons why this new approach is                                                               
believed  to be  preferable and  more effective  at accomplishing                                                               
the goal  of basically giving  100 percent value for  the credits                                                               
that a  producer or  explorer earns  that the  state is  going to                                                               
bear 100 percent of anyway.                                                                                                     
1:39:26 PM                                                                                                                    
CHAIR HUGGINS asked how big this fund would be.                                                                                 
MS.  DAVIS replied  that they  have looked  at the  state's track                                                               
record  so far  on  the  tax credits  and  they  are higher  than                                                               
predicted. In terms  of identifying how much money  would need to                                                               
be available  to have enough  funds on  hand to fully  refund the                                                               
credits the  department is expecting,  said that  Cherie Nienhuis                                                               
did the analysis and forecast.  She saw consistently if the price                                                               
of oil is $60 or higher, 10  percent covers it; if it's less than                                                               
$60,  15 percent  covers it.  The  administration is  comfortable                                                               
with that range.                                                                                                                
It was also  comfortable enough to eliminate the  $25 million per                                                               
taxpayer in part because they  are not having the large companies                                                               
come  in  and  have  credits,   because  clearly  they  have  tax                                                               
liability that  is sufficient to absorb  whatever capital credits                                                               
they have  in the  current year.  They are  seeing that  it's the                                                               
smaller  producers who  either  do not  yet  have production  and                                                               
those were  the companies that said  the $25 million cap  was too                                                               
low  for  the  majority  of  the  types  of  expenses  they  were                                                               
incurring. She  said she could  bring the committee a  number for                                                               
the size of the fund.                                                                                                           
CHAIR HUGGINS asked  for her to bring the mechanism  to deal with                                                               
the annual cycle as well.                                                                                                       
1:41:30 PM                                                                                                                    
MR.  MINTZ  said  the  current  system  has  monthly  installment                                                               
payments of estimated tax with a  final payment on March 31. This                                                               
is unchanged.  But since  the tax calculation  is changed  in the                                                               
proposal, the rules for calculating  it - the installment payment                                                               
-  needs to  be  changed.  One set  of  changes  is basically  to                                                               
conform  to the  changes in  the tax.  The other  set of  changes                                                               
basically  corrects  what  may  have been  an  oversight  in  the                                                               
original law  - one  of which  was that  Cook Inlet  tax ceilings                                                               
were not  accounted for in  the estimated payments -  which means                                                               
Cook Inlet  producers will  be required  to overpay.  This didn't                                                               
make sense,  so they fixed  that by  allowing Cook Inlet  oil and                                                               
gas  to  take account  of  those  ceilings in  calculating  their                                                               
estimated tax. Also if you're a  legacy field subject to a floor,                                                               
you  take account  of  the floor  in  calculating your  estimated                                                               
The last point  is that installment payments do  not take account                                                               
of  the  progressivity  rate.  He said,  "There  is  a  practical                                                               
problem in requiring  that which is simply that  we would require                                                               
predicting  the movement  of oil  prices in  the future,  which I                                                               
think we  all know  is not  something which you  can do  with any                                                               
1:43:30 PM                                                                                                                    
CHAIR  HUGGINS  asked  him  to   explain  the  old  mechanism  on                                                               
installment payments and progressivity rate.                                                                                    
MR.  MINTZ replied  that the  old mechanism  did take  account of                                                               
progressivity because that was calculated  on a monthly basis. In                                                               
the  new   progressivity  provision,  you  don't   know  even  if                                                               
progressivity is triggered  or if it is how much  it is until you                                                               
know the price of oil over the course of the year. He explained:                                                                
     Here  are  the things  that  go  into calculating  your                                                                    
     estimated  installment  payment:  one is  your  monthly                                                                    
     production.  Well,  you  know  that  every  month.  The                                                                    
     second is your gross value  at the point of production.                                                                    
     You pretty well know that  every month because you know                                                                    
     what the price of oil is  for that month. And the third                                                                    
     is  1/12   of your  annual costs.  Now  that's to  some                                                                    
     extent a  forecast, but the producers  typically have a                                                                    
     pretty good  handle on their  costs, because  they have                                                                    
     to  budget in  advance. So  that's  not too  much of  a                                                                    
     stretch.  But those  are the  things that  go into  the                                                                    
     installment payment.                                                                                                       
     A  producer,  in fact,  cannot  know  exactly what  the                                                                    
     right amount is  until March 31, but he  can get pretty                                                                    
     The fourth  element, as I say,  involves predicting the                                                                    
     future of  oil prices and  I think in  the department's                                                                    
     judgment that's  too much  to expect  a producer  to do                                                                    
     and  that's  why  the   progressivity  element  is  not                                                                    
     included  in the  estimated taxes,  but  of course,  on                                                                    
     March  31  when  taxes  for the  year  are  calculated,                                                                    
     that's going to be part of the tax due.                                                                                    
1:45:14 PM                                                                                                                    
CHAIR  HUGGINS said,  as an  example, the  producers wouldn't  be                                                               
held accountable if the progressivity  rate caused them to be out                                                               
of tolerance.                                                                                                                   
MS. DAVIS replied yes. She said  the policy call behind doing the                                                               
progressivity on an annual basis  is because of the volatility of                                                               
oil price  up and  down, the  administrative time  and efficiency                                                               
for everyone  to try to  track it month  to month and  follow the                                                               
spikes and make  sure it's all right and challenge  if it's wrong                                                               
is  a lot  of  effort for  not  a  lot of  money.  She wanted  to                                                               
simplify and focus efforts on things that mattered.                                                                             
CHAIR HUGGINS  said that  could possibly  cause an  automatic big                                                               
MS.  DAVIS said  their  analysis  doesn't show  that  could be  a                                                               
sizeable number.                                                                                                                
1:47:10 PM                                                                                                                    
SENATOR  WIELECHOWSKI said  Dr. van  Meurs recommended  a penalty                                                               
for  underpayments  to encourage  payment  of  correct taxes.  He                                                               
asked if she would consider that.                                                                                               
MS. DAVIS replied  that they want to have  something that someone                                                               
views uniformly  as having sufficient  teeth to  encourage people                                                               
to not use  the state as an  ATM. She would be open  to what they                                                               
thought were adequate penalties.                                                                                                
1:48:14 PM                                                                                                                    
SENATOR  WAGONER asked  if they  didn't  come up  with a  certain                                                               
percentage  that was  required for  each payment  with a  true up                                                               
once a year.                                                                                                                    
CHAIR HUGGINS said that was true.                                                                                               
MR. MINTZ  responded that  was in various  versions of  the bill,                                                               
but  it wasn't  in  the final  PPT, which  has  no "safe  harbor"                                                               
In fact,  he said,  interest is required  on any  underpayment or                                                               
refunded on any  overpayment - a slightly  different approach. He                                                               
didn't hear  what Dr. van Meurs  was referring to on  the subject                                                               
of penalties, but existing law in  AS 43.05 which are the general                                                               
administrative  provisions  for all  the  tax  laws have  penalty                                                               
provisions  that are  modeled after  the  IRS penalty  provisions                                                               
where underpayments of tax are  subject to civil penalties. There                                                               
are at least two  types: a 5 percent per month  up to 25 percent,                                                               
which applies unless  the taxpayer can show  reasonable cause and                                                               
not  willful neglect  for  the  underpayment. The  other  is a  5                                                               
percent  of  the  total  deficiency  penalty if  any  part  of  a                                                               
deficiency  is   caused  by  intentional  disregard   of  law  or                                                               
regulation. There are  more substantial penalties in  the case of                                                               
intentional fraud.                                                                                                              
These  potentially  apply  to  any  underpayments,  whether  it's                                                               
annual or  the monthly installment.  You have to be  more careful                                                               
with  the monthly  installment payments,  because everyone  knows                                                               
they're going to  be off - because it involves  estimates of what                                                               
one will  ultimately owe. You  wouldn't expect the  department to                                                               
be  particularly  harsh  in  using   the  penalty  authority  for                                                               
installment payments,  but if  it was clear  that a  producer was                                                               
intentionally underpaying  because the interest isn't  that much,                                                               
the  department has  the authority  to  impose substantial  civil                                                               
SENATOR  WAGONER said  honest mistakes  are made  accounting-wise                                                               
and  asked if  companies are  allowed a  true up  without penalty                                                               
every month for the last month's underpayments.                                                                                 
MR. MINTZ  replied yes if it  was not due to  wilful neglect. You                                                               
always pay interest because that is the time value of money.                                                                    
1:51:16 PM                                                                                                                    
SENATOR  WIELECHOWSKI asked  if the  penalty for  underpayment is                                                               
around 3 or 4 percent.                                                                                                          
MR. MINTZ  replied that  the interest  rate for  underpayments or                                                               
overpayments  on the  estimated monthly  payment imports  the IRS                                                               
interest rate,  which is intended to  be a market rate.  If there                                                               
is  an  underpayment after  the  March  31  final date,  that  is                                                               
subject  to the  regular state  interest rate,  which is  usually                                                               
substantially higher, 11 percent compounded.                                                                                    
1:51:50 PM                                                                                                                    
MR. MINTZ  said a number  of provisions that deal  with reporting                                                               
are in  the nature  of clarifying  the department's  authority to                                                               
avoid potential  disputes. It has broad  reporting authority, but                                                               
there are specific  types of reports that are  very necessary for                                                               
the administration  of this law.  And the department wants  to be                                                               
sure there is  no possibility for producers to  argue about them.                                                               
