Legislature(2007 - 2008)BUTROVICH 205

10/25/2007 10:00 AM RESOURCES

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Audio Topic
10:10:30 AM Start
10:19:13 AM SB2001
02:43:34 PM Roundtable
04:15:43 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Time Change --
Heard & Held
Tentative agenda: Continuation/Callbacks
Previous Presenters: Industry and/or
-- Testimony <Invitation Only> --
                SB2001-OIL & GAS TAX AMENDMENTS                                                                             
CHAIR HUGGINS announced the consideration of SB 2001.                                                                           
WAYNE  STEVENS,  President  and  CEO,  Alaska  State  Chamber  of                                                               
Commerce,  Juneau, Alaska,  said the  Chamber is  concerned about                                                               
the   proposed  changes   to  the   recently  enacted   petroleum                                                               
production tax  embodied in ACES.  The Chamber  believes changing                                                               
the  tax  structure  so  quickly  will  have  long-term  negative                                                               
impacts on the future of  Alaska's economy. They also believe the                                                               
consequences  of adopting  ACES  have not  been fully  considered                                                               
with regard to all business in Alaska.                                                                                          
He said  the Chamber  is a  business advocacy  organization whose                                                               
mission  is  to  drive  positive  change  for  Alaska's  business                                                               
environment and to improve its  member organizations by providing                                                               
leadership, advocacy and support.  The State Chamber members have                                                               
a strong  commitment to ethical  business conduct  and understand                                                               
the  legislature's commitment  to ethical  conduct among  elected                                                               
and  public officials.  Because the  legislators have  heard from                                                               
Alaskans' that  their faith  in the current  PPT is  shaken, they                                                               
understand  the desire  to review  it again.  However, they  also                                                               
believe this comes with great risk.                                                                                             
MR. STEVENS  said they urged  caution in the  rush to find  a fix                                                               
for something that  is not broken. The concern is  that while the                                                               
governor and  legislature work to restore  public faith, outcomes                                                               
based more on  emotion than economics will further  chill the oil                                                               
investment climate.                                                                                                             
He said  a second concern is  the stated goal of  generating more                                                               
revenue for the treasury, but  Chamber members fear that Alaskans                                                               
will confuse the  outcome of higher tax revenue with  the goal of                                                               
fair  share. Members  believe tax  debate creates  unwelcome risk                                                               
and stalls  investment planning  and decisions.  Taxes are  a key                                                               
consideration in  all business decisions  and anytime tax  law is                                                               
debated, investments can  be delayed; the wrong tax  rate can end                                                               
all consideration of  investment. He said that  working to induce                                                               
investment  such as  the pipeline  full of  oil at  $80 plus  per                                                               
barrel would generate  more revenue at the current  tax rate than                                                               
would a dwindling quantity of oil at a higher tax rate.                                                                         
Most members of  the Chamber do not understand  the finer details                                                               
of  petroleum  exploration  and   production.  However  they  all                                                               
understand two major  trends in Alaska's oil patch.  Taxes on the                                                               
oil industry have  increased at a rate no  other business segment                                                               
could survive.  But despite billions  of dollars invested  by the                                                               
oil  industry  on the  North  Slope  and Cook  Inlet,  production                                                               
continues to  decline at an  alarming rate. Many have  noted this                                                               
decline  and  think   that  proposing  a  new   increase  to  the                                                               
production tax  is a risky  policy given the desire  to encourage                                                               
increased production.                                                                                                           
He  said  that   a  decade-old  tax  regime  in   Cook  Inlet  is                                                               
encouraging  very limited  investment and  recent investments  on                                                               
the  North Slope  were committed  under  the significantly  lower                                                               
economic  limit  factor  tax  (ELF)  and  historically  high  oil                                                               
prices.  Yet this  exploration activity  pales  in comparison  to                                                               
that taking  place in Canada  and the  Gulf of Mexico.  He stated                                                               
that raising production  taxes in light of  limited investment is                                                               
counter  intuitive.  Instead of  referring  to  fiscal notes  and                                                               
revenue projections,  he urged  them to  set the  policy outcomes                                                               
they desire in the oil patch  and then debate language to achieve                                                               
those outcomes. He suggested: "Adopt  an oil tax regime that will                                                               
generate   reasonable   revenue   for  state   government   while                                                               
encouraging maximum utilization of oil reserves."                                                                               
He said the  State Chamber had advocated for decades  for a state                                                               
fiscal  plan and  willingness  to check  spending.  A clear  plan                                                               
however  is not  guiding spending  or revenue  collection or  the                                                               
question  of how  the state  can invest  new revenue  in projects                                                               
that  will  render a  return  on  investment. Given  today's  oil                                                               
prices, the taxes the ACES proposes  to collect go to revenue for                                                               
a fiscal system  that results in increased spending,  but lacks a                                                               
strategic business plan  for the state. This  policy outcome does                                                               
not warrant worsening the investment environment.                                                                               
He said  the State  Chamber members have  a strong  commitment to                                                               
ethical business conduct and this  includes many members from the                                                               
oil   and   gas  industry.   Given   the   daily  headlines   and                                                               
investigations  their  concern is  that  many  Alaskans now  view                                                               
business  negatively. This  impression is  further fueled  by the                                                               
implication that  the oil and  gas industry has  somehow slighted                                                               
the state  through its accounting  practices. He  encouraged them                                                               
to consider this  dynamic and to avoid  making unfair accusations                                                               
that fuel this distrust.                                                                                                        
He said at  the end of the day differences  of opinions exist and                                                               
reasonable  people   can  disagree.  He  offered   the  Chamber's                                                               
assistance in  boosting the state  tax audit  capabilities saying                                                               
they  are  confident   that  if  industry  can   hire  talent  to                                                               
administer a  wide range  of complex  tax regimes  throughout the                                                               
world, Alaska  can recruit the  best and brightest  to administer                                                               
its single tax  regime. This expertise he said would  be found in                                                               
a  combination  of  state   employees  and  private  contractors.                                                               
Although  they are  concerned with  the proposed  minimum tax  on                                                               
certain fields, they thanked the  legislature for recognizing the                                                               
wisdom  of   a  profits  tax.   He  commented,  "So   many  today                                                               
illogically condemn  petroleum industry profits.  Alaskans should                                                               
cheer since those  profits will allow the same  companies to make                                                               
the world class investments Alaska  needs to monetize our oil and                                                               
10:19:13 AM                                                                                                                   
SENATOR WIELECHOWSKI said  he is glad Mr. Stevens  brought up the                                                               
idea of  profits, because  all the oil  companies have  made huge                                                               
profits. However,  he said, they  are not spending  these profits                                                               
increasingly  in  Alaska, but  rather  giving  it back  to  their                                                               
investors. He wanted to encourage  them to explore in Alaska with                                                               
more of their profits because  there are global shortages of both                                                               
oil and gas. He asked how  the Chamber thinks the producers could                                                               
be encouraged to  develop the fields on the North  Slope that are                                                               
profitable because they are not doing it now.                                                                                   
10:20:49 AM                                                                                                                   
MR. STEVENS  responded that in  looking at  the one line  item of                                                               
billions in  profit, you  lose perspective of  the costs  and how                                                               
they relate to  each other. He thought it was  important to focus                                                               
on  an  overall  balance  sheet  -  the  percentages  of  income,                                                               
expense, assets, liabilities,  equities et cetera -  so that they                                                               
don't stray too far away  from what other industries like banking                                                               
and national retail industries fall under.                                                                                      
He stated  that Alaska  is a significant  shareholder and  on one                                                               
hand it slaps  the industry around and tries to  get more revenue                                                               
from them; yet the managers  of our investment funds - retirement                                                               
funds or  the Permanent  Fund -  if they  didn't reach  a certain                                                               
level of return on investment  from those holds, would be selling                                                               
them off with  vigor because they weren't producing  the kinds of                                                               
returns they want  and that the citizens of Alaska  share in as a                                                               
part of their  dividend. Isolating a single  item or shareholders                                                               
without  acknowledging that  the state  is a  shareholder with  a                                                               
significant  portion  of  its  portfolio   invested  in  the  oil                                                               
industry  is not  the right  thing to  do. However,  the PPT  was                                                               
designed with this premise.                                                                                                     
10:22:56 AM                                                                                                                   
SENATOR WAGONER  said they  have heard over  and over  again that                                                               
Alaska has  the highest oil tax  regime in North America,  but he                                                               
doesn't buy into it. His studies  have shown him that Alberta has                                                               
a 25 percent royalty - 24  percent of which is forgiven until the                                                               
companies recoup  their investment costs  - then it goes  back to                                                               
25 percent -  in addition to other taxes. Alberta  is now looking                                                               
at revamping  its tax  structure and their  head advisor  was Dr.                                                               
Pedro  van  Meurs. They  are  now  looking  at a  three-tier  tax                                                               
structure  for oil,  gas and  oil sands.  The figure  he saw  was                                                               
taxing the  oil sands  at 33 percent  royalty. With  figures like                                                               
that, he didn't  think Alaska was the higher of  the tax regimes.                                                               
Everyone else  in the  world is changing  their tax  structure to                                                               
take what they  see as more of a fair  proportion of the revenues                                                               
from their  resource. He  said he  used to be  a retailer,  so he                                                               
understood  where  the Chamber  was  coming  from, but  he  still                                                               
thinks the state needs to take its equitable portion.                                                                           
10:25:05 AM                                                                                                                   
MR. STEVENS  responded that he  reads a lot of  different numbers                                                               
and depending  on how they are  portrayed, Alaska ends up  in the                                                               
higher end  of comparable  tax regimes.  What doesn't  get talked                                                               
about is the higher cost of  doing business on the North Slope of                                                               
Alaska versus Alberta and the  cost of an 800-mile transportation                                                               
system to get  to tidewater that Alberta or other  Gulf of Mexico                                                               
entities don't have. It is  difficult to compare them with Alaska                                                               
without filling in the complete picture.  He thinks it is good to                                                               
review the tax structure as a  business person would to make sure                                                               
it is right. They need to  keep the pipeline full. It is designed                                                               
for 2.1  million/barrels a day  and it is  only using a  third of                                                               
that capacity with  a 6 to 12 percent annual  decline. It doesn't                                                               
take very long to  work the math down to get  to that point where                                                               
it  is not  feasible to  run the  pipeline. That  window of  time                                                               
diminishing before a  gasline starts that would  increase some of                                                               
that production is "pretty scary."                                                                                              
10:27:30 AM                                                                                                                   
SENATOR WAGONER cautioned:                                                                                                      
     Don't get too  scared about that, because a  lot of the                                                                    
     information being  put out that that  pipeline won't be                                                                    
     operational  at   300,000  barrels/day  is   pure  just                                                                    
     information that is not factual.  Because all they have                                                                    
     to do is change the  mechanical makeup of that pipeline                                                                    
     and  it can  carry 300,000  barrels/day through  chokes                                                                    
     and changes and pumping systems and things like that.                                                                      
He said people in the oil  industry have assured him that that is                                                               
not  a  consideration  at  this  time,  but  it's  being  made  a                                                               
consideration in several presentations.                                                                                         
CHAIR HUGGINS  commented that he  saw it  as their task  to avoid                                                               
seeking the answer to that.                                                                                                     
SENATOR STEVENS summarized Mr. Stevens'  comments that we haven't                                                               
really given  PPT a chance and  we don't really know  the answers                                                               
yet and don't  have the data to decide whether  it's the right or                                                               
wrong approach.  He was saying to  give it a little  more time to                                                               
see if it works or not.                                                                                                         
MR. STEVENS responded that was correct.                                                                                         
10:29:54 AM                                                                                                                   
SENATOR WAGONER offered him a copy of the Alberta proposal.                                                                     
SENATOR STEDMAN said the last  round on the PPT discussions spent                                                               
quite  a bit  of time  comparing  oil basins  and the  difference                                                               
between oil  and gas  and other production.  What we  are dealing                                                               
with is a  natural life-cycle of an oil basin  where it peaks, in                                                               
this  case, at  2 million  barrels/day and  now is  substantially                                                               
below that  at less than 50  percent. What they are  trying to do                                                               
is extend  the lifecycle. He  didn't want  the people at  home to                                                               
think  that if  they create  the magic  combination of  taxes and                                                               
incentives  that would  bring  production back  up  to 2  million                                                               
barrels per day. The odds of  that happening are near zero unless                                                               
they find another Prudhoe Bay.                                                                                                  
MR. STEVENS agreed and added that  the oil industry would like to                                                               
move east  from Prudhoe Bay  where there may be  some opportunity                                                               
for  that, but  it has  restrictions  on it.  Offshore has  other                                                               
restrictions  and other  considerations that  drive up  costs and                                                               
restrict access.  They should  try to strike  that balance  of an                                                               
appropriate  tax structure  that  encourages people  to take  the                                                               
risk.  He remembered  that the  producer at  Milne Point  spent a                                                               
year  exploring and  found  nothing  but a  dry  hole. "Any  good                                                               
business person would try to balance risk and reward."                                                                          
CHAIR HUGGINS said the one thing  he liked about what Alberta has                                                               
done which  Alaska is  not doing  is taking the  time to  come up                                                               
with a solution. This is a  special session and they have only 30                                                               
days. He  said even  the administration had  to contract  with an                                                               
outside contractor  to write the  bill because people  were doing                                                               
other things. Alberta  has a very deliberate process  over a time                                                               
span to  look at the ramifications  of what they are  being asked                                                               
to do. He admonished:                                                                                                           
     Good  for them  and shame  on us,  because we're  doing                                                                    
     just  the opposite.  We're essentially  saying -  bring                                                                    
     those guys to  Juneau, give 'em 30 days and  we want an                                                                    
     answer. My concern  about that is the  validity of what                                                                    
     we do  and the durability  of the results. And  we know                                                                    
     there's going  to be a gas  pipeline proposition that's                                                                    
     going to ask  us to look at gas. And  my concern is the                                                                    
     timeframe  that   we're  being  asked  to   answer  the                                                                    
     questions will  not allow  us to  get to  the questions                                                                    
     that will stand the test of time.                                                                                          
CHAIR HUGGINS said  he is concerned about  the direction Alaska's                                                               
economy is  heading and it  is an understatement to  say Alaska's                                                               
real estate  market is  soft. Agrium with  its 100-plus  jobs has                                                               
closed its  doors, and in  Palmer, the administration  is helping                                                               
Matanuska Maid  to close its  doors. He  knows that Alaska  has a                                                               
power generation  challenge and Enstar has  difficulty in getting                                                               
natural  gas. The  dynamics of  things that  are coming  together                                                               
about the state's economy are  concerning to him along with state                                                               
spending  habits  - whether  they  like  it  or not,  the  Public                                                               
Employees  Retirement system  is looking  for $8  billion to  $10                                                               
billion. He asked Mr. Stevens if  he should be concerned from the                                                               
State Chamber's  perspective or not  because of the  magnitude of                                                               
the assets the state has.                                                                                                       
10:35:23 AM                                                                                                                   
MR. STEVENS responded, "You should  be very concerned." There are                                                               
a number of  very troubling trends. Alaska has  enjoyed a largess                                                               
from a number  of sources like federal funding that  is coming to                                                               
an end in  the near future. Alaska has  tremendous fish, mineral,                                                               
oil and gas resources at its  disposal and at every turn business                                                               
is  thwarted by  those  who  don't want  to  allow  the state  to                                                               
develop them. The  tourist industry seems to be  strong, but that                                                               