Section  51 gives  express authority  to the  DOR to  require tax                                                               
payments to  be made electronically in  a form that will  be most                                                               
helpful for tax administration.                                                                                                 
MS.  DAVIS  added  that  they  get all  types  of  payments,  but                                                               
electronically is much faster and easier.                                                                                       
CHAIR HUGGINS asked why that hasn't been done by regulation.                                                                    
MR.  MINTZ replied  there  is a  regulation  for modest  amounts.                                                               
There are  two reasons for  this proposal  - to remove  any doubt                                                               
that the department has the authority  and they want to make sure                                                               
that the  electronic payments  are made in  a specific  form that                                                               
will help the department administer the program more easily.                                                                    
At ease from 1:55:43 PM to 2:21:27 PM.                                                                                      
MS. DAVIS  deferred to  Mr. Burnett to  explain the  mechanics of                                                               
the funding.                                                                                                                    
JERRY BURNETT,  Director, Administrative Services,  Department of                                                               
Revenue(DOR) ,Juneau,  Alaska , recapped the  question, which was                                                               
related to  the tax credit  fund and how  much money would  go in                                                               
each year.  He said  he believes  the FY08  fiscal note  was $1.9                                                               
billion. With  10 percent  net of  expected credit  payments, the                                                               
money going  into the fund in  FY08 would be about  $200 million.                                                               
Whatever  credits were  paid from  the  fund in  FY08, which  are                                                               
estimated to be between $125 and  $150 million, would come out of                                                               
the fund  in FY08 and the  rest of the money  would roll forward.                                                               
In FY09 ten  percent of the production tax revenue  would go into                                                               
the fund and  the credits for 09  would be paid out  of the fund.                                                               
In high revenue  years it would build a sort  of balance to carry                                                               
forward for low  revenue years. Since it's not  a dedicated fund,                                                               
the  legislature could  appropriate some  of the  money for  some                                                               
another purpose if the balance got too big, he said.                                                                            
MR. BURNETT continued:                                                                                                          
     One  thing  it does  that  would  be helpful,  at  this                                                                    
     point, when  you look at  our fiscal note  with revenue                                                                    
     projections, it shows an amount  going into the general                                                                    
     fund  that's actually  lower than  the  amount that  is                                                                    
     expected  to go  into  the general  fund  in that  year                                                                    
     because  with  refundable  credits, we're  required  to                                                                    
     make  then  a  general  fund  appropriation  under  the                                                                    
     current  system  to  pay for  the  refundable  credits.                                                                    
     Revenue  estimates are  net of  those credits  so right                                                                    
     now it  looks like  we're projecting less  revenue than                                                                    
     we're  actually  expecting  to get.  The  general  fund                                                                    
     actually carries a larger balance  than we estimate and                                                                    
     then  we take  some  out for  an  appropriation to  pay                                                                    
     credits.  It creates  a little  confusion  and at  this                                                                    
     point  we have  open-ended  appropriations  out of  the                                                                    
     general  fund in  07. In  08 we  had an  appropriation,                                                                    
     which is limited  at $25 million, which  will require a                                                                    
     supplemental,  which will  be made  before we  know how                                                                    
     many  credits are  required to  be paid.  So again,  it                                                                    
     will have  to be  an open-ended appropriation  from the                                                                    
     general fund  in order to  properly pay the  credits. I                                                                    
      don't know how much exactly that will be, what we're                                                                      
     estimating, but I think it's between $125 million and                                                                      
     $150 million total credits in 08.                                                                                          
CHAIR HUGGINS asked if those are all interest-bearing accounts.                                                                 
MR. BURNETT  said yes, and if  it's not specified in  the statute                                                               
the interest would go to the general fund.                                                                                      
2:25:31 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked how much  the state earns on  the CBR                                                               
(Constitutional Budget Reserve).                                                                                                
MR. BURNETT said  he believes that the annual return  is in the 4                                                               
percent range. General fund and  CBR funds earn short-term market                                                               
rates  for  secure investments.  The  original  $400 million  CBR                                                               
funds are  an exception. Those  were invested long and  last year                                                               
probably earned in the 15 percent range.                                                                                        
CHAIR HUGGINS recognized that Senator Hoffman was present.                                                                      
MR. MINTZ  informed the committee  that he would discuss  the key                                                               
tools for administrating the tax.  Bill section 46 deals with the                                                               
annual return and  clarifies that all oil and  gas producers must                                                               
fill a return  annually regardless of whether any tax  is due. He                                                               
explained  that the  substantial tax  credits that  are available                                                               
create  a  situation where  in  a  particular year  a  particular                                                               
producer may  not have  to pay  tax. Nonetheless,  it's important                                                               
for DOR to receive the  information for verification purposes and                                                               
to  track  potential  credits. Thus,  actual  production  is  the                                                               
trigger.  This   section  also  expands  the   list  of  specific                                                               
information that's  required for the  returns. He noted  that DOR                                                               
always retains the authority to require additional information.                                                                 
CHAIR  HUGGINS   questioned  expanding  the  list   when  there's                                                               
unilateral authority to require additional information.                                                                         
MR. MINTZ  responded DOR decided  that adding relevant  things to                                                               
the  existing  list  makes  sense   and  potentially  avoids  the                                                               
possibility of a challenge.                                                                                                     
2:29:41 PM                                                                                                                    
MR. MINTZ explained that the  bill proposes an additional penalty                                                               
that relates solely to late  filing whether there's an associated                                                               
tax deficiency  or not.  It's calculated as  a percentage  of the                                                               
tax  deficiency.  DOR would  adopt  by  regulation standards  for                                                               
determining  the size  of the  penalty, but  it couldn't  be more                                                               
than $1,000 per day.                                                                                                            
MR. MINTZ  said bill section  48 requires explorers  or producers                                                               
to file  an annual statement  of expenditures  even if no  oil or                                                               
gas  is  produced during  the  year.  DOR  needs to  track  those                                                               
expenditures because  they could be deductible  or potentially be                                                               
turned into credits.                                                                                                            
SENATOR STEVENS asked  if the form would be  complicated and time                                                               
MS. DAVIS replied  the requirements are set  out separately under                                                               
the  statute so  the  scope  of information  is  narrower in  the                                                               
instance  that  no  oil  and  gas has  been  produced.  It's  not                                                               
onerous, she added.                                                                                                             
CHAIR HUGGINS asked if electronic filing is required.                                                                           
MS. DAVIS said yes, that's included in the bill.                                                                                
MR.  MINTZ added  that  DOR has  ongoing  information needs  that                                                               
aren't adequately  satisfied by  annual returns and  bill section                                                               
48  makes it  clear  that  the department  has  the authority  to                                                               
require regular monthly reports with appropriate information.                                                                   
2:33:15 PM                                                                                                                    
MR.  MINTZ  explained that  bill  section  49 adds  explicit  new                                                               
authority  for  DOR  to   require  reporting  of  forward-looking                                                               
information for  revenue forecasting purposes. This  is important                                                               
because   the  current   tax  is   dependent  on   upstream  cost                                                               
deductions, which is a category  where very little information is                                                               
available except for  producers and operators. He  added that now                                                               
there's a  provision giving express authority  for the department                                                               
to require electronic filing. There  is some question whether the                                                               
department  could impose  the requirement  by regulation  so this                                                               
fills that  gap. Also, this  new authority allows  the department                                                               
to  specify  the   format  for  the  electronic   report  so  the                                                               
information is readily available.                                                                                               
2:35:42 PM                                                                                                                    
MR.  MINTZ said  AS 38.05.035,  bill section  2, gives  DNR broad                                                               
authority to  share oil  and gas lease  information with  DOR for                                                               
purposes of  administering the production  tax and  AS 38.05.230,                                                               
bill  section   13,  provides  DOR   broad  authority   to  share                                                               
production tax information with DNR.                                                                                            
SENATOR  STEVENS  referred  to  Commissioner  Galvin's  statement                                                               
about  confidential information  that's transferred  from DOR  to                                                               
DNR and asked how that works and who is involved.                                                                               
2:36:53 PM                                                                                                                    
MS.  DAVIS   explained  that  royalty  and   tax  information  is                                                               
carefully  protected.  Specific  auditors sign  an  agreement  to                                                               
review records  and files  while they're in  the DOR  office. "We                                                               
rarely allow  copying of any  record to  even leave the  floor so                                                               
it's very  constrained, very  limited. It's more  of a  check and                                                               
verify," she said.                                                                                                              
SENATOR STEVENS asked  if there are penalties  for violating that                                                               
MS.  DAVIS  replied there  are  very  severe penalties  including                                                               
criminal  sanctions and  monetary  fines. DOR  and DNR  employees                                                               
take  this very  seriously, she  said. She  understands that  the                                                               
same constraints  exist with  regard to  confidential information                                                               
that DNR possesses.                                                                                                             
MR. MINTZ added that both agencies  have a long history of having                                                               
access  to and  maintaining  highly  sensitive information.  He's                                                               
sure both have exemplary records for protecting confidentiality.                                                                
CHAIR HUGGINS  questioned why royalties aren't  under the purview                                                               
of DOR since they are revenue.                                                                                                  
MS.  DAVIS replied  it's  because royalties  are  a benefit  that                                                               
flows from  a contract that  is entered into and  administered by                                                               
CHAIR  HUGGINS commented  it still  appears that  it would  be an                                                               
objective for consolidating effort in managing resources.                                                                       
2:40:16 PM                                                                                                                    