can change  at a moment's notice.  He said the state  is facing a                                                               
number of issues  including where its future  employees will come                                                               
from.  People  are  reaching  retirement age,  but  there  is  no                                                               
mechanism to  keep young  people in Alaska  or encourage  them to                                                               
avail themselves of vocational opportunities.  He said Alaska has                                                               
done little about it.                                                                                                           
MR. STEVENS  said there is no  fiscal plan and the  state doesn't                                                               
have a  common goal; it has  created a system that  pays everyone                                                               
to just be here and that  payment is going to increase; yet we're                                                               
not attracting businesses that challenge  us to create an economy                                                               
beyond government and distribution  of common wealth. "And that's                                                               
troubling. That's very troubling."                                                                                              
10:38:58 AM                                                                                                                   
KEN   THOMPSON,  Managing   Director,  Brooks   Range  Petroleum,                                                               
Anchorage  Alaska,  read the  following  testimony  [this is  not                                                               
verbatim, however]:                                                                                                             
     I am  the Managing Director for  Alaska Venture Capital                                                                    
     Group,  or AVCG  LLC,  an  independent oil  exploration                                                                    
     company formed with a sole  focus on the North Slope of                                                                    
     Alaska.  AVCG is a  privately held member LLC comprised                                                                    
     of private  equity investors made up  of 15 independent                                                                    
     oil and  gas companies and individuals  from Kansas and                                                                    
     me as an  owner/member partner from Alaska.  AVCG has a                                                                    
     technical and operational  services' subsidiary company                                                                    
     called Brooks  Range Petroleum, with offices  and staff                                                                    
     in Anchorage.   In  Alaska and on  the North  Slope, we                                                                    
     operate under the name Brooks Range Petroleum.                                                                             
     AVCG has lease holdings  and explores currently only in                                                                    
     Alaska…and  nowhere else.  AVCG/Brooks Range  Petroleum                                                                    
     likes to think of  our company as 'Alaska's Independent                                                                    
     Oil and Gas Company.'                                                                                                      
     AVCG LLC has  been very active in the  past seven North                                                                    
     Slope  areawide lease  sales  and  active in  acquiring                                                                    
     acreage   held  by   other  companies   where  we   see                                                                    
     potential.  We and  our  partners  currently hold  over                                                                    
     300,000   acres   of   exploration   leases   in   five                                                                    
     exploration   prospect   areas   on  the   Slope.   Our                                                                    
     exploration strategy is to explore  in the central part                                                                    
     of the  North Slope for  fields in the  10-100+ million                                                                    
     barrels range,  fields that  may be  too small  for the                                                                    
     giant producers  but satisfy as  niche fields  that can                                                                    
     be  'company  makers'  for   a  small  independent.  We                                                                    
     believe there are hundreds of  millions if not billions                                                                    
     of barrels  of oil left  on the central North  Slope in                                                                    
     smaller  fields of  this  size  for small  independents                                                                    
     like ours  that want to  take this type  of exploration                                                                    
     Last year, AVCG LLC  announced joint venture agreements                                                                    
     with  two Canadian  independents, TG  World Energy  and                                                                    
     Bow  Valley  Energy,  and with  a  private  exploration                                                                    
     company from Houston,  Ramshorn Exploration.  Together,                                                                    
     as  working interest  co-owners  we  are exploring  the                                                                    
     central part of the North Slope.                                                                                           
     In  the  winter  of  2006, AVCG  participated  with  an                                                                    
     ownership  interest  in  the  Cronus  exploration  well                                                                    
     about  10   miles  southwest  of  the   Kuparuk  Field,                                                                    
     operated by  Pioneer Natural  Resources. Unfortunately,                                                                    
     that well was a dry hole.                                                                                                  
     This  past winter  for the  first time,  our operations                                                                    
     subsidiary,  Brooks   Range  Petroleum,   operated  the                                                                    
     drilling  of  two  exploration wells  for  our  working                                                                    
     interest partners in  the Gwydyr Bay area  of the North                                                                    
     Slope,  just northwest  of Prudhoe  Bay. One  well, the                                                                    
     Sak River  #1, was a dry  hole, but we were  excited to                                                                    
     announce earlier this year that  our Northshore #1 well                                                                    
     northwest of the  Prudhoe Bay Field did  strike oil. We                                                                    
     plan to  complete and  test this  well this  winter. In                                                                    
     addition, we  ran a 130-square  mile 3D  seismic survey                                                                    
     over  our acreage  and surrounding  area in  the Gwydyr                                                                    
     Bay  area  on  the  North Slope.  In  total  this  past                                                                    
     drilling  season,  our  JV   Group  invested  over  $44                                                                    
     million on land, seismic and drilling activities.                                                                          
     This winter our  Joint Venture Group will  be among the                                                                    
     most active of  explorers as we plan to  shoot over 200                                                                    
     square  miles  of  new  seismic  data  on  the  extreme                                                                    
     western and  eastern sides of  the Central  North Slope                                                                    
     and to drill up to four  exploration wells.  We plan to                                                                    
     test the Northshore  #1 well and also drill  one or two                                                                    
     other  exploration  wells  nearby  to  see  if  we  can                                                                    
     discover  a  sufficient  volume of  oil  to  warrant  a                                                                    
     commercial  development at  Gywdyr Bay.  We will  drill                                                                    
     our Tofkat #1  well south of the Alpine  Field and also                                                                    
     drill a  fourth exploration  well on  a prospect  to be                                                                    
     named. In total, our group  will spend over $40 million                                                                    
     in seismic and exploratory  drilling in winter 2008. If                                                                    
     our Northshore oil completion test  is as suspected and                                                                    
     one of the  wells strikes oil close by,  we may proceed                                                                    
     with  Northshore  development   with  more  substantial                                                                    
     capital investment in the second half of 2008.                                                                             
     My  comments  today  represent the  perspectives  of  a                                                                    
     small,   independent   exploration  company   that   is                                                                    
     actively  exploring  on the  North  Slope  with a  good                                                                    
     level of activity, generally  on prospects that because                                                                    
     of  smaller   size  no   longer  interests   the  major                                                                    
     companies.  At the  end of  next drilling  season, AVCG                                                                    
     since 1999 and  our partners since last  year will have                                                                    
     jointly  invested  over  $100 million  in  Alaska  even                                                                    
     though none  in our  group have generated  any revenues                                                                    
     yet from  Alaska oil, so we  sincerely appreciate being                                                                    
     listened  to. We  think in  the long  run we  can bring                                                                    
     substantial, incremental value to  the State of Alaska.                                                                    
     Please wish us good luck.                                                                                                  
     Many of you also know me  as the past President of ARCO                                                                    
     Alaska,  Inc.   from  1994-1998.   I  also   served  as                                                                    
     Executive Vice-President  for ARCO  and head  of global                                                                    
     oil   and  gas   exploration  for   ARCO.  I   do  have                                                                    
     exploration  and  production   experience  in  10  U.S.                                                                    
     states and  in over 20 countries  throughout the world,                                                                    
     so  I'll also  share my  perspective in  how I  see the                                                                    
     ACES  bill in  the  context of  competitiveness in  the                                                                    
     United States and in the world.                                                                                            
     General Comments on ACES Legislation                                                                                     
     At  this point,  I would  like to  address various  key                                                                    
     points  in the  ACES  legislation.  First, our  company                                                                    
     prefers that  the PPT be  allowed to run its  course in                                                                    
     the next few years, and  that ACES not be approved with                                                                    
     its  current provisions.  I agree  with  Dr. Pedro  van                                                                    
     Meurs that in the light  of declining oil production in                                                                    
     the  state  of  Alaska and  prospectivity  trending  to                                                                    
     smaller field  sizes, the State  should not  once again                                                                    
     increase its taxes  after having done so last  year.  I                                                                    
     will tell  you that  when recruiting companies  to join                                                                    
     in  our Alaska  ventures in  2005 and  2006, many  were                                                                    
     concerned about the threat of  tax increases in Alaska.                                                                    
     PPT  proved  tax increases  were  not  a threat  but  a                                                                    
     reality.  Adding yet another  tax increase via the ACES                                                                    
     bill  this  year  shows  instability  in  Alaska's  tax                                                                    
     policy  which  results  in uncertainty  and  risk  when                                                                    
     making investment decisions.                                                                                               
     I  heard  that   consultant  Daniel  Johnston  differed                                                                    
     strongly from Dr. van Meurs  and urged the oil industry                                                                    
     to  understand  the  "cloud  of  corruption"  over  the                                                                    
     existing Petroleum  Profits Tax, or PPT,  and that this                                                                    
     alone  provides   a  good  reason  to   change  PPT.  I                                                                    
     challenge Daniel  Johnston that  the bushel  should not                                                                    
     be thrown but because of a few bad apples.                                                                                 
     10:49:31 AM                                                                                                              
     In fact,  last year  during the  PPT debates,  I recall                                                                    
     those who are guilty of  paying bribes and some who are                                                                    
     accused  of  taking  bribes  actually  supported  a  20                                                                    
     percent base tax  rate, not the 22.5  percent base rate                                                                    
     that was finally  adopted.  In fact, I'd  like to think                                                                    
     that the almost all in  the legislature and in industry                                                                    
     were  honest,  that  they could  be  trusted  in  their                                                                    
     deliberations last  year, and that the  final answer of                                                                    
     PPT was a good answer and an honorable answer.                                                                             
     It  is also  very important  to keep  in mind  that the                                                                    
     progressivity  tax  was added  at  high  oil prices  to                                                                    
     drive  the real  tax rate  to even  higher levels  than                                                                    
     22.5  percent, with  a  range  exceeding 30percent  now                                                                    
     possible  at certain  prices. And  let's not  forget to                                                                    
     tack on the royalty, the  corporate tax, the ad valorem                                                                    
     property  tax, and  environmental and  permitting fees.                                                                    
     It appeared to  me that the checks and  balances in the                                                                    
     system  worked  in the  Legislature  last  year, and  I                                                                    
     applaud the honesty  of the legislators who  in the end                                                                    
     made a positive difference.                                                                                                
     But  I   sit  here  feeling   as  if  the   honest  and                                                                    
     trustworthy  investors  in   this  industry  are  being                                                                    
     punished alongside the guilty.  I personally think this                                                                    
     will have negative consequences  for Alaska in the long                                                                    
     haul   in  relationships   and   even  in   sustainable                                                                    
     increased  value. I  am  politically  astute enough  to                                                                    
     know  that  the ACES  train  is  moving fast  down  the                                                                    
     track, so I  can stand out of the way  or jump on board                                                                    
     and try  to make the  ACES bill better before  we reach                                                                    
     derailment in the  long-term relationships between this                                                                    
     industry I love and this State  I love. So, I have some                                                                    
     suggestions  of  things not  to  change  and things  to                                                                    
     change in the ACES proposal.                                                                                               
     10:50:38 AM                                                                                                              
   1) Keep the exploration and development investment tax                                                                     
     credits.  For a  small  explorer  startup company  like                                                                    
     AVCG   LLC,   the   exploration  economics   with   the                                                                    
     exploration tax  credits ranging from 20-40  percent as                                                                    
     provided by PPT  and with ACES are  more favorable with                                                                    
     an  improvement in  the investor's  rate  of return  as                                                                    
        compared with Alaska's old severance tax system.                                                                        
     Near-term  cash  flow  because of  the  investment  tax                                                                    
     credits  is   higher  which  improves  the   return  on                                                                    
     investment. Plus refund of cash  to companies like AVCG                                                                    
     and our working interest  partners via the credits mean                                                                    
     that we can  apply that cash to our  capital budget the                                                                    
     next  year to  run adequate  seismic and  do additional                                                                    
     drilling  that   increases  the  chance  of   more  oil                                                                    
     production and reserves for us and for the State.                                                                          
     Likewise, the credits for losses  for a startup company                                                                    
     like ours while we establish  production - and also the                                                                    
     development  investment credit  - can  take substantial                                                                    
     risk  out of  development  of smaller  fields that  our                                                                    
     company is  focusing on. Many  of these  smaller fields                                                                    
     can   add  up   over  time   and  provide   significant                                                                    
     incremental revenue to the State.                                                                                          
     10:52:31 AM                                                                                                              
   2) Keep the standard tax deduction/exemption for smaller                                                                   
     companies. The  small producer  tax credit  that exempts                                                                 
     up  to the  first  $12,000,000 in  production taxes  for                                                                   
     smaller companies can allow us  to return a larger share                                                                   
     of our  annual cash flow for  exploration and investment                                                                   
     while  we  build  the  company to  a  critical  mass  of                                                                   
     reserves  and production  necessary  to expand  staffing                                                                   
     and have a routine level  of major capital spending each                                                                   
10:54:46 AM                                                                                                                   
   3) Keep the new ACES tax credit allowance for qualified                                                                    
     delineation wells. A new proposal  in the ACES bill that                                                                 
     was  not in  the  PPT  law is  the  possible tax  credit                                                                   
     allowance for  the investment in  up to  two delineation                                                                   
     wells following a discovery. This  would be very helpful                                                                   
     to small  explorers as  well as  for large  companies on                                                                   
     the North  Slope where often  one well is not  enough to                                                                   
     determine  if  field size  is  large  enough to  warrant                                                                   
     A  real  case  in  point  is  that  should  we  have  a                                                                    
     discovery this coming winter  at our Tofkat exploration                                                                    
     well on the western side of  the Slope, we will have to                                                                    
     drill one or two delineation  wells to confirm if field                                                                    
     size  is sufficient  to develop  the  resource at  this                                                                    
     remote  location. Often,  due  to the  nature of  these                                                                    
     complex stratigraphic  traps where  sands unpredictably                                                                    
     come and  go, the  delineation wells  can be  almost as                                                                    
     risky as the initial  exploration well. Having a credit                                                                    
     where the  State, in  a real sense,  is sharing  in the                                                                    
     risk  will -  I  think -  expedite  delineation of  new                                                                    
     fields and advance development for revenues.                                                                               
   4) Keep the revised progressivity tax rate at 0.2 percent                                                                  
     per dollar increase  in oil price. The PPT  tax law had                                                                  
     an  incremental  tax  rate of  0.25  percent  per  each                                                                    
     dollar  increase in  oil price  above  a trigger  price                                                                    
     while the  new ACES  reduces this incremental  tax rate                                                                    
     to 0.2  percent per dollar  increase in oil price  at a                                                                    
     trigger price.  While we  can debate  all day  long the                                                                    
     competitiveness  of   Alaska's  tax  rate   with  other                                                                    
     countries'  fiscal systems,  giving  some reduction  in                                                                    
     this  surcharge  keeps  the  government  take  at  more                                                                    
     reasonable levels.   However, as I'll  outline below, I                                                                    
     would change  the ACES  trigger price  back to  $40 per                                                                    
     barrel net and  not the proposed $30 per  barrel net if                                                                    
     Alaska wants  to better balance revenues  with industry                                                                    
     capital  investment at  low prices  as I'll  more fully                                                                    
   5) Do establish the Oil and Gas Tax Credit Fund for the                                                                  
     purposes  of   purchasing  certain  tax   credits  from                                                                    
     explorers  and  producers.  This ACES  provision  would                                                                    
     establish  a procedure  and standard  for appropriation                                                                    
     into this  fund and management  of this fund.  Having a                                                                    
     clear  and  transparent  way  for  small  explorers  to                                                                    
     receive  their  credits  at  full  value  is  extremely                                                                    
     important  for  AVCG to  then  be  able to  plow  those                                                                    
     credits back into seismic and  exploration on the North                                                                    
     10:56:53 AM                                                                                                              
   6) Change the recovery of tax credits from two years as                                                                    
     proposed in  ACES back  to the  recovery of  credits in                                                                    
     one year currently provided for  in the PPT law. In the                                                                  
     PPT law, a company could  file for the various credits,                                                                    
     and  if  approved,  would receive  those  full  capital                                                                    
     credits  not  to  exceed credits  of  $25  million  per                                                                    
     company. In  the new ACES  law, while the cap  has been                                                                    
     removed  which  is  very   positive,  the  credits  are                                                                    
     refunded over two  years instead of over  one year; for                                                                    
     example,  50  percent  of   qualified  credits  can  be                                                                    
     applied for in the first  year once a well is completed                                                                    
     or abandoned and 50percent in the following year.                                                                        
     10:58:48 AM                                                                                                              
     For  a small  company like  ours, this  will definitely                                                                    
     affect our  capital spending  in a  given winter  as we                                                                    
     plow  all  the  credit  refunds back  into  seismic  or                                                                    
     exploration drilling. As a very  real example, AVCG and                                                                    
     our  working interest  owners are  projecting to  spend                                                                    
     $41 million  in seismic  and exploration  drilling this                                                                    
     coming winter and  likely around the same in  2009.  We                                                                    
     calculate  that we  could receive  $16 million  cash in                                                                    
     qualified  credits in  mid-year  2008. So  essentially,                                                                    
     our  working interest  owners are  planning to  provide                                                                    
     cash  out  of  pocket  of  $25  million  for  the  2009                                                                    
     drilling season; this  is a fixed number  based on cash                                                                    
     availability in  these small companies to  spend toward                                                                    
     the Alaska  portfolio. If the  State refunds  only one-                                                                    
     half  of this  credit in  the  first year,  or only  $8                                                                    
     million instead  of $16 million, AVCG  and our partners                                                                    
     will still  provide $25 million  out of our  pockets as                                                                    
     now planned  and budgeted…meaning our  overall spending                                                                    
     in 2009 will be $33  million, not $41 million, i.e. $25                                                                    
     million  from our  available funds  and only  $8MM from                                                                    
     the State.  This would mean  one less well that will be                                                                    
     drilled by our  group in 2009. And one  less chance for                                                                    
     another   discovery  that   eventually  could   provide                                                                    
     revenues to us all.                                                                                                        
11:00:46 AM                                                                                                                   
     With small  companies, this  is just  the way  our cash                                                                    
     flow  situation  works.  And   for  some  of  our  AVCG                                                                    
     investors like me,  when I say "out of  pocket," I mean                                                                    
     "out of  pocket." So,  we hope the  full credit  can be                                                                    
     applied  for and  refunded in  a given  year.   We hope                                                                    
     this  happens for  all of  industry.  As an  innovative                                                                    
     compromise,  however, the  legislature  may consider  a                                                                    
     small   company  refund   provision  that   allows  for                                                                    
     companies   that  meet   the  no   production  or   low                                                                    
     production  measures in  the small  company tax  credit                                                                    
     provision of  the PPT law -  that remains in ACES  - to                                                                    
     receive tax  credit refunds that are  fully refunded in                                                                    
     the first  year for  qualified costs.   Once  a company                                                                    
     grows  in   production  beyond  this   'small  company'                                                                    
     measure  with  more   substantial  cash  flow,  perhaps                                                                    
     refunds of 50percent each year  would apply as outlined                                                                    
     in ACES.                                                                                                                 
11:02:58 AM                                                                                                                   
SENATOR WAGONER asked if those  credits only apply to the smaller                                                               
explorer  and not  much  to  the majors,  because  they have  the                                                               
production  to write  it off  against -  including Chevron.  When                                                               
they  are talking  about purchasing  back the  credits, they  are                                                               
only talking about  the smaller producers. Instead  of being more                                                               
complicated, it would  be simpler for the state to  just buy them                                                               
back at 100 percent, because that's what it would pay anyway.                                                                   
MR. THOMPSON replied  that would help for  Brooks particularly if                                                               
it were in one year instead  of two, because that is capital that                                                               
is put back  into the business. For his size  program, that would                                                               
mean  one  more  well  he  could drill  in  every  winter.  Major                                                               
producers  can deduct  the credits  off their  tax bill  and this                                                               
would affect their capital profile,  but it's just less cash flow                                                               
for them.                                                                                                                       
MR. THOMPSON continued reading his comments on the PPT tax rate:                                                                
11:04:43 AM                                                                                                                   
     Change the base  tax rate in ACES from  25 percent back                                                                    
     to  the PPT  tax rate  of 22.5  percent, and  re-review                                                                    
     again in  2011 after  some time  has passed  as allowed                                                                    
     for in current law. As  I mentioned in my introduction,                                                                  
     I felt the  22.5 percent base tax  rate was reasonable.                                                                    
     And  the real  tax rate  is  much higher  with the  tax                                                                    
     progressivity  factor.  But  what   is  fair,  and  how                                                                    
     exactly is 'fair' determined?                                                                                              
     I  saw  a  copy  of a  presentation  entitled  'Guiding                                                                    
     Principles  For A  New Production  Tax  System' by  the                                                                    
     Department  of  Revenue  urging the  changes  in  ACES,                                                                    
     arguing  that the  average government  take in  various                                                                    
     international  countries averaged  67  percent for  all                                                                    
     types of  fiscal regimes. So  that the  ACES government                                                                    
     take,  at  an  oil  price  of  $60/barrel  net,  is  68                                                                    
     percent. So these principles argued  that that was fair                                                                    
     for Alaska  to take  68 percent when  the international                                                                    
     average  is  67.  Somehow, the  Department  of  Revenue                                                                    
     representatives concluded  an average of 68  percent as                                                                    
     provided for in  ACES would be close to  the average of                                                                    
     67 percent for all types of regimes internationally.                                                                       
11:06:45 AM                                                                                                                   
     On  that  same slide  show  the  DOR broke  the  fiscal                                                                    
     regimes into  two types: production  sharing agreements                                                                    
     where the  government take averages 74  percent, but in                                                                    
     tax  and  royalty  regimes  like  Alaska's,  for  those                                                                    
     international   companies  that   had  tax   a  royalty                                                                    
     regimes, the  average take was  55 percent as  shown by                                                                    
     the DOR.                                                                                                                   
11:07:27 AM                                                                                                                   
     First,  the  average  recommended   to  Alaska  is  the                                                                    
     average  of   all  regimes,   i.e.  the   averaging  of                                                                    
     government take  from tax and royalty  regime countries                                                                    
     and government  take from production  sharing agreement                                                                    
     (PSA) regimes.                                                                                                             
     In the years  I was with Arco and I  managed a research                                                                    
     center and worked  in 20 countries or so  and also when                                                                    
     I was  executive vice president  and also in  charge of                                                                    
     global exploration  working in  over 20  countries, I'm                                                                    
     very  familiar  with   different  types  of  production                                                                    
     sharing  regimes, and  actually  the  risk profile  for                                                                    
     capital development  was often  much different  than in                                                                    
     regimes that use a tax  and royalty system like Alaska.                                                                    
     In some  of the  PSA countries where  I worked,  it was                                                                    
     not unusual for a producer  on capital projects to have                                                                    
     a  very  low  initial  tax  burden  until  the  capital                                                                    
     investment was fully recovered  plus a negotiated rate-                                                                    
     of-return was  achieved. So we would  literally get all                                                                    
     of our money back up front,  pay out was often only two                                                                    
     or three  years, unlike Alaska being  4 or 5 or  more -                                                                    
     in terms of payout. We'd  get our capital back and we'd                                                                    
     get  a  preferred  return. Then  the  government  would                                                                    
     increase the  take to  the 74  percent. I'll  take that                                                                    
     deal any time.                                                                                                             
11:08:55 AM                                                                                                                   
SENATOR WIELECHOWSKI asked what the general negotiated rate of                                                                  
return was.                                                                                                                     
MR. THOMPSON replied that it would differ by whatever a company                                                                 
could negotiate. A major corporation would calculate its cost of                                                                
capital based  on how much  the debt would  cost and the  cost of                                                               
issuing it  and maintenance of  equity. That might be  an average                                                               
of 8  to 10 percent. Investors  that hold stock want  more return                                                               
than that  from you because  otherwise they could just  invest in                                                               
the  market. So  often  the rate  of  return might  be  12 to  15                                                               
percent  above  the  weighted  average   cost  of  capital.  Some                                                               
companies,  like exploration  ventures with  higher risks,  often                                                               
were  successful in  negotiating  a better  preferred return  and                                                               
sometimes for  those kinds  of interest  that might  be 15  to 20                                                               
percent after  all taxes  and burden. Once  your capital  is paid                                                               
back and  you have your preferred  return, then the high  take of                                                               
74 percent was taken. He further stated:                                                                                        
     I  don't feel  what ACES  does to  me is  equitable and                                                                    
     fair because  it's averaging in those  types of regimes                                                                    
     that pay back  the capital and get a  return along with                                                                    
     the   tax  and   royalty.   And  again,   international                                                                    
     countries  shown by  the Department  of Revenue  on the                                                                    
     Governor's website  for a tax royalty  regime, the take                                                                    
     is  55 percent.  And ACES  says 68  for a  similar type                                                                    
SENATOR WIELECHOWSKI said he was  intrigued by the profit sharing                                                               
concept.  He asked  how investors  would think  if the  state had                                                               
more of  that type of system  - it maximizes investments  and the                                                               
take for  the government,  because it  assesses each  field. Both                                                               
sides  negotiate so  both sides  know they  are making  money. He                                                               
asked, "Why don't  more developed nations do that  and would that                                                               
be something  that would be  acceptable to  do in Alaska,  do you                                                               
11:12:16 AM                                                                                                                   
MR. THOMPSON  replied one of  the things that makes  it difficult                                                               
for  Alaska to  switch  to purely  that type  of  system is  when                                                               
you're getting the capital paid  back and the preferred return of                                                               
12 to  15 percent, the government  take is very low  - maybe only                                                               
10 or  15 percent (not  the 68 percent).  So if Alaska  wanted to                                                               
immediately  switch  to  that  system,  which  he  thought  would                                                               
generate a lot more investment than  either ACES or PPT, it would                                                               
take a few years  for it to work out and they  would have to fund                                                               
government from other sources like the Permanent Fund.                                                                          
11:13:27 AM                                                                                                                   
SENATOR WAGONER  said the state already  has the ability to  do a                                                               
reduction in royalties  - like Alberta does with the  oil sands -                                                               
until the  companies recoup their  capital investment,  and asked                                                               
if that would be doing the same thing.                                                                                          
MR. THOMPSON  replied that could  be a compromise. He  thought if                                                               
Alaska switched  to the  other system it  would get  more capital                                                               
projects  going, but  the problem  is that  the state  would have                                                               
less  revenues for  a few  years. For  small fields  like his  it                                                               
would make an impact.                                                                                                           
11:15:16 AM                                                                                                                   
SENATOR  STEDMAN recalled  the previous  discussions on  PPT that                                                               
covered the  American tax and royalty  regime and outside-America                                                               
profit sharing  and rate  of return scenarios.  He urged  them to                                                               
focus on  the system at hand  unless they wanted to  spend a year                                                               
here in  committee working  on something else.  He said  they are                                                               
working on refining  the PPT and he  personally wasn't interested                                                               
in going back and starting  over. They are talking about changing                                                               
the government take number.                                                                                                     
CHAIR  HUGGINS said  he  concurs  and he  asked  Mr. Thompson  to                                                               
proceed. He asked  if Mr. Thompson does something  in spruce bark                                                               
beetle work.                                                                                                                    
MR. THOMPSON replied he is a  drummer in a band called the Spruce                                                               
Bark Beetles  and quipped  that he  does it  on the  side pending                                                               
revenue  from new  discoveries. He  went back  to the  subject at                                                               
hand and  said it  is hard  for Alaska to  change to  a different                                                               
system. It should  compare to other countries, not  lumped into a                                                               
unique  world  of  production  sharing  agreements  with  special                                                               
arrangements made  for capital  payback and  return up  front. He                                                               
     Another distinction in regards to  ACES is that most of                                                                    
     the   individual    people   and    company   investors                                                                    
     specifically  in  AVCG  do not  consider  international                                                                    
     regimes  as  areas  to   consider  as  competition  for                                                                    
     investment  dollars with  Alaska. The  main competition                                                                    
     for most  AVCG Owners' cash  is in other states  in the                                                                    
     U.S.  I found  it  astounding and  concerning that  the                                                                    
     average  of 67  percent for  all international  regimes                                                                    
     did  not consider  weight-averaging  in  a little  more                                                                    
     strongly  the  major   American  producing  states.  As                                                                    
     examples, the  current government  take in the  Gulf of                                                                    
     Mexico offshore -  one of the main  competing areas for                                                                    
     Alaska investment  dollars - averages 45  percent. This                                                                    
     is  under  consideration  by the  U.S.  government  for                                                                    
     increase,  but  it is  highly  doubtful  with the  boom                                                                    
     going  on in  deep  water  exploration and  development                                                                    
     that the U.S. government  would increase the government                                                                    
     take from  45 percent to  ACES' 68 percent.  Although I                                                                    
     think the government will increase the 45 percent.                                                                         
     11:18:57 AM                                                                                                              
     Now let me give you  some astounding figures as of this                                                                    
     week.  Yesterday we  participated  in  the North  Slope                                                                    
     area wide all acreage held by  the state - on the North                                                                    
     Slope was  up for bid  - anything not yet  taken. There                                                                    
     were a lot of bids and  his company won six tracts. The                                                                    
     total of all bids is  a little over $2 million. October                                                                    
     3, just  a few  days ago,  at the  Gulf of  Mexico sale                                                                    
     205, and that was just one  area of the Gulf of Mexico,                                                                    
     the bids  were $2.9  billion -  45 percent  tax burden.                                                                    
     The State of  Alaska right now is going  to 68 percent?                                                                    
     The bids were $2 million!                                                                                                  
11:20:01 AM                                                                                                                   
SENATOR WAGONER asked what would be the government take if Shell                                                                
is allowed to proceed and strikes oil on their leases in federal                                                                
water on the North Slope.                                                                                                       