MS.  DAVIS  said  one  thing  we've  learned  is  that  different                                                               
countries arrange  things in different  ways. Ideally we  want to                                                               
make efficient use  of people and computer  resources and improve                                                               
the flow  of information  for the customers.  As we  move forward                                                               
working  with  DNR,  opportunities to  create  efficiencies  will                                                               
occur and this is a first step, she said.                                                                                       
MR.  MINTZ  added that  confidentiality  is  required under  both                                                               
aforementioned  provisions. He  then directed  attention to  bill                                                               
section 61,  which deals  with public  disclosure. He  noted that                                                               
there's  existing  authority  for   DOR  to  publish  statistical                                                               
information so  long as it  doesn't include the particulars  of a                                                               
taxpayer's business.  This clarifies  that if the  information is                                                               
aggregated among at least three  producers or explorers then it's                                                               
okay  for  the  department  to   publish  certain  categories  of                                                               
production  tax  information.  The  idea is  to  increase  public                                                               
transparency  and   the  confidence  that  tax   laws  are  being                                                               
effectively administered.                                                                                                       
2:43:20 PM                                                                                                                    
SENATOR  STEVENS  asked for  the  rationale  for selecting  three                                                               
rather than two.                                                                                                                
MS.  DAVIS  explained  that  this bridge  was  crossed  when  the                                                               
department  looked at  how to  make the  fisheries licensing  tax                                                               
information public. With help from  DOL it was determined that an                                                               
aggregation of  three supplied sufficient anonymity.  The driving                                                               
goal  is  to maintain  an  adequate  standard of  protection  for                                                               
individuals and this seems to work, she said.                                                                                   
MR. MINTZ relayed  that AS 39.25.110, bill section  10 places oil                                                               
and  gas auditors  in the  exempt service.  There's a  transition                                                               
provision  in bill  section 67  that  provides current  employees                                                               
with the option to remain  in classified service if they exercise                                                               
the option  within a specified  period of time. AS  43.05.260 and                                                               
AS  43.55.075, bill  sections 14  and  50 extend  the statute  of                                                               
limitations for  production tax  from three  years to  six years.                                                               
DOR believes  this is an important  change to insure that  it can                                                               
do an adequate job of auditing and enforcing tax laws, he said.                                                                 
SENATOR WAGONER  commented that  seems to  be a  long time  for a                                                               
statute of limitations to run.                                                                                                  
MR. MINTZ replied it's not  uncommon for a considerable amount of                                                               
time to  elapse when resolving  tax matters. Even with  a statute                                                               
of  limitations there  are often  extensions by  agreement. Often                                                               
it's in the interest of the  taxpayer to do that rather than have                                                               
the department issue a blue  sky assessment. Also, one reason for                                                               
statutes  of  limitation  is  the  disappearance  of  memory  and                                                               
witnesses, but  that really isn't  much a factor with  tax cases.                                                               
Everything is documentary so the  fairness issues aren't as acute                                                               
in this area.                                                                                                                   
2:45:44 PM                                                                                                                    
SENATOR  WIELECHOWSKI   advised  that   breach  of   contract  is                                                               
typically six years.                                                                                                            
MS. DAVIS said in Alaska it was amended to 3 years.                                                                             
MR.  MINTZ recalled  that  if  there is  no  specific statute  of                                                               
limitations provided, the default is six years.                                                                                 
2:48:10 PM                                                                                                                    
CHAIR  HUGGINS asked  Mr.  Bullock  to give  an  overview of  the                                                               
effective dates and any other things that might be worthwhile.                                                                  
DONALD BULLOCK, Counsel, Legislative  Legal and Research Services                                                               
Division, Juneau,  AK said  he's listened  to testimony  from the                                                               
administration   and  Mr.   Mintz  as   he  discussed   what  the                                                               
administration plans to do in  terms of policy calls. His opinion                                                               
is that  the bill as  it's been presented would  adequately carry                                                               
out the proposed policies.                                                                                                      
MR. BULLOCK  drew attention to the  provisions at the end  of the                                                               
bill  related to  retroactivity  and reported  that U.S.  Supreme                                                               
Court cases  have said that after  a first return is  filed, it's                                                               
within the  scope of  due process  to allow  changes by  the next                                                               
legislature.  Under  that  interpretation the  first  return  was                                                               
filed last April  1, so the next legislature could  go up to this                                                               
session. This  is a  special session  so it's a  gray area  as to                                                               
whether this session  would count. He believes  an argument could                                                               
be  made that  it  would  not count  because  the legislature  is                                                               
limited  by the  call  of the  special session  and  by the  time                                                               
period. If  faced with that kind  of challenge he would  say it's                                                               
unreasonable to have expected the  legislature to have considered                                                               
the issue during  this special session or in the  one day session                                                               
in June. Under that interpretation,  there would not be a problem                                                               
applying the retroactive provisions in  the bill back to April 1,                                                               
2006, he stated.                                                                                                                
MR.  BULLOCK  addressed  the question  about  putting  things  in                                                               
regulation as compared to statute  and explained that regulations                                                               
are tested  for consistency with  statutes. Also, there  are many                                                               
things the department could do by  regulation, but if it's a gray                                                               
area or involves information somebody  doesn't want to part with,                                                               
then it'll be  litigated. As legislators you're in  a position to                                                               
identify  the  information  that's critically  important  to  the                                                               
state, he said.  Put that in statute so it's  not necessary to go                                                               
through  litigation if  the regulation  is challenged.  It's more                                                               
efficient.  That   doesn't  take   away  general   challenges  of                                                               
information that may  be subject to the privacy  provision in the                                                               
constitution, he added.                                                                                                         
2:52:16 PM                                                                                                                    
SENATOR WIELECHOWSKI  said he  didn't see  a severance  clause in                                                               
the bill.                                                                                                                       
MR. BULLOCK replied it's redundant;  Title 1 has a provision that                                                               
every bill impliedly has the  severance clause. If a provision is                                                               
found  unconstitutional, it  would fail  and if  the rest  of the                                                               
bill  can  be enforced  without  that  provision, then  it  would                                                               
CHAIR HUGGINS  asked him  to describe the  schools of  thought on                                                               
the bill.                                                                                                                       
MR.  BULLOCK opined  that several  things are  going on  and some                                                               
deal directly  with the  tax under the  PPT. For  example there's                                                               
the nominal  tax rate  increase from 22.5  percent to  25 percent                                                               
and there's  the progressivity. Also  there are issues  that have                                                               
to do  with expenditures. Part  of the PPT  is just like  the old                                                               
tax  because you  start  with the  gross value  at  the point  of                                                               
production  and   then  the  allowable  lease   expenditures  are                                                               
deducted  to arrive  at the  tax value  of the  oil and  gas. The                                                               
credits follow a similar line.  Once the gross tax is determined,                                                               
you figure  how much further the  net revenue to the  state would                                                               
be  reduced  by the  allowance  of  credits.  Those are  all  tax                                                               
things, he said.                                                                                                                
MR.  BULLOCK explained  that within  the  expenditures there  are                                                               
additional  information requirements  so this  is an  appropriate                                                               
place for tax policy. If you  give a credit for exploration, it's                                                               
reasonable  to  set  the  condition   of  getting  some  of  that                                                               
information  back.  The  tax rates,  the  expenditures,  and  the                                                               
credits are all directly related, he said.                                                                                      
MR.  BULLOCK said  that with  regard  to issues  relating to  the                                                               
administration of  the tax,  the bill  has several  provisions to                                                               
address  how  you  know  the   information  that's  submitted  is                                                               
correct.  One thing  is  that  if the  auditors  are exempt,  the                                                               
increased pay will attract auditors  that have the skills to look                                                               
in the nooks  and crannies to find out what  the numbers ought to                                                               
be.  Also,  the information  sharing  between  DNR and  DOR  will                                                               
create a better  bank of information so that the  auditors on the                                                               
royalty side  and the tax  side can communicate and  review their                                                               
thinking.  Another administrative  part is  the extension  of the                                                               
statute  of limitations.  He said  he  believes that  there is  a                                                               
statute  of limitations  for claims  by the  state. AS  09.51.010                                                               
comes to  mind, he said.  There's already  a six year  statute of                                                               
limitations in place  for the state to bring actions,  but not in                                                               
tax. Over the course of six  years things happen, he said. Things                                                               
that  affect the  production may  come  up in  other bodies.  For                                                               
example these taxpayers are subject  to the IRS code and normally                                                               
if  the IRS  makes a  change  that affects  Alaska taxes  they're                                                               
required to file.  This is emphasized for this bill,  he said. As                                                               
Mr.  Mintz said,  the  state  can get  agreements  to extend  the                                                               
statute of  limitations and  often it's in  both the  state's and                                                               
taxpayer's best  interest to  do that. But  by having  the longer                                                               
time, they  won't have  to take all  those extra  steps involving                                                               
additional  negotiations. This  approach  is  more efficient,  he                                                               
MR.  BULLOCK summarized  that  most  of the  issues  in the  bill                                                               
including  the  tax  rates,  the   conditions  for  credits,  and                                                               
allowable   expenditures   are   all   policy   calls   and   the                                                               
administration has characterized what the calls will be.                                                                        
2:56:55 PM                                                                                                                    
SENATOR McGUIRE  clarified the statute of  limitations statute is                                                               
AS 09.10.110 [AS 09.10.120].-Actions  in name of state, political                                                               
subdivisions, or public corporations-and it is six years.                                                                       
MR. MINTZ thanked Mr. Bullock  for providing many helpful editing                                                               
suggestions   based   on   the    initial   bill   version.   The                                                               