MR. THOMPSON said  those are federal leases and he  didn't bid on                                                               
those. Most  federal leases have  a 12.5 or 16.7  percent royalty                                                               
and other federal taxation. It  may trend slightly higher than 45                                                               
percent with the higher royalty.                                                                                                
11:21:07 AM                                                                                                                   
MR. THOMPSON continued:                                                                                                         
     In other  producing states that compete  for investment                                                                    
     by our  AVCG investors, the state  and federal combined                                                                    
     government takes  in 2006 were as  follows and averaged                                                                    
     45-57 percent:                                                                                                             
     U.S. Gulf of Mexico           45 percent                                                                                   
     Colorado                      51 percent                                                                                   
     Wyoming                       52 percent                                                                                   
     Kansas                        53 percent                                                                                   
     Texas                         53 percent                                                                                   
     New Mexico                    53 percent                                                                                   
     Oklahoma                      53 percent                                                                                   
     California                    53 percent                                                                                   
     Louisiana                     57 percent                                                                                   
     To my  knowledge, these  states do  not have  the added                                                                    
     progressivity  surcharge tax,  which further  separates                                                                    
     Alaska in government take  from these competing states.                                                                    
     I  would argue  that  Alaska should  have a  government                                                                    
     take    of   55    percent   to    maintain   long-term                                                                    
     competitiveness with these  other states for investment                                                                    
     dollars.  Having said  that, some  of these  states are                                                                    
     examining their  own tax structures and  the Department                                                                    
     of  Revenue was  to have  obtained current  figures for                                                                    
     2007 for  these states as  some have changed  their tax                                                                    
     rates. That would be good  for the committee to look at                                                                    
     when that's available.  But I don't think  it'll be the                                                                    
     68 percent  of ACES. In  fact if  we were to  just step                                                                    
     back  a  bit  and  look  at  tax  and  royalty  regimes                                                                    
     internationally, have a government  take of 55 percent,                                                                    
     the  Gulf of  Mexico is  45 -  headed upwards  some and                                                                    
     then these other  states average in the  50s, if Alaska                                                                    
     set a government  take at 60 percent and  40 percent to                                                                    
     the investor,  the ACES  legislation should  be amended                                                                    
     to allow  for a base tax  rate of 22.5 percent,  not 25                                                                    
     percent,  should  be amended  to  allow  for a  trigger                                                                    
     price  of $40  per barrel  and  not $30,  and then  the                                                                    
     incremental progressivity  tax rate increase  should be                                                                    
     0.2 percent  per dollar.  I calculated  that by  hand -                                                                    
     that the state yield would  be 60 percent take and that                                                                    
     can be  verified by  having the DOR  run some  of their                                                                    
     models for those examples that I gave.                                                                                     
     I  think  the  60  percent would  be  competitive  with                                                                    
     states; it  would increase above  PPT slightly,  but it                                                                    
     would also  be something  that doesn't  stop investment                                                                    
     when people look  at things like the Gulf  of Mexico or                                                                    
     even  federal  waters  offshore Alaska  for  investment                                                                    
11:23:33 AM                                                                                                                   
SENATOR WAGONER asked what if the tax rate went to 25 percent on                                                                
both sides - tax and credits.                                                                                                   
MR. THOMPSON answered that wouldn't be as competitive as some of                                                                
these other total take tax burdens, but it could be looked at                                                                   
with the new data DOR will collect.                                                                                             
11:24:26 AM                                                                                                                   
MR. THOMPSON said his final two points were on changing the                                                                     
trigger price to $40 per barrel:                                                                                                
     In particular  there, if oil  prices fall, many  of the                                                                    
     small  and  medium  size fields  that  our  company  is                                                                    
     looking at  simply would not  pass muster below  $40 if                                                                    
     we did have  the higher tax rate.  And hopefully prices                                                                    
     do  not  fall  that  low,  but  it  would  make  a  big                                                                    
     difference  if  the trigger  was  $40  instead of  $30.                                                                    
     There is  a whole  other wedge  of smaller  fields that                                                                    
     could be brought  on stream, we think,  if that trigger                                                                    
     price is left at the more reasonable $40 net.                                                                              
     Then my final  point 4 on the last page  of my comments                                                                    
     is it would  be great if the state in  my opinion could                                                                    
     consider   some   type  of   "Transitional   Investment                                                                    
     Expenditure (TIE)" tax credit.  This provision that was                                                                    
     in  PPT  was repealed  in  ACES.  And this  benefit  or                                                                    
     provision does  not greatly benefit our  company, AVCG,                                                                    
     because we  did not  have large seismic  or exploration                                                                    
     drilling  costs between  March 31,  2001, and  April 1,                                                                    
     2006.  In  fact most  of  our  drilling was  this  last                                                                    
     winter  in 2007,  but it  is important  to other  major                                                                    
     investors in Alaska.                                                                                                       
     As an  example, the  largest explorer and  developer in                                                                    
     Alaska,  ConocoPhillips,  now  with the  ARCO  heritage                                                                    
     assets,  was  hardest  hit in  tax  exposure  with  the                                                                    
     change from  the old severance  tax law to the  PPT and                                                                    
     now once  again to ACES.  I think just allowing  a good                                                                    
     steward  who is  the  largest explorer  in Alaska  some                                                                    
     transition  allowance  to  ease  the  pain  of  greatly                                                                    
     increased taxes is  the right thing to do  and can only                                                                    
     build better, more  trusting relationships. Again, this                                                                    
     provision  does   not  greatly  benefit   our  company,                                                                    
     This  concludes  my  remarks.  I  tried  to  share  the                                                                    
     perspective of an  independent exploration company that                                                                    
     only invests in Alaska.  My  ultimate wish would be for                                                                    
     the state  to leave  PPT alone  and re-review  it under                                                                    
     the law  as planned  in 2011 or  perhaps even  in 2010.                                                                    
     But if the  ACES train has left the  station and cannot                                                                    
     be stopped,  I urge you  to at least consider  the five                                                                    
     things our  company would not  change in this  bill and                                                                    
     the four things we would change.                                                                                           
     The above comments  are offered with a  hope that there                                                                    
     can  be an  eventual win-win  solution to  this complex                                                                    
     subject of the State  realizing more revenues at higher                                                                    
     prices  while  attracting exploration  and  development                                                                    
     investors who can also realize  upside at higher prices                                                                    
     for the substantial risk they  have taken in the remote                                                                    
     and harsh environment  of the North Slope.  In the end,                                                                    
     I hope  both sides  get a fair  and equitable  share at                                                                    
     all price levels.                                                                                                          
11:28:03 AM                                                                                                                   
SENATOR WAGONER  asked the feasibility  of a company his  size or                                                               
bigger  exploring and  producing  a  field of  25  million or  50                                                               
million barrels when it's marginal. He asked:                                                                                   
     What effect on a marginal  field will the upcoming TAPS                                                                    
     settlement have  in the tax  tariff case  that's before                                                                    
     FERC?  Would  that  have  a  positive  effect  on  your                                                                    
     ability  to  go out  there  and  produce one  of  those                                                                    
     fields that are marginal right now?                                                                                        
MR. THOMPSON replied that the  TAPS tariff increase that happened                                                               
last year was the largest increase  of burden of any type that he                                                               
faces  as a  smaller  explorer  to ship  oil  down  the line.  He                                                               
     We have no  interest in that line. We  have no interest                                                                    
     in the  tankers or refining  profits on the  other end.                                                                    
     So  we feel  the full  brunt in  that that  TAPS tariff                                                                    
     somehow could  be reduced would be  very significant in                                                                    
     developing marginal fields.                                                                                                
Having worked  for years at  ARCO, Mr.  Thompson said he  saw the                                                               
thing  that  most  lowers  the  tax tariff  per  barrel  is  more                                                               
production  in oil  down  the  line. So,  whatever  ACES does  to                                                               
encourage  investment   in  exploration  or  allow   fairness  in                                                               
development projects increases  the chances of more  oil down the                                                               
line.  And that's  fewer  tariffs per  barrel  on everybody.  His                                                               
company  is  not involved  heavily  in  the settlement,  but  the                                                               
increase last year was very discouraging.                                                                                       
11:30:10 AM                                                                                                                   
SENATOR WIELECHOWSKI  asked what impact  he saw on  people coming                                                               
back  to Alaska  to  look  for gas  if  a  gasline contract  goes                                                               
MR.  THOMPSON  replied  that  they would  most  likely  see  more                                                               
activity in  the foothills area  of the North Slope.  The largest                                                               
reserves  would  be the  existing  reserves  at Prudhoe  and  Pt.                                                               
Thomson. Companies  have been taking  position over the  last few                                                               
years hoping that  the gasline deal moves ahead.  ARCO felt there                                                               
was some  significant gas potential  in other interior  basins in                                                               
Alaska - a  couple hundred miles from Fairbanks,  for example. He                                                               
hoped there would be more  exploration in some interior basins as                                                               
well.  He  also pointed  out  that  smaller  fields can  be  more                                                               
economic when they have two revenue  streams - gas as well as the                                                               
oil. He  hopes a good  contract is turned  in and that  the state                                                               
moves ahead with it.                                                                                                            
SENATOR STEDMAN said they were talking about the Nenana basin.                                                                  
SENATOR WIELECHOWSKI  stated that  they should consider  that the                                                               
state is  likely to see  a significant amount more  of investment                                                               
and exploration in Alaska with  an impending gasline contract and                                                               
when they  are thinking  about loading  up investment  credit and                                                               
tax breaks,  there's probably going  to be a surge  of investment                                                               
coming in anyway.                                                                                                               
11:33:06 AM                                                                                                                   
MR. THOMPSON  responded that  he has worked  big oil  and natural                                                               
gas projects all over the world.  At the time Arco merged with BP                                                               
in 2000, it was the third  largest holder of natural gas reserves                                                               
in the  Pacific Rim  Basin. If  Alaska does  things right  on the                                                               
investment tax credits on  encouraging additional oil exploration                                                               
not only on state lands, but  also offshore in federal waters and                                                               
the NPRA, there are still a  lot of big oil fields and production                                                               
to  come. He  thought  that would  start up  much  sooner than  a                                                               
gasline. "In my view, you need them both."                                                                                      
11:35:03 AM recess 11:42:27 AM                                                                                              
CRAIG HAYMES,  Production Manager, ExxonMobil  Alaska, Anchorage,                                                               
Alaska, read the following statement:                                                                                           
     Good morning. For the record,  my name is Craig Haymes.                                                                    
     I am  the Production Manager for  ExxonMobil in Alaska,                                                                    
     a position I  have held since January 2007.  I have the                                                                    
     pleasure of  living in Anchorage with  my family. Prior                                                                    
     to January  this year  I was  involved with  Arctic oil                                                                    
     and  gas  projects on  the  East  coast of  Canada  for                                                                    
     almost five  years. I want  to thank the  committee for                                                                    
     the  opportunity to  express  ExxonMobil's views  today                                                                    
     regarding the Administration's proposed tax increase.                                                                      
     Let me  state upfront  ExxonMobil believes  the current                                                                    
     PPT  tax   rate  and  the  increase   proposed  by  the                                                                    
     Administration will have a  negative impact on resource                                                                    
     investments in Alaska. ExxonMobil  does not support the                                                                    
     proposed tax increase by the Administration.                                                                               
     We believe  that Alaska needs  to focus on  a long-term                                                                    
     resource   development   policy.  The   policy   should                                                                    
     encourage  increasing  investment  that  is  needed  to                                                                    
     maximize   the  development   of  Alaska's   resources.                                                                    
     Alaska is rich in  undiscovered resource potential, yet                                                                    
     oil  production   continues  to  decline   from  mature                                                                    
     basins.  Oil production today  is one third of the peak                                                                    
     of  over 2  million  barrels per  day  in 1988.  Alaska                                                                    
     faces a  significant challenge. We  have a  common goal                                                                    
     to maximize  economic resource development and  need to                                                                    
     work together; Government, industry,  and the people of                                                                    
     Alaska,  to enhance  the development  of Alaska's  rich                                                                    
     resources and the future.                                                                                                  
     EXXONMOBIL IN ALASKA                                                                                                   
     ExxonMobil  invests  all over  the  world  to meet  the                                                                    
     growing  need for  energy. Over  the last  20 years  we                                                                    
     have invested  close to $280 billion  dollars to search                                                                    
     for  new  supplies  of  energy,  build  new  production                                                                    
     facilities,  expand refinery  capacity and  deploy new,                                                                    
     environmentally sound technologies.                                                                                        
     ExxonMobil  believes technology  innovation is  the key                                                                    
     to meeting  the world  and Alaska's  energy challenges.                                                                    
     Technology   is   the   lifeblood  of   our   industry.                                                                    
     ExxonMobil  currently spends  close to  $1 billion  per                                                                    
     year on  research and technology. We  have consistently                                                                    
     applied our technology in Alaska  to unlock and develop                                                                    
     resources.  We   have  significant   arctic  experience                                                                    
     around the world.                                                                                                          
     Some examples  of technology applications that  we have                                                                    
     contributed to Alaska are:                                                                                                 
   · The installation of the ice resistant Granite Point                                                                        
     platform in Cook Inlet, which is still producing oil                                                                       
   · Significant research and engineering for the Prudhoe                                                                       
     Bay completion designs for permafrost                                                                                      
   · The installation of the first Concrete Island Drilling                                                                     
     System  (CIDS)  to  drill   exploration  wells  in  ice                                                                    
     covered waters in the Alaska Beaufort Sea                                                                                  
   · The first full-field 3-D simulation model of Prudhoe                                                                       
     Bay,  leading   to  many  enhanced  oil   recovery  and                                                                    
     development  drilling  programs  that are  still  being                                                                    
     pursued today                                                                                                              
     The  application of  technology will  continue to  be a                                                                    
     key to the future of Alaska's resource developments.                                                                       
     ExxonMobil has  had a  presence in  Alaska for  over 50                                                                    
     years  and  has  been  a key  player  in  Alaska's  oil                                                                    
     industry development,  spending and investing  over $20                                                                    
     billion dollars.  We hold the largest  working interest                                                                    
     at Prudhoe  Bay (36.4 percent) and  our current working                                                                    
     interest  share  of  oil production  in  the  state  is                                                                    
     approximately 150,000 barrels per  day. We are also the                                                                    
     largest owner of discovered Alaska gas resource.                                                                           
     We are  currently active with our  co-owners at Prudhoe                                                                    
     Bay,  Kuparuk, Duck  Island,  Granite  Point and  Point                                                                    
     Thomson. Over  the last two years  we have participated                                                                    
     in the drilling of over 70  percent of the wells on the                                                                    
     North Slope  - over 130  wells were drilled  at Prudhoe                                                                    
     Bay alone  - this drilling  will add 50,000 B/D  of oil                                                                    
     production in  2007, an important contribution  to help                                                                    
     mitigate production decline.                                                                                               
     We are  proud of the  role that our company  has played                                                                    
     in  Alaska, which  we believe  has  benefited both  the                                                                    
     State and the industry, and  we look forward to working                                                                    
     with Alaska for many years to come.                                                                                        
     ALASKA RESOURCE POTENTIAL IS SIGNIFICANT                                                                               
     I would like to take  a few moments to discuss Alaska's                                                                    
     resource opportunities. Alaska  has significant oil and                                                                    
     gas resources.  According to  the US  Geological Survey                                                                    
     and  the  US   Minerals  Management  Service,  Alaska's                                                                    
     undiscovered technically  recoverable resources  are 53                                                                    
     billion  barrels of  oil. This  is in  addition to  the                                                                    
     Department  of  Natural  Resources estimate  for  known                                                                    
     remaining oil  resources of 6 billion  barrels. To date                                                                    
     Alaska has produced close to  17 billion barrels of oil                                                                    
     - this is  a world class result - but  is less than one                                                                    
     fourth of  the potential  total of 76  billion barrels.                                                                    
     That  is, Alaska  still has  the  potential to  produce                                                                    
     another  59 billion  barrels of  oil. The  gas resource                                                                    
     potential  almost doubles  this undiscovered  potential                                                                    
     on an oil equivalent basis.                                                                                                
     Whilst  Alaska's resource  potential is  high, the  Oil                                                                    
     and Gas  Journal and Energy  Information Administration                                                                    
     report that  its world ranking  of proved  reserves has                                                                    
     declined from 14   in 1977 to a position closer  to 30                                                                     
     ALASKA's FUTURE OIL PRODUCTION                                                                                         
     Today   Alaska  is   producing  approximately   750,000                                                                    
     barrels of oil per day  from the North Slope, one third                                                                    
     of  its peak  production. The  Department of  Revenue's                                                                    
     production outlook,  from their Spring  Revenue Sources                                                                    
     Book,  shows  that  they  estimate  a  9percent  annual                                                                    
     decline  in Alaska's  current base  production. As  the                                                                    
     chart illustrates, at this decline  rate, over the next                                                                    
     ten years  Alaska's current  base production,  shown in                                                                    
     green,  will drop  to around  360,000 barrels  per day.                                                                    
     That  is  a  production  level of  less  than  half  of                                                                    
     The  Department of  Revenue  also  forecasts that  this                                                                    
     base  production decline  will  be partially  mitigated                                                                    
     with  the   development  and   production  of   oil  in                                                                    
     categories   called   "Under  Development   and   Under                                                                    
     Evaluation",  shown   in  blue  on  the   chart.  These                                                                    
     categories   include   future  investments,   such   as                                                                    
     development   drilling,  satellite   developments,  and                                                                    
     enhanced oil  recovery from  existing fields.  Based on                                                                    
     this  forecast, over  50percent  of  the projected  oil                                                                    
     production in 10 years will  come from new investments.                                                                    
     Let  me  say  that   again,  50percent  of  future  oil                                                                    
     production  in  10  years  is  not  even  developed  or                                                                    
     producing  today. Considering  that  most new  projects                                                                    
     take at least  5-7 years to bring to  production on the                                                                    
     North   Slope,    investment   decisions    for   these                                                                    
     activities,  particularly in  the  near  term, will  be                                                                    
     critical  to  underpin  the   future  of  Alaska's  oil                                                                    
     As  I  mentioned  earlier, the  Department  of  Revenue                                                                    
     forecast  is  based on  a  9percent  annual decline  in                                                                    
     Alaska's   current  base   production.  However,   this                                                                    
     decline    assumes    that    production    enhancement                                                                    
     investments  at  the  core  Prudhoe  Bay,  Kuparuk  and                                                                    
     Alpine  areas  continue.   The  Department  of  Revenue                                                                    
     forecast,  as  shown,  does  not  highlight  that  this                                                                    
     activity  requires  investment  decisions that  are  no                                                                    
     different  from   the  "Under  Development   and  Under                                                                    
     Evaluation"  categories.  As   such,  a  more  accurate                                                                    
     representation  of   the  future  oil   production  and                                                                    
     investment  levels required  to achieve  the Department                                                                    
     of  Revenue forecast  is illustrated  in the  following                                                                    
     As this  chart shows, Alaska's oil  production from the                                                                    
     North Slope could be as  low as 150,000 barrels per day                                                                    
     within 10 years, (assuming  15percent decline, which is                                                                    
     typical  for large  oil fields  such  as Prudhoe  Bay),                                                                    
     without  ongoing and  increasing  investment. Based  on                                                                    
     this  forecast,   within  10   years,  75   percent  of                                                                    
     production will come from new investments.                                                                                 
     Conservatively,  we  estimate   that  at  least  $30-40                                                                    
     billion of  investment is required  within the  next 10                                                                    
     years to  achieve the  Department of  Revenue forecast.                                                                    
     This  does  not  include  the billions  of  dollars  of                                                                    
     additional   operating  expenditures   that  would   be                                                                    
     required  to support  the  developments  once they  are                                                                    
     producing.    This is  a  significant  level of  future                                                                    
     investment and spending.                                                                                                   
     The high tax rate in  PPT and the proposed tax increase                                                                    
     put this investment at significant  risk.  Alaska needs                                                                    
     to encourage  the increasing investments  required, not                                                                    
     only  in  exploration  activities,   but  also  in  the                                                                    
     ongoing development of existing and new fields.                                                                            
11:52:41 AM                                                                                                                   
SENATOR WIELECHOWSKI  said ExxonMobil's annual  report recognized                                                               
that  the easy  stuff has  all been  found and  from now  on huge                                                               
investments are  required all  over the world.  He asked  if that                                                               
was a fair statement.                                                                                                           
MR. HAYMES replied  that it is fair to say  that the challenge of                                                               
finding  new oil  and gas  resources  is becoming  more and  more                                                               
technically challenged, but  there probably is still  some of the                                                               
easy oil out there. "We're all  looking for it. There is no doubt                                                               
the level  of capital investment  that's required to  explore and                                                               
develop  the future  resources  for the  generations  to come  is                                                               
going to be very, very high."                                                                                                   
SENATOR WIELECHOWSKI asked  if there are huge  resource costs all                                                               
over the world. "It's not just isolated to Alaska is it?"                                                                       
MR. HAYMES  replied, "Alaska  has some  very unique  aspects that                                                               
I'll talk about almost immediately in my testimony."                                                                            
11:53:56 AM                                                                                                                   
SENATOR WIELECHOWSKI said regarding  government take that a chart                                                               
by Chevron on the Alberta  Royalty Review Panels shows that every                                                               
jurisdiction is raising oil taxes.                                                                                              
MR. HAYMES  responded that it  is useful  to look at  what others                                                               
are doing  and learn from  it, but they  need to decide  what the                                                               
right take for Alaska is to encourage more investment.                                                                          
SENATOR WIELECHOWSKI said  his point is if costs are  going up in                                                               
every  jurisdiction in  the  world, ExxonMobil  is  not going  to                                                               
leave every  jurisdiction in the  world. The cost of  getting oil                                                               
is going up  for industry all over the world,  not just in Alaska                                                               
and oil  take by government is  going up everywhere in  the world                                                               
as well. "So, it's not just [in] Alaska that this is happening."                                                                
MR. HAYMES  said there is no  doubt that there is  increased cost                                                               
in inflation and  costs have doubled. Costs go up  when oil price                                                               
goes up, so  it is fair to  say that all regions  are seeing cost                                                               
increases.  He said  they have  to look  at what  makes Alaska  a                                                               
high-cost area.                                                                                                                 
11:56:23 AM                                                                                                                   
SENATOR  WIELECHOWSKI said  it is  also  an extremely  profitable                                                               
MR. HAYMES responded  that production has declined to  a third of                                                               
the  peak. He  said  there gas  potential  doubles the  remaining                                                               
production  and   these  resources   aren't  being   explored  or                                                               
developed  at  a  prudent  pace.  He  said  that  government  and                                                               
industry don't control  all of the variables, but  there are some                                                               
things that can be controlled, which he would talk about later.                                                                 
SENATOR WIELECHOWSKI  said ExxonMobil made $40  billion last year                                                               
and asked him how much of that was made in Alaska.                                                                              
MR. HAYMES answered  that ExxonMobil does not  report its earning                                                               
on a state by state basis.                                                                                                      
SENATOR WIELECHOWSKI said  he knows that, but  someone surely has                                                               
calculated that figure.                                                                                                         
MR.  HAYMES responded  that ExxonMobil  is a  global company  and                                                               
reports its  earnings on  quarterly summaries  and in  the annual                                                               
SENATOR WIELECHOWSKI  asked the  question one  more time  and got                                                               
the same answer.                                                                                                                
CHAIR HUGGINS said they would move on.                                                                                          
11:58:22 AM                                                                                                                   
SENATOR MCGUIRE  digressed to  say there is  a question  on where                                                               
Alaska sits on his company's  investment timeline and ExxonMobil,                                                               
in particular,  has been criticized for  "warehousing" in Alaska.                                                               
She  asked  him  to  explain  how  Alaska  fits  into  ExxonMobil                                                               
worldwide  portfolio   timeline.  She  invited  him   to  mention                                                               
alternative energies it is looking into also.                                                                                   
11:59:35 AM                                                                                                                   
MR.  HAYMES replied  that ExxonMobil  will always  look at  every                                                               
opportunity  in  the  world  to  pursue  energy.  Its  demand  is                                                               
significantly increasing. It looks  at many factors: the resource                                                               
potential, the technology required  to develop that resource that                                                               
includes exploring appraising  and developing, marketability, and                                                               
costs to develop the facilities.                                                                                                
They look at  cost for an investment over the  entire life of the                                                               
project  - decades.  The decisions  are  made. He  said the  most                                                               
important thing  is the  fiscal policy  including predictability.                                                               
Because  the investments  are capital  intensive  and take  quite                                                               
some time to  generate a return they need to  look at things over                                                               
decades. Alaska  is an  area ExxonMobil  constantly looks  at and                                                               
evaluates. The  future of  Alaska is  not just  gas, but  oil and                                                               
gas. According to  federal studies, half is oil and  half is gas.                                                               
Currently  they do  not have  a  way to  get the  gas to  market.                                                               
That's  a challenge,  but ExxonMobil  continues to  be active  in                                                               
looking at ways to commercialize Alaska's gas.                                                                                  
12:02:53 PM                                                                                                                   
SENATOR  MCGUIRE remembered  a  presentation she  heard in  House                                                               
Resources when  she first started  serving in the  legislature in                                                               
2001  or 2002  that  a representative  from  ExxonMobil said  the                                                               
price of gas  at the time didn't make development  of Pt. Thomson                                                               
economic. Clearly  today the price  makes it economic.  She asked                                                               
him to illustrate their decision  making over that period of time                                                               
and explain why those leases aren't being developed.                                                                            
12:03:57 PM                                                                                                                   
MR.  HAYMES  said   he  didn't  mention  price   earlier  in  his                                                               
assessment and  the reason is because  ExxonMobil doesn't control                                                               
it. It  is a commodity  that goes up and  down all the  time. The                                                               
gas market  is far more  volatile than  crude. Crude has  gone up                                                               
recently  and  gas  has  gone  down.  When  ExxonMobil  looks  at                                                               
economics  for  any project  they  look  at sensitivities  around                                                               
price,  but focus  on the  aspects they  can control  like costs,                                                               
project execution, assessing the  resource, the technology needed                                                               
to develop it and ongoing  operations required. The government is                                                               
in control of the fiscal policy.                                                                                                
With respect to Pt.  Thompson, he said, it is a  gas field and it                                                               
needs  a  gas pipeline  to  commercialize  it. He  repeated  that                                                               
ExxonMobil  continues  to  evaluate  ways  to  commercialize  Pt.                                                               
Thomson and is currently working  off-take studies with the other                                                               
owners and  the AOGCC. They  have continued their  technical work                                                               
and have complied with all  of the lease agreements, the statute,                                                               
regulations  and the  Pt. Thomson  agreement.  It is  unfortunate                                                               
there  is  a dispute,  but  they  will  continue  to do  what  is                                                               
necessary to move that along.                                                                                                   
SENATOR MCGUIRE said  that's the legal answer, but  she wanted to                                                               
know why  they don't want to  get that gas  in a line and  get it                                                               
MR. HAYMES replied:                                                                                                             
     We are  absolutely keen  to commercialize  Pt. Thomson.                                                                    
     We  have  invested over  $800  million  and drilled  19                                                                    
     wells in the  field. We are as keen as  anybody to seek                                                                    
     a return on  that investment. Pt. Thomson has  a lot of                                                                    
     significant  challenges  -   high  pressure,  reservoir                                                                    
     quality challenges; the  technology required to develop                                                                    
     it  is  leading edge  and  of  course  it needs  a  gas                                                                    
     pipeline to produce the gas.                                                                                               
12:06:24 PM                                                                                                                   
SENATOR  WAGONER said  it is  interesting  that ExxonMobil  won't                                                               
disclose   profits   they  make   in   Alaska   because  BP   and                                                               
ConocoPhillips did. He  came down here with an open  mind to come                                                               
up with  a solution to the  difference between PPT and  ACES. The                                                               
fact that  he is  not disclosing  their profits  leads him  to be                                                               
suspect when  all oil companies  come before the  legislature and                                                               
say they  are partners  in producing  and marketing  Alaska's oil                                                               
and stated, "I don't think that's the way a partner acts."                                                                      
12:07:40 PM                                                                                                                   
MR.  HAYMES responded  that Alaska  is a  high-cost region.  Many                                                               
factors  contribute   to  that  including  the   severe  climate,                                                               
sensitive environment,  remote location and  current restrictions                                                               
for future  exploration opportunities.  Alaska has two  large oil                                                               
fields: Prudhoe Bay and Kuparuk.  They have accounted for over 70                                                               
percent of  the North Slope oil  production. Assuming exploration                                                               
and  investment activity  continues in  these fields,  they could                                                               
remain  at this  level of  production  for the  next decade.  The                                                               
legacy  fields  require continuous  investment  to  keep the  oil                                                               
flowing. This is the same for  any oil field in the world. During                                                               
the  production  phases  there  are  many  changes  in  operating                                                               
parameters  such  as reservoir  pressure  changes,  oil, gas  and                                                               
water production changes and changes  in operating conditions and                                                               
on-going technical challenges.  He said in order to  keep the oil                                                               
flowing, these  changes require  additional investments,  such as                                                               
the  addition of  water  and gas  injection  and gas  compression                                                               
facilities,  which are  historically  significant investments  at                                                               
Prudhoe Bay.                                                                                                                    
MR. HAYMES continued:                                                                                                           
     Currently, the owners spend over  $2 billion dollars to                                                                    
     optimize and  enhance production  from Prudhoe  Bay and                                                                    
     Kuparuk.  These spending levels  are in addition to the                                                                    
     capital investments  pursuing new wells,  projects, and                                                                    
     enhanced  oil recovery  opportunities. These  operating                                                                    
     expenditures  are  essential   to  mitigate  production                                                                    