administration tried to incorporate those in the final version.                                                                 
MR. MINTZ turned  to bill section 1,  dealing with transportation                                                               
and explained that those costs  are deductible in arriving at the                                                               
gross value  of oil  and gas  for tax  purposes. Imagine  that in                                                               
2000  a taxpayer  reported  and paid  production  taxes based  on                                                               
pipeline  tariff,  which  is  a   transportation  rate  that  was                                                               
deductible. After three years the  statute of limitations expires                                                               
and in 2004 there's a rate case  and the FERC or the RCA orders a                                                               
refund of  transportation charges  from year 2000.  That actually                                                               
increases the  taxable value of  the oil that was  transported in                                                               
2000 and it  increases the amount of tax that  should be paid. He                                                               
asked  if   the  department  is   precluded  from   getting  that                                                               
additional tax  because more  than three  years has  passed since                                                               
the return was filed or does  the statute of limitations begin to                                                               
run again  because it's a  new event  when the refunds  are made.                                                               
The department  has had  a longstanding  interpretation expressed                                                               
in regulation  that the statute  starts to run  again. Logically,                                                               
how the statute  of limitations could have run  on something like                                                               
that hasn't occurred, he said.  But the taxpayer could argue that                                                               
if they  owed taxes  in 2000  and now it's  four years  later the                                                               
statute has run and nothing can be done about that.                                                                             
There hasn't been a test of  this for two reasons: first, most of                                                               
the time  these retroactive adjustments  have been dealt  with by                                                               
agreement with  the taxpayers.  The other reason  is that  in the                                                               
tax arena the  issue is generally income tax and  when there's an                                                               
adjustment  like  that for  income  tax  it's simply  treated  as                                                               
income tax in  the year that it occurs so  there's no question of                                                               
going back in time. Things don't  work that way in the production                                                               
tax arena because it's not income  that's taxed. The value of oil                                                               
produced in a certain time period  is what's taxed so it's really                                                               
a  retroactive  change.  Because  this hasn't  been  settled  and                                                               
because there  should be  no room  for argument  or disagreement,                                                               
this interpretation that's been in  regulation is being placed in                                                               
the statute.  Because they believe it's  a correct interpretation                                                               
of existing  law, they don't  want it viewed  as a change  in the                                                               
law.  They're  asking  the  legislature  to  recognize  that  the                                                               
intention   of  enacting   this  is   to  confirm   the  existing                                                               
3:02:02 PM                                                                                                                    
MR. MINTZ directed attention to  AS 43.55.110(g) bill section 51,                                                               
which  gives  express authority  to  the  DOR to  issue  advisory                                                               
bulletins  interpreting production  tax  statute and  regulations                                                               
for  guidance  to  taxpayers  and others.  He  noted  that  Chair                                                               
Huggins questioned why this isn't  already being done. The reason                                                               
has  to   do  with  the   very  broad  definition  of   the  term                                                               
"regulation" in  the Administrative  Procedure Act and  the broad                                                               
interpretation  the courts  have given  that term.  Basically, he                                                               
said,  whenever  the  department   issues  an  interpretation  of                                                               
general  applicability,   the  court   says  it  sounds   like  a                                                               
regulation,   but  unless   it's  adopted   through  the   formal                                                               
regulation process  the court will  say it's invalid.  That's why                                                               
the department is asking for  the express statutory authority, he                                                               
CHAIR HUGGINS described it as an inoculation.                                                                                   
MR. MINTZ  directed attention  to the  changes in  the uncodified                                                               
law dealing  with the details of  applicability, effective dates,                                                               
and transition.  He noted  that most  of the  substantive changes                                                               
that  have  been discussed,  such  as  changes  in tax  rate  and                                                               
credits are  prospective under  the bill  and would  begin taking                                                               
effect on  January 1, 2008.  That means  they would apply  to oil                                                               
and  gas that  is  produced and  expenditures  that are  incurred                                                               
after December  31, 2007. However,  there are some  categories of                                                               
changes that  the department views  as mid-course  corrections or                                                               
changes  that should  have  been  made in  April  1, 2006.  Those                                                               
include  additions to  the categories  of  exclusions from  costs                                                               
such  as  repair  replacement  to  DR&R  and  costs  relating  to                                                               
violation of law.  The second category is  repealing the sections                                                               
relating to the use of  unit operating agreements to define lease                                                               
expenditures. Those are going back to April 1, 2006, he said.                                                                   
CHAIR  HUGGINS commented  that some  people  are questioning  why                                                               
this couldn't be  done in the regular session  with a retroactive                                                               
effective date. A response isn't necessary, he said.                                                                            
3:05:55 PM                                                                                                                    
MR. MINTZ  explained that another  applicability provision  is to                                                               
apply the extension  to any tax liability that's  still open even                                                               
if it came  up in an earlier  year. For example for a  tax on oil                                                               
and  gas produced  in 2005,  the statute  of limitations  will be                                                               
extended up to six years. But  if the statute had already run-the                                                               
three  years  had passed-that  wouldn't  be  reopened. It's  also                                                               
limited  back to  April 1,  2006.  It's viewed  as a  retroactive                                                               
application so it's necessary to  specify the retroactivity date,                                                               
he said.                                                                                                                        
MR.  MINTZ  reminded members  that  two  provisions in  the  bill                                                               
clarify  that  a  tax  exempt  entity  isn't  allowed  to  get  a                                                               
transferable  tax   credit  certificate.   We  view  that   as  a                                                               
clarification   rather   than  a   change,   he   said,  so   the                                                               
applicability  date  is the  date  that  each of  the  respective                                                               
credit provisions began. In the  case of the section 023 credits,                                                               
the  date was  April 1,  2006.  In the  case of  the section  025                                                               
exploration incentive  credits, the date  was July 1,  2003. Most                                                               
of the other provisions take effect immediately. He noted that                                                                  
MR. MINTZ  noted that  earlier he referred  to authority  to make                                                               
regulations  retroactive  to  the   same  extent  that  they  are                                                               
implemented. That was  provided for in the original  PPT bill and                                                               
it's  provided for  in this  bill, he  said. When  the department                                                               
implements by  regulation the provisions that  are retroactive to                                                               
April 1, 2006 they likewise can  be retroactive to April 1, 2006.                                                               
Otherwise, there's  authority to make regulations  retroactive to                                                               
January  1, 2008.  That is  in  the future  but by  the time  the                                                               
regulations are  adopted and  the process  is completed  it'll be                                                               
after that date.                                                                                                                
MR. MENTZ explained that a  technicality is that although many of                                                               
the provisions don't  take effect until January  1, 2008,there is                                                               
authority to  immediately begin  developing the  regulations even                                                               
though  they  wouldn't  be  adopted  and  effective  until  after                                                               
January 1, 2008.                                                                                                                
3:09:11 PM                                                                                                                    
SENATOR  WAGONER noted  that  he had  asked  about the  corrosion                                                               
issue and the  billings and he would like Ms.  Davis' thoughts on                                                               
the  increase in  the capital  and operation  costs and  how that                                                               
would relate to  the amount that BP initially said  it would cost                                                               
to replace that  line. He recalled it was in  the neighborhood of                                                               
300 some million dollars.                                                                                                       
MS. DAVIS  said that's  the kind  of prospective  information DOR                                                               
would get  under the  bill, but  it doesn't  have access  to that                                                               
information as yet.  She suggested the most immediate  way to get                                                               
that  information  would be  to  ask  the  parties that  will  be                                                               
SENATOR WAGONER said he plans to ask that question.                                                                             
At ease from 3:12:26 PM to 3:23:42 PM.                                                                                      
CHAIR HUGGINS reconvened the meeting.                                                                                           
3:24:26 PM                                                                                                                    
DAN DICKINSON, LB&A Consultant, said  he had a short presentation                                                               
to provide  context and  a longer  one that  will go  through the                                                               
legislation looking at  issues that need to be  raised. He stated                                                               
that he  was formerly with  the Alaska Department of  Revenue and                                                               
did considerable work on the PPT.                                                                                               
STEVE  PORTER, LB&A  Consultant,  relayed that  he  would make  a                                                               
short presentation  on a  higher level analysis  of the  bill and                                                               
the associated issues.                                                                                                          
MR. DICKINSON delivered a  PowerPoint presentation beginning with                                                               
slide  4, which  was a  graph of  Alaska's actual  oil production                                                               
from 1965  to the present  and the projected production  from the                                                               
present to 2020. The largest  area is Prudhoe Bay, which produced                                                               
1.6 million barrels/day  at its peak and now  produces around 400                                                               
million barrels/day.  At the high  point in 1988,  the aggregated                                                               
fields brought the total up  to 2 million barrels/day. Production                                                               
has been  declining since that  time and now it's  around 700,000                                                               
barrels/day or 1/3 of what it  was 15 years ago. The focus during                                                               
this  period was  on reinvestment  and the  issue of  decline, he                                                               
said. When people  talked about taxes, the  economic limit factor                                                               
(ELF) was  discussed and  the question  was whether  changing ELF                                                               
would change  the investment climate.  The consensus was  that it                                                               
MR. DICKINSIN said that in  2003 some exploration incentives were                                                               
brought  in, but  the decline  dominated all  thinking. In  those                                                               
days the  production tax  was the largest  source of  revenue for                                                               
the  state. It  outpaced royalties  but because  of the  economic                                                               
limit factor, production  taxes began a steady march  down to the                                                               
point that it would become an insignificant tax.                                                                                
SENATOR WIELECHOWSKI  observed that since  the taxes were  so low                                                               
you would  have thought there  would have been a  tremendous rush                                                               
of  investment. He  said he's  never understood  why that  didn't                                                               
MR. DICKINSON  replied there was  investment. If you look  at all                                                               