     decline   at  these   significant  fields,   which  are                                                                    
     critical  to the  future of  Alaska's  North Slope  oil                                                                    
     Many of today's  exploration and development activities                                                                    
     are occurring  in and around  Prudhoe Bay  and Kuparuk.                                                                    
     As  an example,  since the  year 2000  there have  been                                                                    
     multiple  Prudhoe  Bay  satellite  fields  developed  -                                                                    
     Aurora, Borealis,  Midnight Sun, Polaris, and  Orion  -                                                                    
     which  are currently  contributing over  40,000 B/D  of                                                                    
     oil production. These developments  would not have been                                                                    
     possible  without   the  infrastructure   and  facility                                                                    
     sharing of  Prudhoe Bay, which reduced  the development                                                                    
     and operating costs of these  satellites.  As satellite                                                                    
     fields  are   developed  it  reduces   exploration  and                                                                    
     development  costs  for  future new  projects,  as  the                                                                    
     infrastructure  on  the  North Slope  expands.  If  the                                                                    
     major  Prudhoe Bay  and  Kuparuk  developments did  not                                                                    
     exist,  these  satellite  fields would  not  have  been                                                                    
     economic to develop.                                                                                                       
     As another example,  for the past seven  years over 900                                                                    
     new  wells  have  been  drilled   in  Prudhoe  Bay  and                                                                    
     Kuparuk.  The drilling  of these  new wells  has slowed                                                                    
     the overall  production decline  from 12-15  percent to                                                                    
     an estimated 6-9 percent. Almost  40 percent of Prudhoe                                                                    
     Bay's production today is from these new wells.                                                                            
12:11:56 PM                                                                                                                   
SENATOR  STEVENS said  he keeps  hearing about  reduction of  oil                                                               
flow  on the  TAPS  and  that 300,000  barrels/day  might not  be                                                               
optimal to  keep it going. He  assumed that was an  enormous part                                                               
of ExxonMobil's costs.  He asked, "Can you just give  me a little                                                               
insight  as to  how  you decide  what volumes  you  want to  have                                                               
moving through that pipeline? And what would be optimal?"                                                                       
MR. HAYMES  replied that any  oil field  in the world  similar to                                                               
Prudhoe  Bay typically  declines at  15  percent plus  if you  do                                                               
nothing. So  they pursue  as many opportunities  as they  can. He                                                               
said the decline rate is a  challenge for everybody because as it                                                               
goes down,  the unit operating  costs go up. Typically  a certain                                                               
amount of  those costs  are fixed and  while technology  can help                                                               
reduce those costs, "that decline  is constantly against you." He                                                               
said the ExxonMobil  looks at every investment on  its own merits                                                               
and the full life cycle.                                                                                                        
SENATOR STEVENS asked what factors  ExxonMobil takes into account                                                               
in getting the volume up or allowing it to go down.                                                                             
MR. HAYMES replied  that the full life cycle of  a field includes                                                               
different  operating costs,  capital  investments, and  different                                                               
sensitivities. It's a  little like chasing your  tail, when costs                                                               
go up  they need  to produce more  oil. Each  investment decision                                                               
rests on its own merits.                                                                                                        
CHAIR HUGGINS recognized Senator Thomas in attendance.                                                                          
12:16:26 PM                                                                                                                   
MR. HAYMES continued:                                                                                                           
     For  the  past  two   years,  development  drilling  at                                                                    
     Prudhoe  Bay   has  achieved  the  equivalent   of  the                                                                    
     important    Oooguruk    development.   This    example                                                                    
     highlights   the  importance   of  exploring   for  and                                                                    
     developing new  oil in and  around the Prudhoe  Bay and                                                                    
     Kuparuk  fields -  all are  important  to the  economic                                                                    
     benefit and future of Alaska.                                                                                              
     Let me  re-emphasize that Prudhoe Bay  and Kuparuk have                                                                    
     the potential  to continue to be  critical contributors                                                                    
     to Alaska's oil production.  They have the potential to                                                                    
     remain  key  hubs  and  enablers  for  exploration  and                                                                    
     development  of heavy  or viscous  oil,  light oil  and                                                                    
     gas.  Encouraging increasing  investment  at these  key                                                                    
     fields  is as  important as  encouraging investment  in                                                                    
     exploration  and  development  of new  fields.  Without                                                                    
     these two  hubs, Alaska will be  severely challenged to                                                                    
     realize the full potential of its resources.                                                                               
     Progressing  a   tax  policy   that  singles   out  and                                                                    
     penalizes these  fields will discourage  investment not                                                                    
     only  at  these  fields  but will  also  impact  future                                                                    
     investment attractiveness to  explore and develop other                                                                    
     Alaska oil and gas resources.                                                                                              
     PROPOSED TAX INCREASE MORE COMPLICATED                                                                                 
     In  analyzing  the  Administration's tax  proposal,  we                                                                    
     found that  virtually all of the  provisions are simply                                                                    
     tax rate increases or further increases in complexity.                                                                     
     As an example, under  the Administration's proposed tax                                                                    
     increase the  two so-called legacy fields,  Prudhoe Bay                                                                    
     and  Kuparuk, would  have a  separate 10  percent gross                                                                    
     minimum tax and  be segregated from each  other and all                                                                    
     other North Slope  fields.  This gross tax  would be in                                                                    
     addition  to  the  base  royalty  payments.  With  this                                                                    
     minimum  gross tax  the state  would be  insulated from                                                                    
     price  and  cost  risks, whilst  retaining  the  upside                                                                    
     potential   from   the   progressivity   element.   The                                                                    
     Administration  is  simply  proposing to  increase  its                                                                    
     take  while  shifting  the  development  risks  to  the                                                                    
     producers.  Essentially, at  low  price, producers  are                                                                    
     Companies  are willing  to accept  the  risks of  long-                                                                    
     term,  capital intensive  investments when  there is  a                                                                    
     corresponding  opportunity for  upside potential  and a                                                                    
     sharing  of   risk  should   prices  fall.   Under  the                                                                    
     Administration's proposed tax  increase, investors will                                                                    
     need  to  assume a  higher  economic  risk when  making                                                                    
     funding decisions for future investments and spending.                                                                     
     The Administration has also  proposed that all revenues                                                                    
     and  expenses for  the Legacy  Fields will  have to  be                                                                    
     accounted for separately, with  separate taxes paid for                                                                    
     each  unit and  their satellites.   This  would include                                                                    
     Alaska's heavy  or viscous  oil reserves  produced from                                                                    
     those  Legacy  Fields -  a  resource  that already  has                                                                    
     significant   economic   and   technical   hurdles   to                                                                    
     overcome. No other fields, units  or regions within the                                                                    
     state  would  be   subjected  to  these  administrative                                                                    
     The ring-fencing  of the Prudhoe Bay  and Kuparuk Units                                                                    
     makes the  tax proposal more complex  than the existing                                                                    
     EXXONMOBIL POSITON ON THE ENACTED PPT                                                                                  
     I believe  it is important that  I clarify ExxonMobil's                                                                    
     position  on  the  current   PPT.  ExxonMobil  did  not                                                                    
     support  the PPT  that was  enacted last  year.   As we                                                                    
     testified last year, we supported  the concept of a net                                                                    
     based tax  but stated  that the proposed  20percent tax                                                                    
     rate,  in the  original PPT  bill, would  not encourage                                                                    
     the full development of Alaska's  resources.  We agreed                                                                    
     with the  20percent tax  rate in  order to  support the                                                                    
     progression of a gas pipeline project.                                                                                     
     The  PPT  that  was ultimately  enacted  increased  the                                                                    
     already high 20  percent base tax rate  to 22.5 percent                                                                    
     with  progressivity  -  more than  doubling  industry's                                                                    
     taxation.  Alaska's  current PPT tax rate  is too high.                                                                    
     When  combined with  the gross  royalties and  the high                                                                    
     development and  operating costs,  it makes  Alaska one                                                                    
     of the most expensive regions to invest.                                                                                   
     There  has been  a lot  of discussion  recently on  PPT                                                                    
     revenues and forecasts, which has  been used in part to                                                                    
     support  the  Administration's   proposal  to  increase                                                                    
     taxes.  PPT has  only  been in  existence for  slightly                                                                    
     more than one year.   The Department of Revenue has not                                                                    
     completed  its  PPT  regulations  or  started  any  PPT                                                                    
     audit.  ExxonMobil,   like  a   number  of   the  other                                                                    
     producers, met  with the Department of  Revenue several                                                                    
     months ago  to discuss  ways to  help the  State better                                                                    
     forecast its  expected PPT revenues and  we are willing                                                                    
     to  continue those  efforts.   We are  also willing  to                                                                    
     work with  DOR auditors to improve  their understanding                                                                    
     of joint interest billings.                                                                                                
     12:21:39 PM                                                                                                              
     FISCAL PREDICTABILITY IS IMPORTANT                                                                                     
     I would  now like to address  another important element                                                                    
     of  the business  environment -  fiscal predictability.                                                                    
     ExxonMobil  and,  I  believe,  the  industry  values  a                                                                    
     predictable fiscal  environment in  which to  make long                                                                    
     term investment decisions.  Our investments are capital                                                                    
     intensive   and  are   evaluated  over   timeframes  of                                                                    
     decades.  Any change in  the fiscal regime has a direct                                                                    
     impact  on how  we view  predictability of  the Alaskan                                                                    
     fiscal environment, which in  turn directly impacts how                                                                    
     we  evaluate   on  a   risk  basis   future  investment                                                                    
     decisions. Let  me reemphasize  this point.  Because of                                                                    
     the nature  and magnitude of the  risks associated with                                                                    
     any oil or  gas investment, coupled with  the amount of                                                                    
     time required  to recoup that investment,  fiscal terms                                                                    
     that  are   predictable  are  key  to   any  investment                                                                    
     The  Administration's   proposed  tax   increase  would                                                                    
     represent  the  third  significant change  to  Alaska's                                                                    
     fiscal terms  in the  past three  years.   Changing the                                                                    
     fiscal  environment  for  capital  intensive  projects,                                                                    
     that  can take  many years  to generate  a return,  can                                                                    
     only reduce  the attractiveness of  future investments.                                                                    
     Each time  taxes are raised, the  attractiveness of any                                                                    
     prospective   well  or   project  diminishes   and  the                                                                    
     likelihood of it not being  funded increases. For every                                                                    
     well or  project not progressed,  additional production                                                                    
     and State revenues are lost.   As mentioned earlier, to                                                                    
     mitigate  oil   production  decline  Alaska   needs  to                                                                    
     increase investment. The  Administration's proposed tax                                                                    
     increase will reduce investment.                                                                                           
     ExxonMobil expects  to be involved  in Alaska  for many                                                                    
     years to come.   The policies established  today and in                                                                    
     the  future will  impact the  attractiveness of  future                                                                    
     potential projects and the future of Alaska.                                                                               
     ALASKA NEEDS A LONG-TERM RESOURCE DEVELOPMENT POLICY                                                                   
     As   I  mentioned   earlier,  Alaska   has  significant                                                                    
     resource   potential,  but   with   many  unique   cost                                                                    
     challenges.   It  will   take  significant   resources,                                                                    
     technology,  investment and  teamwork from  everyone to                                                                    
     realize  the   full  potential.  Alaska   and  industry                                                                    
     collaboratively need  to create a  resource development                                                                    
     policy   that  encourages   investment  for   long-term                                                                    
     production  and growth.  This is  a  complex issue  and                                                                    
     needs  significant time  and effort  from all  parties.                                                                    
     It is beneficial to look at what others have done.                                                                         
     The   Canadian  province   of   Alberta  has   enormous                                                                    
     unconventional  crude  oil   resources.  Alberta's  oil                                                                    
     sands  represent  the  potential of  over  170  billion                                                                    
     barrels  of crude,  and, like  Alaska's resources,  are                                                                    
     located  in higher  cost,  remote  arctic regions  that                                                                    
     require significant investments to develop.                                                                                
     Alberta   adopted   a   resource   development   policy                                                                    
     approach, designed to  increase industry investment and                                                                    
     production.  Their approach  has proven  successful due                                                                    
     to a number of key factors:                                                                                                
   · Collaborative    pursuit   of    resource   development                                                                    
   · Development  of technologies  jointly with  industry to                                                                    
     reduce  costs,  increase   oil  recovery,  and  upgrade                                                                    
     viscous oil to marketable products                                                                                         
   · Creation of a level playing field for all projects                                                                         
   · Sharing  risks  with  the investors  by  maintaining  a                                                                    
     lower  gross  revenue  based  tax,  that  is,  lowering                                                                    
     royalties significantly                                                                                                    
   · Providing long term fiscal predictability                                                                                  
     Alberta's   success   suggests   that   Alaska   should                                                                    
     seriously  consider what  other  regions  are doing  to                                                                    
     encourage investment.                                                                                                      
     A long-term sustainable  resource development policy is                                                                    
     required to enable  Alaska to maximize its  oil and gas                                                                    
     resource.  There  are  many factors  that  need  to  be                                                                    
     considered.  It is  a complex  issue. I  hope that  key                                                                    
     points addressed in my testimony are considered:                                                                           
   · Alaska has  significant resource  potential, but  it is                                                                    
     in a high cost environment                                                                                                 
   · Oil production  is already one  third of its  peak, yet                                                                    
     we have  only produced one  fourth of the  oil resource                                                                    
   · In  10  years,  75   percent  of  Alaska's  future  oil                                                                    
     production   needs   over   $30-40   billion   of   new                                                                    
     investments -  investments that are needed  sooner than                                                                    
     10 years.                                                                                                                  
   · Prudhoe  Bay and  Kuparuk are  the 'hub'  of the  North                                                                    
     Slope,  they represent  70 percent  of North  Slope oil                                                                    
     production  for the  next  10 plus  years,  can be  the                                                                    
     backbone   for   future    exploration   and   economic                                                                    
     developments,  whether   it  is   existing  production,                                                                    
     future  light  oil,  heavy  oil,   or  gas.  They  need                                                                    
     increasing investments to achieve their potential.                                                                         
   · Development drilling  at Prudhoe  Bay and  Kuparuk over                                                                    
     the  last 2  years  has  added 50,000  B/D  of new  oil                                                                    
     production in 2007.                                                                                                        
     We  propose  a  collaborative  approach  to  develop  a                                                                    
     sustainable  long   term  resource  policy   that  will                                                                    
     encourage the  needed increasing investments  and build                                                                    
     the  future of  Alaska  for many  generations to  come.                                                                    
     ExxonMobil   looks   forward   to  working   with   the                                                                    
     Administration,  the  legislators,   industry  and  the                                                                    
     people of Alaska in the  future pursuit and development                                                                    
     of its oil and gas resources.                                                                                              
     To  encourage full  development of  Alaska's resources,                                                                    
     the PPT  tax rate needs  to be lowered, and  should not                                                                    
     include  a gross  revenue  based component.  Increasing                                                                    
     investment fuels the economy.                                                                                              
     Thank you again Mister Chairman for the opportunity to                                                                     
     testify today.                                                                                                             
12:27:49 PM                                                                                                                   
CHAIR  HUGGINS  said  ExxonMobil's   image  in  Alaska  has  some                                                               
negatives, but it  continues to be the  state's business partner.                                                               
He heard on  the radio that the number two  investment return for                                                               
the Permanent  Fund was from  ExxonMobil. He didn't think  it was                                                               
appropriate  for everyone  to ask  how much  ExxonMobil makes  in                                                               
Alaska,  which could  be proprietary  information;  rather it  is                                                               
important  to  figure  out how  to  make  ExxonMobil  successful.                                                               
Sometimes  people  take  exception  to the  way  ExxonMobil  does                                                               
business, but  he hopes to  continue doing business with  them in                                                               
the future.                                                                                                                     
CHAIR HUGGINS recessed the committee to  the call of the chair at                                                               
12:30:04 PM.                                                                                                                  
2:42:11 PM                                                                                                                    
CHAIR HUGGINS called the meeting back  to order at 2:42:11 PM and                                                             
said they would  have a roundtable discussion on  issues in ACES.                                                               
Committee  members   present  were  Senators   Huggins,  Stevens,                                                               
McGuire,  Wielechowski, and  Stedman. In  addition, he  said LB&A                                                               
consultants,  Dan   Dickinson  and  Steve  Porter;   BP's  Claire                                                               
Fitzpatrick; ConocoPhillips', Kevin  Mitchell; ExxonMobil's Craig                                                               
Haymes;  Alaska Venture  Capital  Group;  Range Petroleum's,  Ken                                                               
Thompson; Anadarko's  Mark Hanley; from the  Administration - DOR                                                               
Commissioner Patrick Galvin and  Gaffney Cline & Associates' Rick                                                               
Ruggiero were in attendance.                                                                                                    
2:43:34 PM                                                                                                                    
CHAIR  HUGGINS  asked Mr.  Ruggiero  to  comment on  anything  he                                                               
wanted to highlight about SB 2001.                                                                                              
RICK RUGGIERO,  Gaffney Cline and  Associates, said the  issue he                                                               
wanted  to make  sure  gets  proper airing  is  that  it is  very                                                               
important  to have  the best  possible  information possible  and                                                               
that  it  is  very  important  to   take  care  of  the  date  of                                                               
disclosure. When  he first met  with Commissioner Galvin  and his                                                               
team he  was "aghast  at the  void of  data that  they had  to do                                                               
their job."                                                                                                                     
He said there was  a lot of press about a  shortfall, but what he                                                               
saw as the companies came to the  table is all of their data were                                                               
DOR  figures. This  was what  they  were using  knowing that  the                                                               
legislature  would possibly  be  moving millions  or billions  of                                                               
dollars across the balance from them  to you or the other way. He                                                               
was disappointed that  they did not take the  opportunity to come                                                               
forward with the best possible data.                                                                                            
2:47:20 PM                                                                                                                    
SENATOR WAGONER joined committee.                                                                                               
MR. RUGGIERO  said new  data is essential  to making  good models                                                               
and therefore  good decisions. He  was a  bit taken aback  by the                                                               
way the industry  gave the DOR the right cost  data the last time                                                               
around,  although  it  was  buried  in footnote  8  of  the  AOGA                                                               
presentation, which  says you  should have  gotten this  and that                                                               
the  DOR  should have  been  able  to  figure  out by  doing  the                                                               
mathematics  that it  does in  the footnote,  that the  real cost                                                               
associated was in the $11 to $13  range instead of $7 to $8 range                                                               
-  a major  difference in  trying to  do predictions.  These were                                                               
major  differences  that   were  known  at  the   time  that  the                                                               
legislature  should have  had  at  its disposal  to  make a  good                                                               
choice on how to set taxes going forward.                                                                                       
He said  they need to  have the right  words in whatever  they do                                                               
with the  ACES bill to make  sure the proper data  does move with                                                               
violation  of  any SEC  rules  or  anti  trust rules.  "There  is                                                               
information  that takes  place that  is  transferred between  oil                                                               
companies and  governments around the  world that you  don't have                                                               
here and that you really need to have to manage your asset."                                                                    
He repeated,  "You deserve  to have  the best  data known  at the                                                               
time to  move forward. You can't  bet the bank on  forecast data,                                                               
he advised  the committee,  but you manage  your business  as the                                                               
government  the same  way these  companies manage  their business                                                               
with their  one, three, five  and 10-year forecast.  They deserve                                                               
to have the  collective wisdom of the various  companies in order                                                               
to  do that  business. The  beauty  of getting  it from  multiple                                                               
players is you  kind of see how they do  their estimation and get                                                               
an idea of what is robust and what's not.                                                                                       
2:53:21 PM                                                                                                                    
CHAIR  HUGGINS  said   that's  easier  said  than   done.  He  is                                                               
flabbergasted  with how  little  the state's  knows -  especially                                                               
after a special session has been called.                                                                                        
SENATOR WIELECHOWSKI said he is  equally frustrated with the lack                                                               
of information the state has to  administer the system it has now                                                               
- and  also to decide whether  the system is working  and whether                                                               
it needs to be improved. He said:                                                                                               
     We  can't even  get the  profits from  Exxon from  last                                                                    
     year; it's  something that I could  probably figure out                                                                    
     with  a calculator  and about  five minutes.  And we're                                                                    
     sitting  here  and we  have  two  senators asking  that                                                                    
     question. We  can't get that information  and we wonder                                                                    
     why Alaskans  - I  mean I get  emails every  day, phone                                                                    
     calls every from  constituents. Go to the  gross, go to                                                                    
     the gross. You  can't trust the oil  industry. And when                                                                    
     I  see   behavior  like  where   I  can't   get  simple                                                                    
     information.  That's  why  Alaskans  are  saying  that.                                                                    
     That's  why   Alaskans  are   hesitant  and   they  are                                                                    
     distrustful  and think  we  should go  to  the gross  -                                                                    
     because they think  we're getting gamed. If  we can get                                                                    
     the information, maybe there is  a better way to do it,                                                                    
     but  if   this  is   the  way  the   relationship,  the                                                                    
     partnership, is  going to be,  then it's no  wonder why                                                                    
     most Alaskans want to go to the gross.                                                                                     
CHAIR  HUGGINS asked  if  the DOR  has the  answers  to what  the                                                               
different organizations' bottom line within  the state is, but at                                                               
any rate  the department could  come up  with the figures  on its                                                               
own "with 15 minutes of homework."                                                                                              
COMMISSIONER  GALVIN  responded  that  he  revealed  profits  for                                                               
ConocoPhillips and  BP as  far as Alaska  operations go.  Most of                                                               
those operations  take place  in partnership  with Exxon  and the                                                               
math could be done based  on ownership percentages, but he hasn't                                                               
done that  because the number  isn't relevant to his  position on                                                               
this issue and nobody has asked them for it.                                                                                    
CHAIR HUGGINS asked  if his was the appropriate  agency to deduce                                                               
those numbers.                                                                                                                  
COMMISSIONER GALVIN  replied that probably  the DNR would  be the                                                               
department  to   do  that  calculation   because  it   knows  the                                                               
percentages of ownership.                                                                                                       
2:57:16 PM                                                                                                                    
MR. DICKINSON  said three specific questions  were addressed. The                                                               
first question dealt  with the notion of  penalties, interest and                                                               
what happens when companies under  declare. He clarified that the                                                               
current law has  two interest regimes - one  deals with estimates                                                               
and  interest on  overpayment or  underpayment through  March 31.                                                               
The  interest rates  there are  IRS interest  rates, which  means                                                               
there are  four. One rate is  for a "large overpayment"  - if the                                                               
amount  of tax  that was  underpaid  is over  $100,000, it's  the                                                               
highest of the  four rates. If the amount that  is due that month                                                               
is under $100,000, then it's a  slightly lower rate. If the state                                                               
owes money (an  overestimation in a month)  there's another rate.                                                               
The fourth rate  is for under $10,000 or $15,000.  There are four                                                               
rates  in all;  all of  those rates  are lower  than the  state's                                                               
rate. And  on March 31 you  take everything that has  happened so                                                               
far and  that becomes a single  amount of tax due  - or underpaid                                                               
or  overpaid -  typically  if  history is  any  indication -  the                                                               
amount underpaid. That  then bears the rate found  in the general                                                               
tax statute.  That rate  is San  Francisco discount  rate federal                                                               
funds rate plus five points or  11 percent. Typically for most of                                                               
the  year since  that went  into  effect it  has been  at the  11                                                               
percent  compounded quarterly.  He said  that back  in the  early                                                               
80's the state's rate was 8  percent simple and there was a sense                                                               
that  the state  could be  essentially used  as a  bank. It  made                                                               
sense to under  declare because you could earn a  lot more than 8                                                               
percent simple elsewhere.                                                                                                       
3:00:17 PM                                                                                                                    
MR. DICKINSON  said the point  he wanted  to make is  after March                                                               
31, those  rates apply to all  other tax types save  one. He said                                                               
the same rate is applied to all taxpayers.                                                                                      
He said  that people  get confused  because of  the IRS  that has                                                               
separate and distinct  civil penalties that can be  levied if you                                                               
purposely ignore  the law  or if there  is misconduct  and things                                                               
like  that.  And then  finally  there  are actually  very  severe                                                               
penalties for  fraud. Where  there is  an honest  dispute between                                                               
the taxpayer  and the  government as to  whether a  deduction was                                                               
appropriate  or how  much tax  is owed,  that is  the 11  percent                                                               
compounded quarterly  and that can  go higher if market  rates go                                                               
above 6 percent.                                                                                                                
He said that same question here  was how that compares with other                                                               
states -  and it is  higher than what  other states have;  but he                                                               
didn't get a chance to compare  it to other peer nations like the                                                               
UK or Norway.                                                                                                                   
CHAIR HUGGINS  asked if the state  is using the IRS  practices in                                                               
its penalties.                                                                                                                  
MR.  DICKINSON replied  only in  a year  for underestimations  or                                                               
overestimations of the amount.                                                                                                  
CHAIR HUGGINS asked if there  are distinct statutes or provisions                                                               
for people that by design or omission did something.                                                                            
MR. DICKINSON  replied yes and that  could be up to  a 25 percent                                                               
penalty. He  said if there's any  messing around or proof  of bad                                                               
faith on  an item,  that penalty  can apply  to the  total amount                                                               
underpaid, not just that item.                                                                                                  
CHAIR HUGGINS  said it  appears that it's  a more  wholesome task                                                               
than one  would want to  bite into in  30 days to  rejuvenate the                                                               
penalty factors, because there are a  lot of moving parts and the                                                               
synchronization of that is such that  you need time and it's best                                                               
measured in months, not days, to pull that off.                                                                                 
COMMISSIONER GALVIN  answered it depends on  what their objective                                                               
is. If it's  to have a fairly straightforward penalty  apply in a                                                               
particular situation, it's  simple, but if it's going  to be more                                                               
integrated into the  entire system that would  apply across other                                                               
tax types, it would take more time.                                                                                             
CHAIR  HUGGINS said  the provision  this bill  contemplates takes                                                               
the $100 per day to $1000, which is a tangential piece.                                                                         
MR. DICKINSON replied  that really applies to  information so you                                                               
can't  take a  percentage. With  a six-year  expanded statute  of                                                               
limitations that  basically says  monthly reporting  is required,                                                               
that starting  six years from  now in  its most extreme  case the                                                               
state  could  level a  new  penalty  of  $2 million  every  month                                                               
($1000/day X  365/days/yr X 6/yrs  = $2,000,000). This is  a very                                                               
heavy penalty  for underreporting especially if  you don't notify                                                               
the company until six years later.                                                                                              
SENATOR WIELECHOWSKI  said if they're paying  only interest, they                                                               
have that  money, say $1 million.  They can take that  $1 million                                                               
and  invest it  somewhere else  and with  a discount  rate of  10                                                               
percent,  it's  basically  a break  even  proposition.  It's  not                                                               
costing them anything else.                                                                                                     
MR. DICKINSON  said if  their discount rate  is 10  percent, they                                                               
are losing money.                                                                                                               
SENATOR WIELECHOWSKI  said 1 percent  and they have  heard profit                                                               
ratios of 35 - 45 percent from all the companies.                                                                               
CHAIR  HUGGINS  commented that  didn't  sound  like a  very  good                                                               
investment strategy.                                                                                                            
3:05:37 PM                                                                                                                    
KEVIN  MITCHELL,   ConocoPhillips,  commented  that   11  percent                                                               
interest is a significant rate. He  would view that as "quite the                                                               
penalty."  So from  his  perspective, there  is  no incentive  to                                                               
overclaim  expenditures  and  be   subject  11  percent  interest                                                               
3:06:39 PM                                                                                                                    
MS. FITZPATRICK added that with  the proposal to move the statute                                                               
of limitations  to six years, an  audit could take them  out to 8                                                               
or 9 years.  To be told after 8  or 9 years what you  had done in                                                               
good faith  at the time  is now wrong,  then they stand  the best                                                               
chance  of not  over or  under  claiming, but  actually doing  it                                                               
CHAIR  HUGGINS asked  if she  said that  BP needs  regulations to                                                               
MS. FITZPATRICK clarified,  "I said if we're  actually when we're                                                               
doing our filings,  knowing what the regulations  are, that means                                                               
we stand the best chance of  knowing whether or not we are making                                                               
a compliant filing or not."                                                                                                     
SENATOR GREEN arrived - all present                                                                                             
3:09:40 PM                                                                                                                    
MR.  DICKINSON said  the  request  was to  model  a 22.5  percent                                                               
versus  25  percent  without  a floor,  but  with  an  aggressive                                                               
progressivity.  On that  issue, he  observed that  the amount  of                                                               
revenue available  for division  among the parties  (whatever the                                                               
rules are) when  they are down in the range  of $9/barrel and the                                                               
state is  taking 62  percent of  some profit  piece from  that is                                                               
literally a  question of cents  or a dollar.  When you are  up at                                                               
the current range of ten times  that (way above the lifting cost)                                                               
at that  point if the  state has a more  assertive progressivity,                                                               
the amount that will be picked up  may equal what it will give up                                                               
(if you view those  as a trade off) over five or  six years as at                                                               
low prices.  It's not  symmetrical to move  something at  low and                                                               
pick it up.                                                                                                                     
     And I believe that the  state essential if they pick up                                                                    
     the windfall profits or the  spikes, you can do a small                                                                    
     number of profits.  Spikes will make up  for many years                                                                    
     in which  you have  a policy  where if  investments are                                                                    
     being  - the  combination of  investment, cost  and low                                                                    
     price leads  the state  to have a  very very  low take.                                                                    
     So, it's my observation that  the floor may have a very                                                                    
     chilling  effect when  prices  are low  and  if it's  a                                                                    
     revenue issue,  that you  may pick it  up at  the other                                                                    
     end. If it's  a sufficiency of revenue  issue, the only                                                                    
     other observation I would make  and I think I made this                                                                    
     for your  committee before, and  I hesitate to  make it                                                                    