the production  except Prudhoe Bay  you will see  that production                                                               
was increasing, he said. The point is, they weren't "elephants."                                                                
3:30:00 PM                                                                                                                    
SENATOR WIELECHOWSKI  commented that  supports the  argument. The                                                               
investments were  occurring in  the areas  that had  higher taxes                                                               
than the taxes on Prudhoe Bay and Kuparuk.                                                                                      
MR. DICKINSON  acknowledged that is partially  true. The smallest                                                               
fields had no  tax, but places like Alpine and  Northstar came on                                                               
with rates that  were as high as or higher  than Prudhoe Bay. The                                                               
atmosphere changed with the change in the price for oil.                                                                        
CHAIR HUGGINS remarked he's deducted  that a challenge in getting                                                               
new exploration is  that there are no new elephants  and the cost                                                               
of a  discovery for an  "ant" is high risk.  He asked if  it's in                                                               
the  ballpark to  say  we're  trying to  balance  that risk  with                                                               
finding the "ant" a small amount of oil.                                                                                        
Steve PORTER agreed that he's on the right path.                                                                                
SENATOR WIELECHOWSKI  brought up another concept  that he's never                                                               
fully  understood,  which  is  that  decreasing  taxability  will                                                               
result in more exploration than we had under ELF.                                                                               
MR.  DICKINSON displayed  the slide,  ANS West  Coast Price  from                                                               
July 77-Sept  07 that  shows the  absolute rise  in the  price of                                                               
oil.  If people  invested  expecting returns  from selling  their                                                               
product in  the $30 to  $50 range there's a  good deal on  top of                                                               
that that's  being generated, he  said. An observation  he'd make                                                               
is that  the production tax is  no longer talked about  as a tax.                                                               
We're now  talking as though  we're entering a bidding  round and                                                               
we're  talking about  leaving money  on the  table and  promoting                                                               
ourselves to partners  and wanting to share. That may  or may not                                                               
be appropriate, but there's definitely  a very different sense of                                                               
what we're  doing here than  there was  when we were  focusing on                                                               
the declining issues.                                                                                                           
SENATOR WIELECHOWSKI  responded the  legislature and  the experts                                                               
including Mr. Van Meurs, Mr.  Johnston, Dr. Finizza, and Gaffney,                                                               
Cline have  all said we could  have increased our taxes  and we'd                                                               
still have incurred investment.                                                                                                 
MR. DICKINSON  replied he's  not disagreeing;  his point  is that                                                               
there's been a real shift in the last seven years.                                                                              
MR. DICKINSON  summarized the next  two slides and noted  that in                                                               
1988 2  million barrels/day  were produced at  a market  value of                                                               
$15  for  basically  $30  million/day.  Now  production  is  just                                                               
700,000  barrels/day,  but at  $80  that's  $56 million/day.  The                                                               
point that  people designing  a system need  to consider  is what                                                               
700,000 barrels/day  at $15 would  yield. He clarified  that he's                                                               
not making  predictions about price  dips, he's just  saying that                                                               
any  system  needs  to  be  robust  enough  to  deal  with  those                                                               
3:36:39 PM                                                                                                                    
MR.  DICKINSON referenced  Article 1,  Section 1,  of the  Alaska                                                               
Constitution,  which  is quoted  frequently  in  tax circles  and                                                               
noted that Chief Justice Marshall  articulated that "the power to                                                               
tax is  the power to destroy"  and that "taxation is  an absolute                                                               
power and  like sovereign  power of  every other  description, is                                                               
trusted to  the discretion of those  who use it." Tax  is part of                                                               
the economic compact  made in a society, which  is very different                                                               
from  entering into  commercial ventures,  he said.  Although the                                                               
balance can change,  the notion is that those  are different ways                                                               
of  thinking about  it and  as a  society our  thinking might  be                                                               
MR. DICKINSON  reviewed slides showing  the increasing  costs and                                                               
the projected $2 billion cost  assumptions in the original fiscal                                                               
note and then the $4  billion spring 2007 forecast. Those numbers                                                               
are  relevant because  if you'd  asked  four years  ago what  the                                                               
State of Alaska's costs would  be, probably very few people would                                                               
have said they would double. This  is all part of the perspective                                                               
of why we're changing the  way we're thinking about these things,                                                               
he stated.                                                                                                                      
3:38:53 PM                                                                                                                    
CHAIR  HUGGINS  recognized  that  Senator Dyson  had  joined  the                                                               
MR. DICKINSON  explained that  in 2007  the legislature  passed a                                                               
budget and the DOR said there  would be revenues from oil and gas                                                               
of $3 billion and there would  be another $400 million of non oil                                                               
and   gas  for   a   budget  of   $3.4   billion.  General   fund                                                               
appropriations were $3.2  billion so the surplus  was expected to                                                               
be  $200 million.  That was  based on  the ELF-driven  production                                                               
tax. Two months later PPT had  passed and the fiscal note said in                                                               
FY07 there will be an additional  $420 million, which will be the                                                               
retroactive portion  from 2006 that  won't arrive until  March of                                                               
2007  so it'll  be  counted as  fiscal 2007  money.  In FY07  the                                                               
payments  will be  $923  million  for a  total  increase of  $1.3                                                               
billion.  Take the  original  estimate and  add  $1.3 billion  to                                                               
arrive at  $2.3 billion.  Now you're looking  at oil  revenues at                                                               
$4.3 billion and the same non  oil revenue for a revenue total of                                                               
$4.8 billion so the expected surplus was $1.3 billion.                                                                          
MR.  DICKINSON  continued to  say  that  a  year later  you  see,                                                               
according  to   the  un-finalized   Spring  Forecast,   that  the                                                               
projected $2.3 billion  actually came in at  $2.1 billion. That's                                                               
about $200  million off.  As a  percentage, that  was one  of the                                                               
best projections  DOR made, he  said. Looking at the  figures, he                                                               
explained that  the property tax  projection was $36  million and                                                               
after a  hearing on the  value of  the Trans Alaska  Pipeline, it                                                               
was increased by  42 percent to $52 million. For  the income tax,                                                               
prices were higher  than anticipated so they went  up 18 percent.                                                               
For the  oil and gas  production tax, the price  forecast, volume                                                               
forecast, and cost forecast were all  off, but the net effect was                                                               
very close to the projection.                                                                                                   
SENATOR  WIELECHOWSKI questioned  if  it's projected  to be  $800                                                               
million off next year.                                                                                                          
MR. DICKINSON replied  he's heard that figure, but  he isn't sure                                                               
where  it's coming  from. He  offered  the belief  that the  $800                                                               
million is  the difference between  what the  governor's proposal                                                               
is  projected to  bring  in  if that  proposal  had been  applied                                                               
retroactively to the  first day of the fiscal year.  It's fine if                                                               
you  want to  define that  as a  shortfall, but  that's different                                                               
from  what you've  been told  in  a fiscal  note is  going to  be                                                               
available for  the fiscal year.  He said  his point is  that what                                                               
happened with the  PPT is essentially as accurate  as other taxes                                                               
that were forecast.                                                                                                             
3:43:08 PM                                                                                                                    
CHAIR HUGGINS asked him to  do the analysis because Alaskans have                                                               
a misconception of what the $800  million really means and how it                                                               
was derived.                                                                                                                    
MR. DICKINSON  asked if  he should compare  what the  fiscal note                                                               
said for 2008 and what the projection is now.                                                                                   
SENATOR WIELECHOWSKI suggested an apples-to-apples comparison.                                                                  
MR. DICKINSON responded that would  require waiting until the end                                                               
of 2008  and then  looking back  to see what  came in.  I'm doing                                                               
that now, he said.                                                                                                              
SENATOR  WIELECHOWSKI  said  DOR  has forecast  an  $800  million                                                               
MR. PORTER  responded they can't figure  out how to come  up with                                                               
those numbers.                                                                                                                  
MR. DICKINSON added there's no deficit being forecast.                                                                          
SENATOR  WIELECHOWSKI  said he  understands  that;  it's an  $800                                                               
million shortfall from the projection under PPT.                                                                                
MR. DICKINSON asked, "In the fiscal note?"                                                                                      
SENATOR WIELECHOWSKI replied, "In the fiscal note."                                                                             
MR. DICKINSON  responded he believes  he can show that  isn't the                                                               
MR. DICKINSON  continued to say  that royalties came in  at about                                                               
what was  projected because  the price forecast  was low  and the                                                               
production forecast  was high so  one offset the other.  He noted                                                               
that  it's  interesting  that  the  non  oil  and  gas  was  more                                                               
volatile.  It  was   off  by  about  50   percent.  Overall,  the                                                               
difference was about $200 million.                                                                                              
CHAIR HUGGINS noted  that he gave a number of  non oil investment                                                               
categories to the commissioner of  revenue because it shows a lot                                                               
of  disparities   between  the  projections  and   what  actually                                                               
happened. That gets to the  accuracy piece of the projections, he                                                               
MR. DICKINSON  observed that since  1990 when  the Constitutional                                                               
Budget Reserve  (CBR) fund  was established,  the issue  has been                                                               
how much will come out of the  CBR. A budget would be passed, the                                                               
revenue identified and  the difference would be made  up from the                                                               
CBR. The notion of  getting a forecast to be dead  on went by the                                                               
wayside because it  didn't matter relative to how  the budget was                                                               
being passed, he stated.                                                                                                        
MR.  DICKINSON  questioned  how   a  better  forecast  or  closer                                                               
monitoring would have  made a difference. He  acknowledged that a                                                               
big  mistake  in  the  PPT legislation  was  not  requiring  this                                                               
earlier information and  he applauds the measures  in the current                                                               
SENATOR  WAGONER  referenced  a   prior  presentation  that  used                                                               
$43.43/barrel  oil.  The status  quo  at  that price  would  have                                                               
brought in $.9 billion. After credits  the tax was going to bring                                                               
in $1.7 billion for a difference  of $800 million. That's what we                                                               
came up with, he said, but  that was with oil at $67 plus/barrel.                                                               
Where did  we go  wrong on  projecting the  credits that  were to                                                               
come in, he asked.                                                                                                              
MR.  DICKINSON  replied  that  the state  had  no  experience  in                                                               
estimating  operating costs;  and  he understands  that for  2007                                                               
they  were off  by  70 percent  to 100  percent  and the  capital                                                               
investment  nearly doubled.  His point  is that  a lot  of things                                                               
were underestimated. The $800 million  likely came from adjusting                                                               
the "knowns"  and isolating the  affect on one thing.  That tends                                                               
to overwhelm the things you've been adjusted for, he said.                                                                      
SENATOR WAGONER  said maybe  we didn't ask  the right  people the                                                               
right questions when  making the projections for  CAPEX and OPEX.                                                               
That's an awfully large amount to  be off when the legislature is                                                               
relying on the projections to set tax policy, he stated.                                                                        
3:49:52 PM                                                                                                                    
MR. DICKINSON pointed  out that the legislature did  ask a number                                                               
of people  and Mr.  Van Meurs  has said that  if he'd  been asked                                                               
directly he  would have said  they would  be higher. A  number of                                                               
folks looked  at the  numbers and  nobody said  they were  out of                                                               
whack. Using the Matanuska Maid  bankruptcy as an example he said                                                               
the point  is that  those sorts  of things  happen. You  can have                                                               
some  forewarning  and  sometimes  you   can  get  it  right  and                                                               
sometimes  you  don't. In  this  case,  the cost  estimates  were                                                               
significantly low, as were the price estimates.                                                                                 
MR.  DICKINSON   directed  attention  to  a   one-page  model  he                                                               
developed  of the  main  revenue  issues of  the  PPT versus  the                                                               
governor's proposal.  It gives a  sense of the general  orders of                                                               
magnitude of some of the issues.  All formulas are there and it's                                                               
not too complicated, he said. You can walk through making                                                                       
assumptions about barrels and costs.                                                                                            
CHAIR HUGGINS asked him to go through the chart methodically.                                                                   
MR. DICKINSON continued the explanation as follows:                                                                             
     The first  column simply  runs things  over a  range of                                                                    
     prices. Back  in September when  I first did  this, $80                                                                    
     was  considered the  high end-and  that's  life in  the                                                                    
     food-chain, I guess. We used  2008 estimate of volumes.                                                                    
     Now that  was the  earlier one. DOR  is about  to knock                                                                    
     40,000barrels/day  off that  estimate, but  a flat  244                                                                    
     million  taxable barrels/year.  You  multiply what  you                                                                    
     sell  it for  times the  number of  barrels and  so you                                                                    
     come  up with  a sort  value in  market. At  $30/barrel                                                                    
     that's  $7 billion  at $80/barrel  that's $19  billion.                                                                    
     You  then  subtract  the downstream  costs,  which  the                                                                    
     department estimated at $7.22  and that's tankering and                                                                    
     TAPS-the  ones that  have always  been deductible  even                                                                    
     under the  so-called gross  tax that  we used  to have.                                                                    
     You then  subtract the upstream costs,  which are about                                                                    
     $4 billion  and I  think as Senator  Wagoner indicated,                                                                    
     in  our  initial  estimates those  were  closer  to  $2                                                                    
     billion.  If  you  look at  the  document  that  you're                                                                    
     looking  at  there   [that  Senator  Wagoner  indicated                                                                    
     earlier]  it's  $1.7  so more  like  100  percent  off.                                                                    
     They're  closer  to  the  downstream  costs.  Once  you                                                                    
     subtract  that, you  get what's  called the  production                                                                    
     tax value  or the  net value.  So again,  at $30/barrel                                                                    
     you've got  just over $1 billion.  At $80/barrel you've                                                                    
     got  $13.7 billion.  And that's  going to  be the  same                                                                    
     under  the governor's  proposal or  under the  existing                                                                    
     The  first change  occurs when  you then  multiply that                                                                    
     times the  tax rate.  Under the  current law  it's 22.5                                                                    
     [percent], the governor's proposed  25 [percent] and so                                                                    
     in column  H you  get the difference  and as  you might                                                                    
     expect it's bigger at higher prices.                                                                                       
     The  next  set  of  calculations between  I  and  N  is                                                                    
     progressivity. Again it's  not really that complicated.                                                                    
     You simply  take the production  tax value,  you divide                                                                    
     through  by the  barrels  and  so you  come  up with  a                                                                    
     dollar  per  barrel value.  …  The  starting point  for                                                                    
     progressivity  under  the  current   law  is  $40,  the                                                                    
     governor's proposed  dropping that  to $30.  … Starting                                                                    
     at  $60 and  subtracting costs,  under the  current law                                                                    
     there's  no progressivity.  Under the  governor's bill,                                                                    
     at   $60  and   $36   net,  you   have   $6  worth   of                                                                    
     progressivity. So  you calculate the number  of dollars                                                                    
     that  you  have  and  that's what's  called  the  price                                                                    
     index. Under current law you  multiply each dollar is a                                                                    
     quarter  of a  percentage point.  Under the  governor's                                                                    
     proposal, each dollar would be  a fifth of a percentage                                                                    
     point  so  it'd  rise  less sharply.  Then  you  simply                                                                    
     multiply  that  through so  if  you  had $6.15  and  25                                                                    
     percentage   for   each   dollar,   that   means   that                                                                    
     progressivity  is 1.54  percent.  You mechanically  can                                                                    
     add it to  the base rate, in this case  we're trying to                                                                    
     keep   them  separated,   to   show   the  results   of                                                                    
     progressivity so  you multiply that 1.54  percent times                                                                    
     your  production   tax  value.  And  you   can  see  at                                                                    
     $70/barrel,    you    generate    $173    million    in                                                                    
     There was  earlier discussions today-folks  were saying                                                                    
     how  much was  the progressivity  piece. So  this gives                                                                    
     you a  sense. At $70…it goes  up rapidly so at  $80 its                                                                    
     $.5 billion.                                                                                                               
     The  third   piece  down  here  simply   subtracts  the                                                                    
     governor's proposal  from current  law so it  shows you                                                                    
     the  change. And  you can  see that  there is  a couple                                                                    
     hundred million dollars of  change in the progressivity                                                                    
     with increases in price levels.                                                                                            
SENATOR WAGONER  asked how to  calculate the difference  when the                                                               
governor has  progressivity on an  annual basis and  the original                                                               
bill had a monthly calculation.                                                                                                 
MR. DICKINSON  replied you  don't calculate  that in  this simple                                                               
model. That  is in  his later  presentation though  because there                                                               
are going to be differences, he added.                                                                                          
3:56:54 PM                                                                                                                    
SENATOR  WAGONER  commented   there  will  be  quite   a  bit  of                                                               
MR. DICKINSON  agreed; potentially  the differences can  be huge.                                                               
He  then referenced  the slide  showing ANS  West Coast  Price to                                                               
further demonstrate the point.                                                                                                  
SENATOR STEDMAN asked  if his model uses the Texas  or West Coast                                                               
MR.  DICKINSON replied  that would  be ANS  West Coast,  which is                                                               
typically within $1.60 of ANS.                                                                                                  
MR. DICKINSON continued to review  the model. The next thing sums                                                               
up progressivity and the base line  to come up with the total tax                                                               
before credits. Then  you analyze the credits  beginning with the                                                               
TIE  (Transitional Investment  Expenditures).  The assumption  is                                                               
that  most  of  the  producers  paying the  tax  would  have  had                                                               
sufficient  investment  to  generate  TIE credits.  They  can  be                                                               
matched 2 to 1  so he decided to make the  TIE credit exactly one                                                               
half of what the investment  credit is under bill section 023(a).                                                               
Under the status  quo they would subtract $190  million and under                                                               
the governor's proposal they wouldn't. He continued:                                                                            
     Because this  is looked at  as a one year  snapshot for                                                                    
     the first  year, this is  the only year in  which you'd                                                                    
     see a  substantial financial affect from  the notion of                                                                    
     cutting  credits in  half and  requiring to  be applied                                                                    
     over two  years. I guess  in theory the very  last year                                                                    
     you'd have the affect as  well, but basically this year                                                                    
     you see  it. The  fact that it's  being proposed  to be                                                                    
     introduced on  a calendar year  basis means  the fiscal                                                                    
     year  affect will  be fairly  minimal.  Again, this  is                                                                    
     assuming that that change was  in for the entire fiscal                                                                    
     year. Not just half of it.                                                                                                 
     So I've taken the full  investment credit that would be                                                                    
     allowed for $1.9 billion, and  that's $380 million, and                                                                    
     cut  that in  half. …  It then  shows you  there's your                                                                    
     total cost. You  then say, what is my tax  net of those                                                                    
     credits? At $30, I'm wiped  out and of course under the                                                                    
     governor's proposal  you wouldn't  be wiped  out. There                                                                    
     would be  a floor  there. But I  was mainly  focused on                                                                    
     the ranges where we see  things today and at $40/barrel                                                                    
     we're  at $316  million  [tax net  of  credits] and  at                                                                    
     $80/barrel we're  at $3  billion. Under  the governor's                                                                    
     proposal … it's  an incremental $200 million  as you go                                                                    
     up each $10 of price.                                                                                                      
MR. DICKINSON  said his intention  is to show  how easy it  is to                                                               
sit down with an Excel spreadsheet  and play with the concepts to                                                               
get some sense of what's  happening. Responding to a question, he                                                               
agreed to provide an electronic copy.                                                                                           
4:01:11 PM                                                                                                                    
SENATOR  WIELECHOWSKI  questioned  how  $30 versus  $40  and  .20                                                               
versus .25 impacts investment decisions by oil companies.                                                                       
MR.  DICKINSON  recalled that  Dr.  Tony  Finizza addressed  that                                                               
question.  Generally  there's  a   company-wide  price  that  all                                                               
projects are  evaluated against and  then there's a  stress price                                                               
to evaluate against. Each company guards those numbers, he said.                                                                
CHAIR  HUGGINS asked  him  to restate  the  information from  the                                                               
slide titled  FY 2007 comparisons  because this bill is  based on                                                               
MR.  DICKINSON   relayed  it's  easy   to  be  critical   of  the                                                               
projections but  it's difficult to  come up with  better methods.                                                               
What we  do is take  a set of  knowledge and  plug in a  bunch of                                                               
assumptions that we  don't have any particular  insights into, he                                                               
said. He stated  that the notion behind a revenue  system is that                                                               
it  needs to  be robust  and cover  a wide  range. Also,  it made                                                               
sense to have  a regressive system when Alaska was  a young state                                                               
because money was  needed every month to do  things like maintain                                                               
roads and  pay teachers. If  there was a  boom in the  market the                                                               
state was  content not to  participate because with  a regressive                                                               
system it  was getting  a baseline amount  of money.  The state's                                                               
more mature  now and it has  a savings account that  has billions                                                               
of  dollars in  the unrestricted  portion that  is available  for                                                               
appropriation.  For lots  of reasons  the state  can look  at its                                                               
fiscal  system and  opt for  a  progressive system  so that  when                                                               
everyone is  making a large  profit the  state gets more.  But it                                                               
also means  that when profits  are smaller, the state  gets less.                                                               
Under ELF  the state got a  larger piece when people  were making                                                               
less. He said he  believes that a lot of hard  work goes into the                                                               
estimates, but they can't be  guaranteed. They're simply the best                                                               
numbers that are available at the time.                                                                                         
4:06:51 PM                                                                                                                    
SENATOR STEDMAN asked how many barrels/day the model used.                                                                      
MR. DICKINSON  said he believes  it was 760 barrels/day.  All the                                                               
numbers came from the DOR Spring Forecast, he added.                                                                            
SENATOR STEDMAN  said he believes  the Spring Forecast  shows 995                                                               
barrels  and the  model shows  1.4  billion net  of credits.  The                                                               
general concept is to be conservative on forecasting revenue.                                                                   
MR. PORTER advised that the  administration has agreed to go over                                                               
the assumptions  to explain  how the  results were  achieved. The                                                               
idea is to create a public model that's within a percentage.                                                                    
MR. DICKINSON  clarified that the  2008 Spring Forecast  price is                                                               
$54.72 and he believes they're at 983 barrels.                                                                                  
SENATOR  STEDMAN questioned  whether  there's  opportunity for  a                                                               
surplus at the end of the year.                                                                                                 
MR.  DICKINSON  directed attention  to  page  81 of  the  revenue                                                               
forecast and  calculated that  700,000 barrels/day  at $70  and a                                                               
general  fund budget  of $4.1  billion would  bring a  surplus of                                                               
$300  million. That  gives a  sense  of movement  with price,  he                                                               
4:11:35 PM                                                                                                                    
MR.  PORTER began  his  presentation and  advised  that he  would                                                               
touch on  stability, Alaska's prospectivity, ACES  incentives and                                                               
a  general summary.  Beginning with  the issue  of stability,  he                                                               
noted that Pedro Van Meurs warned  that you begin to look like an                                                               
unstable regime  if you change the  tax for what is  arguably the                                                               
third  time.  Daniel  Johnston  has  disagreed  with  that  while                                                               
industry has repeatedly  said you're moving in  that direction of                                                               
instability.  He said  he tends  to  agree with  Mr. Johnston  in                                                               
terms of impact because stability  is related to what happened at                                                               
each particular time.                                                                                                           
MR. PORTER relayed that the  oil industry continues to argue that                                                               
there was a tax change several  years ago, prior to PPT. Pointing                                                               
out that  to change taxes  it's necessary  to change the  law, he                                                               
emphasized  that there  was not  a  change in  either statute  or                                                               
regulation. Basically, industry changed  the way it managed wells                                                               
and oil  on the  North Slope and  captured an  additional benefit                                                               
under ELF. That's  all that occurred; we simply  applied the tax.                                                               
Oftentimes that's been  interpreted as a change in  tax and we've                                                               
politely not  challenged that interpretation. But  everyone knows                                                               
that  wasn't  an   issue  of  stability,  he  said.   It  was  an                                                               
application  of law  that happens  all  the time.  Over time  the                                                               
industry and the  state have lots of issues  over the application                                                               
of the regulations and the statute  and this is just one more. It                                                               
was just a bit more public, he said.                                                                                            
MR. PORTER  said the PPT came  next. The situation was  that over                                                               
time  ELF didn't  pick up  enough  tax, particularly  in a  high-                                                               
priced environment. That didn't  make sense and everyone realized                                                               
that ELF was  broken. The recognition that the tax  would need to                                                               
change merged with industries need  for stability, a stranded gas                                                               
contract, and  a reasonable tax.  They lost on all  three counts,                                                               
he said, and  that wasn't expected. That is the  first change, he                                                               
4:16:32 PM                                                                                                                    
MR. PORTER  described the current  situation as the  second point                                                               
in  time. According  to the  governor, a  cloud on  the decision-                                                               
making  occurred  during  the  PPT  change of  tax  and  so  it's                                                               
necessary to  go back  and see  if the  right decision  was made.                                                               
There are  a number of  ways of looking at  the tax and  the $800                                                               
million, but  ultimately it doesn't  matter. We're here  so let's                                                               
figure out  what to do  from here.  Figure out the  right answer,                                                               
get  it done  and  move forward,  he  said. But  if  you do  work                                                               
through this process and make a  change you will be moving into a                                                               
more unstable  world if you  immediately make another  change, he                                                               
MR. PORTER  turned to Alaska's  Prospectivity and said  he'd walk                                                               
through oil and then gas.  From the Colville through the Canning,                                                               
the  state  land   with  oil  underneath  is   a  mature  region.                                                               
Referencing  page  5 of  Mr.  Dickinson's  presentation, he  said                                                               
we've found  the elephant  and all that's  left is  puddles. Move                                                               
out into  NPRA where  the wells cost  considerably, more  and you                                                               
see  a changing  economics factor  for drilling  wells. From  the                                                               
standpoint  of attracting  people,  he said  we're  not the  most                                                               
prospective  state  in  the  world. Nobody  is  going  to  drill,                                                               
regardless of  the incentives unless  you're willing to  pay over                                                               
100  percent and  at this  point the  state isn't  willing to  do                                                               
With  regard to  competition he  said we  have three  sets. First                                                               
there's the Coleville and Canning  competition, which is a mature                                                               
field that  only has puddles in  remote regions so the  costs are                                                               
high. A second  competition region is NPRA. That's  what he calls                                                               
the Alpine  type region.  Those are pretty  good size  fields but                                                               
the oil  is expensive.  A rough estimate  is between  $30 million                                                               
and $50 million, which  is a lot of money if the  hole is dry. He                                                               
noted that when  you shift from state lands you  lose the royalty                                                               
and that's  not exactly prospective  to the general  fund budget.                                                               
He  elaborated that  you  get half  the value  that  goes to  the                                                               
federal  government,  but  it  goes through  a  gauntlet  to  get                                                               
anywhere. If  anything is left  after paying impact funds  to the                                                               
five communities in the North  Slope Borough, then you go through                                                               
a formula for  funding PCE. Then you go through  the next funding                                                               
formula that pays for some type  of credit fund for education. If                                                               
anything is  left, there's a  possibility that some of  the money                                                               
will  go  to  the  general  fund. He  doesn't  recall  that  ever                                                               
happening. Most of  it has stayed on the North  Slope. You do get                                                               
tax out there though so that  is a benefit and that's why capital                                                               
credits make sense there. Those  puddles are much bigger than the                                                               
ones between Colville and Canning, he said.                                                                                     
MR. PORTER noted  the difference between the  industry models and                                                               
state  models. If  you model  a prospect  from either  standpoint                                                               
there are  lots of  bells and  whistles in  terms of  taxes, risk                                                               
factors and other sensitivities,  but take the reserves component                                                               
alone and if you spread it to  a bell curve, it really fattens up                                                               
the  economics.  Geology  is  king,  he said.  If  you  have  the                                                               
geology, you will  have the players because with  big geology and                                                               
big elephants, industry is willing to take big risks.                                                                           
MR. PORTER said  the third region of competitiveness  is the OCS.                                                               
It truly does compete with  elephants simply because there hasn't                                                               
been enough  drilling out there  to know  if there are  still any                                                               
elephants.  Shell Oil  is there  and ready  to spend  billions on                                                               
drilling in  the OCS. The only  problem is the state  doesn't get                                                               
any  tax or  royalty  money from  drilling on  the  OCS and  that                                                               
represents  more than  50 percent  of the  potential oil  and gas                                                               
discoveries on the  North Slope. That isn't the deal  in the Gulf                                                               
States.  Those  states  have  figured out  that  since  they  are                                                               
carrying the risk, the federal  government ought to pay a portion                                                               
of the funds.  He suggested that Governor Palin ought  to be back                                                               
in Congress  working with the  delegation to get  a proportionate                                                               
share off the OCS before Shell Oil drills the first well.                                                                       
4:26:03 PM                                                                                                                    
SENATOR WIELECHOWSKI asked if the  state could capture some value                                                               
by taxing the oil once it comes on shore.                                                                                       
MR. DICKINSON recalled  some cases and said he  believes the main                                                               
tax  area  will be  the  facilities  that  are  on shore.  It  is                                                               
something  that   needs  to  be   negotiated  with   the  federal                                                               
government. The  state can't  assert a  tax on  something outside                                                               
the realm  and it can't assert  a tax on the  passage of offshore                                                               
oil or gas through the realm.                                                                                                   
CHAIR HUGGINS  commented everyone can't  take a piece of  the pie                                                               
simply because it crosses the border.                                                                                           
MR. PORTER  said the next thing  to look at is  the huge resource                                                               
of heavy and viscous oil. Because  the oil industry will tap that                                                               
resource,  he cautioned  members to  ask if  things in  this bill                                                               
will  negatively  impact that  ability.  He  emphasized that  the                                                               
taxing structure  should positively encourage the  development of                                                               
those resources because producing  the reserves dwarfs everything                                                               
else. Clearly it's  more important than the  tweaking we're doing                                                               
here.  Tweaking is  within you  purview  but don't  take some  of                                                               
these  options off  the table,  he  cautioned. He  said later  he                                                               
would touch on how he thinks  this may be impacted by the current                                                               
proposed tax.                                                                                                                   
SENATOR  WAGONER  questioned why  it  isn't  possible to  measure                                                               
heavy  oil  that's going  into  the  system  to  come up  with  a                                                               
percentage and then  a different tax system  to encourage further                                                               
development of heavy oil. He asked if that's unreasonable.                                                                      
4:30:53 PM                                                                                                                    
MR. PORTER  suggested looking at  the units Orion, West  Sak, and                                                               
Ugnu because you can almost  identify the complexity and the cost                                                               
of the  well by what the  unit is producing. He  continued to say                                                               
that the net  basis and the 20 percent capital  both work well if                                                               
industry  spends  capital money  on  infrastructure  and if  they                                                               
spend money on new development for  places like West Sak to bring                                                               
on additional reserves. Also you  want industry to spend money on                                                               
exploration. All three  elements are important and  right now the                                                               
market is  working and they're  doing all three. It  doesn't mean                                                               
we've hit the sweet spot, but it's functioning.                                                                                 
SENATOR WAGONER  clarified that's  at $80 or  the higher  rate of                                                               
4:32:48 PM                                                                                                                    
MR. PORTER  responded that goes  to his next statement,  which is                                                               
what happens when oil  is at $40. He noted that  Field A that was                                                               
discussed yesterday  had problems with  the 10 percent  gross tax                                                               
and at  $40/barrel oil it was  right on the margins.  He reminded                                                               
members that when an oil  company runs an economic analysis, each                                                               
company uses  a single price  for consistency  between divisions.                                                               
Also they run  economics on a stress price. Although  it was said                                                               
that  the stress  price is  $40, he's  more conservative  because                                                               
he's seen the world at lower  levels. He emphasized that we don't                                                               
know what  the future holds, but  we do know that  you must cover                                                               
the high, middle, and low to  ensure that the state is positioned                                                               
properly  to encourage  development at  a particular  time. Allow                                                               
for uncertainty to occur and  encourage development to occur over                                                               
time, he said.                                                                                                                  
MR. PORTER  shifted to  gas and  said that in  Alaska gas  is not                                                               
mature.  The  Foothills,  NPRA, and  OCS  haven't  been  explored                                                               
largely because you can't market the  gas. Mr. Van Meurs said the                                                               
gas  pipeline  is  uneconomic,  but   he  would  describe  it  as                                                               
indeterminate because of  three elements that apply  to a fourth.                                                               
First, the  cost of the  pipeline is undetermined and  that won't                                                               
change  much until  you've spent  closer to  $1 billion  and have                                                               
certainty enough  to know if  you should go forward.  Nobody will                                                               
spend that  amount by November,  but they will have  an estimate.                                                               
Second, we don't know the future  price of gas. We don't know how                                                               
the gas  play will  come out  in the future  so that's  risk. The                                                               
third element is  tax stability. Industry has  always been afraid                                                               
that  the state  will raise  taxes  and remove  the profit  after                                                               
starting to build the pipe. All  this rolls into an internal rate                                                               
of  return and  basic  project evaluation  criteria to  determine                                                               
whether you  think it'll  be economic  before building  the pipe.                                                               
You won't know if it is  truly economic until well after the pipe                                                               
is built.  By 2030 you'll have  a pretty good idea  of whether or                                                               
not you made a good decision, he said.                                                                                          
4:39:06 PM                                                                                                                    
SENATOR WAGONER  said he asked  Chair Huggins to contact  Mr. Van                                                               
Meurs  to   define  what  he   was  talking  about.   In  another                                                               
presentation  he said  he was  basing his  statement on  the line                                                               
that  was discussed  in  2000 and  2001, which  was  the 52  inch                                                               
producer-line using new  steel and new technology  and running to                                                               
Chicago. We'll  look at  a lot of  different scenarios  before we                                                               
reach that point, he said.                                                                                                      
MR.  PORTER  added  that  Mr.  Van  Meurs  was  also  basing  his                                                               
statement on  today's price with  estimated increased  costs, but                                                               
that's based  on assumptions  that may  or may  not occur  in the                                                               
CHAIR HUGGINS  recalled Mr.  Van Meurs  said liquids  would work.                                                               
The  committee  needs   to  hear  from  him   to  understand  his                                                               
rationale.  We've also  asked the  administration to  analyze his                                                               
statement, he added.                                                                                                            
MR. PORTER said  his second recommendation relates to  what to do                                                               
with a gas pipeline from here.  He relayed that when he worked on                                                               
the gas pipeline project, every day  he asked himself how to best                                                               
move  the project  forward. It  wasn't how  to move  stranded gas                                                               
forward or  how to  move the Canadian  pipeline forward.  To him,                                                               
the project  was monetizing the 36  tcf on the North  Slope. With                                                               
that in mind he suggested members  ask if the activity today will                                                               
enhance  that  potential.  In his  view  it's  the  legislature's                                                               
responsibility to review  all the information and  figure out the                                                               
best  path for  moving forward.  Don't  lock down  on a  specific                                                               
process;  allow  the  facts  to change  your  direction  if  it's                                                               
appropriate.  That's what  you should  do in  November after  the                                                               
applications come in, he said.                                                                                                  
4:43:43 PM                                                                                                                    
MR.  PORTER turned  to the  issue of  timing the  development and                                                               
said  the faster  you can  bring  on development  the better.  It                                                               
takes time  to bring on oil  after discovery. Six to  eight years                                                               
is  probably  a  reasonable  timeframe   if  you  use  the  major                                                               
facilities, but it there are  environmental difficulties or local                                                               
issues that timeframe gets extended.  For this gasline it'll take                                                               
ten years easily, he said. Any  estimate that's less than that is                                                               
probably  skipping   steps  and  creating  additional   risk.  He                                                               
clarified that's for the Canadian project.                                                                                      
4:45:42 PM                                                                                                                    
MR. PORTER commented there's a lot  of rhetoric about how ACES is                                                               
an incentive  to exploration and  development and that  it brings                                                               
incentives  because of  capital  investment. But,  he said,  ACES                                                               
didn't create  the capital  investment, PPT did.  If you  look at                                                               
the  differences the  only thing  you can  say is  it hurts  some                                                               
parties less  than others. When  you take money out  of someone's                                                               
pocket,  you make  it less  economic for  them, but  that doesn't                                                               
mean  that decision-making  will necessarily  change. He  said he                                                               
does  know that  the  gross  tax of  10  percent  on the  bottom,                                                               
definitely is a  big burden on West Sak and  Orion and some heavy                                                               
and viscous oils  because their cost of doing business  is in the                                                               
$40s. Don't  take money out  of industry  pocket in a  low priced                                                               
world,  he   cautioned.  It   won't  encourage   exploration  and                                                               
development in the future.                                                                                                      
MR. PORTER  encouraged the  committee to  remove the  minimum tax                                                               
from the bill,  but said the other elements  of progressivity and                                                               
changing the 22.5 percent to 25 percent are policy calls.                                                                       
4:48:10 PM                                                                                                                    
SENATOR  WIELECHOWSKI referred  to a  presentation Mr.  Van Meurs                                                               
made, which was 25 percent with a  gross at $50 and .25. He asked                                                               
if that could be done without hurting investments.                                                                              
MR. PORTER said  he hadn't modeled the impact of  that because he                                                               
hadn't seen that  curve. You're trying to create  a sharing curve                                                               
and a lot  of economists like a net sharing  curve versus a gross                                                               
sharing curve.  Look at the  curve and  figure out how  much more                                                               
you want  to pick up,  he said. Only do  it once though  and then                                                               
walk away  for about 15 years.  Take time, do it  thoroughly, and                                                               
make your decision.                                                                                                             
MR. DICKINSON noted that slide 8 illustrates that model.                                                                        
SENATOR  WIELECHOWSKI  asked  if  the state  could  increase  the                                                               
valuation of oil and not discourage investment.                                                                                 
MR. PORTER said there is room.                                                                                                  
SENATOR WAGONER  commented he  didn't agree with  the PPT  but he                                                               
voted  for it  because  he wanted  a bill.  The  problem here  is                                                               
there's a  2011 review  date. He  asked if  having a  clause like                                                               
that in  a tax bill isn't  more dangerous than changing  from one                                                               
year to the next.                                                                                                               
4:51:19 PM                                                                                                                    
MR. PORTER opined  that industry isn't worried so  much about the                                                               
tax review as the fiscal  stability and long-term fiscal plan. If                                                               
you want  to make a  stable environment,  then figure out  how to                                                               
put a  lot of the surplus  money in the  CBR and pay back  the $5                                                               
billion you owe,  he said. Then you'll begin to  develop a fiscal                                                               
plan that shows you're stable,  conservative and responsible with                                                               
the money  you make in  taxes. Do  that and these  companies will                                                               
drop their  risk factors,  he said.  That's what  they're looking                                                               
SENATOR WAGONER thanked him for the perspective.                                                                                
CHAIR  HUGGINS thanked  the participants,  outlined the  schedule                                                               
for the following day, and adjourned the meeting at 4:53:04 PM.                                                               

Document Name Date/Time Subjects