     again,  because it's  stepping a  little outside  of my                                                                    
     area  of expertise,  but when  the state  was young  it                                                                    
     maybe  made sense  to have  a regressive  fiscal system                                                                    
     when the oil was sort  of first flowing in because that                                                                    
     really was the state's only  source. As you know, three                                                                    
     years  after Prudhoe  Bay started  producing there  was                                                                    
     the  first  price spike  and  at  that time  the  state                                                                    
     repealed its  person income tax and  repealed its gross                                                                    
     receipts tax on  business and decided this  was the new                                                                    
     frame of reference. And I  don't know that we need that                                                                    
     any more.  The state has  put a significant,  a quarter                                                                    
     of all the  royalties, have been put aside.  You as the                                                                    
     legislature have  added certain  increments to  that so                                                                    
     there's a  lot of  money sitting  there over  and above                                                                    
     the protected corpus. There's  dollars that are sitting                                                                    
     there  that could  be  drawn on,  the  CBRF is  sitting                                                                    
     there. So it may  be that if I can put  this in sort of                                                                    
     betting terms,  the state's risk tolerance  may be such                                                                    
     that you're  willing to accept  some of that  high side                                                                    
     and when prices  are low and everyone  is challenged we                                                                    
     don't need to  say well - as I believe  you can show in                                                                    
     1999  for  a  couple  of months,  we  were  taking  110                                                                    
     percent   of  the   economic  rent.   That's  just   an                                                                    
     observation on those two and  I know you want some more                                                                    
     quantitative and if I have  the chance I will certainly                                                                    
     do that and present that to you.                                                                                           
3:12:00 PM                                                                                                                    
CHAIR HUGGINS said there's not a lot of affection amongst some                                                                  
on the floor because of what he just described. Somebody said it                                                                
would  be like  upping property  taxes  in the  late 80s.  Nobody                                                               
would like that very much; nobody had  much money to pay it and a                                                               
lot of people were out of jobs.                                                                                                 
3:12:42 PM                                                                                                                    
CRAIG HAYMES,  ExxonMobil, said the  challenge of the  10 percent                                                               
gross  floor is  when you  look at  your forward  investments, as                                                               
investors they would need to assume  that kicks in and be able to                                                               
use that as a basis for economics.                                                                                              
     And that's a  significant deterrent when you  look at a                                                                    
     return on  a significant capital investment  that takes                                                                    
     decades to  get a return.  So the problem is  whilst we                                                                    
     may not be at the  floor today, because the crude price                                                                    
     is  at  ridiculous  levels, the  dynamics  of  the  oil                                                                    
     fields and  the costs and commodity  price will change.                                                                    
     We  never  know  where  it's   going  to  go,  but  for                                                                    
     investment decision  purposes, we would need  to assume                                                                    
     that  floor  kicks in  -  given  unit costs  on  mature                                                                    
     fields will continue to increase  - given the commodity                                                                    
     prices. If  you look at  history it shouldn't  be above                                                                    
     $40 or  $50/barrel and  given currently  the production                                                                    
     is  declining. So,  for us  it would  be if  it was  in                                                                    
     there, even  though it may  not be happening  today, we                                                                    
     would be assuming  it is going to happen.  So, it would                                                                    
     reduce   the   attractiveness  of   future   investment                                                                    
3:14:14 PM                                                                                                                    
KEVIN  MITCHELL, ConocoPhillips,  echoed  those sentiments  about                                                               
the floor. He  is concerned that the floor would  be triggered in                                                               
a low-price  environment which makes  a very regressive  tax. So,                                                               
they would  be getting effective  tax increases at the  time when                                                               
the  industry  can  least  afford  it. The  second  is  that  the                                                               
potential  investment opportunities  could  be  impacted by  that                                                               
floor and  in testimony yesterday  he outlined how they  could be                                                               
at the floor simply because  of trying to pursue investments that                                                               
will drive some growth. This is a significant area of concern.                                                                  
CHAIR  HUGGINS inserted  that tomorrow  they  would get  together                                                               
with the administration to discuss  what scenarios would activate                                                               
the floor.                                                                                                                      
MS. FITZPATRICK said BP, to err  on the side of caution, would be                                                               
making its decisions assuming the  floor kicks in. If they pursue                                                               
investment to  get more barrels,  that might in fact  trigger the                                                               
floor, which  means she  would question the  value of  making the                                                               
investment in  the first  place -  making it  a viscous  cycle at                                                               
that point.                                                                                                                     
3:16:15 PM                                                                                                                    
COMMISSIONER GALVIN  commented that their level  of investment in                                                               
order to kick  in the floor would exceed what  the state has seen                                                               
in the  past. He  said the  administration has  acknowledged from                                                               
the get-go is that there is a trade off.                                                                                        
     You  can  take  the  side of  wanting  to  protect  the                                                                    
     state's interest  when prices are low  and minimize the                                                                    
     risk of having the  significantly low revenues in times                                                                    
     of low prices and we  recognize the opportunity to take                                                                    
     a greater take on the  upside when prices are high. And                                                                    
     what   influenced   our   decision  was   more   of   a                                                                    
     conservative  view that  we  would  rather protect  the                                                                    
     state  when there  are low  prices. But  again we  said                                                                    
     from the get-go that this is  a policy call in terms of                                                                    
     that  risk/reward   trade  off   that  is  up   to  the                                                                    
     legislature  to respond  to. I  think I  hear the  same                                                                    
     hallway  chatter with  regard  to the  floor and  we're                                                                    
     open  to  discussion  about the  validity  of  that  in                                                                    
     replacement for higher  on the upside, but  in the end,                                                                    
     I think it's a responsible  thing for us to consider in                                                                    
     terms  of a  trade  off  there -  and  make a  reasoned                                                                    
     decision that we're going to do something else.                                                                            
SENATOR WAGONER  said he has heard  a lot of good  debate on both                                                               
sides.  He thinks  it's  only fair  if the  state  shares in  the                                                               
upside it should share in the downside.                                                                                         
3:18:57 PM                                                                                                                    
CHAIR  HUGGINS said  his perspective  is that  some parts  of the                                                               
bill need more  airing and there are two other  committees for it                                                               
to go through. Its merits will continue to be reviewed.                                                                         
3:19:24 PM                                                                                                                    
MR. DICKINSON  said Mr. Mitchell made  an interesting observation                                                               
in a  similar roundtable and one  idea people like is  the hybrid                                                               
of a gross  and a net and  if there's some way  of combining them                                                               
that   makes  sense.   Mr.  Mitchell   said  that   progressivity                                                               
essentially acts like  a gross, but maybe it  could be redesigned                                                               
to have the elements  of a gross at the very  high end because at                                                               
that point it becomes very close.                                                                                               
3:20:24 PM                                                                                                                    
MR. MITCHELL elaborated  he believes that the  marginal basis the                                                               
net structure with  progressivity behaves very like  a high gross                                                               
rate.  If  you  look  at today's  $80-plus  barrel  price,  costs                                                               
haven't  jumped  by $20/barrel  over  the  last three  months  as                                                               
prices have  moved from  $60. So  there is  a bigger  margin, but                                                               
that entire margin  is being taxed from a production  tax at 27 -                                                               
28 percent  rate plus  the progressivity.  That's in  addition to                                                               
the royalty and  the other taxes of corporate  taxes and property                                                               
taxes. He said the state gets  the best of both worlds by sharing                                                               
on  the high  side and  getting the  investments through  the tax                                                               
3:21:48 PM                                                                                                                    
MR. DICKINSON  said the third topic  was a request to  provide to                                                               
the  Senate Resources  Committee an  explanation or  illustration                                                               
regarding the  $800 million  shortfall - what  it's based  on and                                                               
how the DOR  arrived that number. While he  said the commissioner                                                               
of  the  DOR could  better  explain  that  number, he  wanted  to                                                               
summarize several  ways of  looking at the  gap. He  referenced a                                                               
handout labeled  "Summer '06 versus  the Spring '07  Forecast for                                                               
Fiscal Year 2008."                                                                                                              
The fiscal note  indicated for two different prices:  one said at                                                               
a price of $46.90 that the  state would bring in $1.5 billion and                                                               
it gave  a high side estimate  of $60 and said  they could expect                                                               
to bring in  $2.4 billion. Eight months later in  2007 the spring                                                               
forecasts came  out and a number  of adjustments had been  made -                                                               
and it  said they could  expect to raise roughly  $1.billion. His                                                               
point  is  the difference  between  the  revenue forecast  at  $1                                                               
billion and  the fiscal  note from eight  months earlier  at $1.5                                                               
billion is roughly $500 million.                                                                                                
Another way  of looking at  it is clearly recognizing  the effect                                                               
that prices  have. And what  would the  fiscal note have  been if                                                               
the price forecast  used had been $54.72? That  suggests it would                                                               
have  been  roughly $2  billion  in  revenue  instead of  the  $1                                                               
billion forecast  by the  DOR. So  there is a  $1 billion  gap on                                                               
this very simplistic  basis. He had not doubt there  are a lot of                                                               
other  tweaks  that  can  account  for  the  smaller  differences                                                               
between those.                                                                                                                  
MR. DICKINSON asked if the  major issue that everyone is focusing                                                               
on is  cost, what difference  would a  doubling of costs  from $2                                                               
billion to $4 billion produce. He answered:                                                                                     
      So, we start with an incremental $2 billion. What's                                                                       
        the tax effect going to be? Let's further assume                                                                        
     really simply that  $1 billion of that  was higher Opex                                                                    
     and $1  billion of that  is higher Capex.  Okay, what's                                                                    
     going to happen? The Opex,  if there's $1 billion extra                                                                    
     dollars, that's  going to  make taxes  go down  by $225                                                                    
     million. It's  that simple.  If your  tax rate  is 22.5                                                                    
     percent  and there's  $1  billion  more in  deductions,                                                                    
     it's $225  [million]. So you  can think about  your own                                                                    
     income tax  when I have  $100 deduction, I  save $22.50                                                                    
     in tax. You know, it's the same idea.                                                                                      
     Capital investments,  though, capital  spending, starts                                                                    
     out   with  the   same   thing   because  that's   also                                                                    
     deductible.  Then you  have the  ability to  take a  20                                                                    
     percent  credit -  so that  gets  added on  - and  then                                                                    
     finally another  very simplifying assumption  I've made                                                                    
     here is that  in this the second year of  the PPT, that                                                                    
     there's enough  TIE investment available  so that   the                                                                    
     two  for  one  match  is fully  utilized.  So  whatever                                                                    
     credit there  was essentially, TIE,  to match  it comes                                                                    
     in  and  the  net  effect  is  you  add  additional  10                                                                    
     percent.  So  I  added  22.5  and  20  percent  and  10                                                                    
     percent. So the effect  of an additional capital dollar                                                                    
     is the  state basically gets  $.52.5 less in tax  or to                                                                    
     go back  to my analogy  if there's $1 billion  in extra                                                                    
     capital spend,  that should knock  $525 million  out of                                                                    
     the tax  receipts.... So,  you take the  22. 5  and the                                                                    
     52.5 and you  combine them and it's an  average of 37.5                                                                    
     and  you multiply  that times  $2 billion  and you  get                                                                    
     $750 million.                                                                                                              
     All I'm trying to do  with this simplistic thing is say                                                                    
     sitting back,  the Department of Revenue  has seen this                                                                    
     $2  billion increase  and yes  you'd expect  everything                                                                    
     else being equal  for that to be about  $800 million. I                                                                    
     think it's  very important to distinguish  that kind of                                                                    
     analysis from  the revenue's efficiency analysis  - the                                                                    
     numbers that  you looked at  then you pass  budgets and                                                                    
     items like that.                                                                                                           
3:28:45 PM                                                                                                                    
COMMISSIONER GALVIN  said the gap  exists and Mr.  Dickinson just                                                               
showed them  two ways that  validate those numbers.  The question                                                               
is moving forward  that acknowledging that the folks  from BP and                                                               
ConocoPhillips said their numbers match up with the state's.                                                                    
MS. FITZPATRICK agreed  and added when BP looks  at current costs                                                               
as an individual  company, it has only part of  what the state is                                                               
looking at. But she felt comfortable with the 2007 numbers.                                                                     
MR. MITCHELL pledged  to work with the  administration in sharing                                                               
MR. HAYMES pledged to not be so ambiguous.                                                                                      
MARK HANLEY,  Anadarko, echoed previous comments  on adequate and                                                               
correct information.                                                                                                            
3:34:53 PM                                                                                                                    
COMMISSIONER GALVIN said  the nature of actually  getting to that                                                               
desire of sharing  of information comes down to  the state saying                                                               
it wants  this information and then  it gets a reaction  from the                                                               
companies  asking  if  the information  is  really  critical  and                                                               
necessary. There is a different  perception between the state and                                                               
companies when it comes to how  valuable it is. There needs to be                                                               
statutory authority that information needs to be provided.                                                                      
     That's why  it's in  the bill. There  needs to  be very                                                                    
     clear statutory authority that  says the taxpayer shall                                                                    
     provide this  information in a  way that  avoids having                                                                    
     individual  conflicts  over   whether  or  not  certain                                                                    
     aspects  of certain  types  of  information are  really                                                                    
     meant to be provided in  a very general statement about                                                                    
     how   they  shall   provide  whatever   information  is                                                                    
     necessary for the  state and you end  up with conflicts                                                                    
     on a  daily basis over whether  that's really necessary                                                                    
     or  not. That's  why  we're trying  to  provide in  the                                                                    
     statutory  language  some  clear  definitions  of  what                                                                    
     needs to be provided.                                                                                                      
SENATOR WIELECHOWSKI said  one of the things  he's confused about                                                               
in  the  overall argument  is  PPT  was  supposed to  raise  $2.2                                                               
billion and  it actually raised  $1.4 billion. But last  year the                                                               
industry expected  to pay $2.2 billion  in taxes and it  ended up                                                               
paying $1.4 billion.                                                                                                            
COMMISSIONER  GALVIN corrected  that last  year in  FY'07 it  was                                                               
supposed to bring  in $2.2 billion if all the  numbers were lined                                                               
up; but it  brought in $2.0 billion; when you  look at FY'08 with                                                               
the current costs they are looking at a $800 million shortfall.                                                                 
SENATOR  WIELECHOWSKI said  that ACES  would have  them pay  less                                                               
than they expected to pay under PPT.                                                                                            
MR. HANLEY said  he raised this issue upstairs as  well and a lot                                                               
of  what  was debated  during  PPT  was  how  much is  the  right                                                               
government take  and for the  companies to have. One  thing seems                                                               
to be  forgotten and it's  the fact  that if companies  paid less                                                               
than  they expected  to  pay,  it was  because  their costs  were                                                               
higher and it cost them more.  When everyone figured out the 22.5                                                               
percent tax rate, that was based  on having a lower cost as well.                                                               
Results show they had a lower  return than was expected, too. "It                                                               
is important to remember that while  the state lost money, so did                                                               
the  companies  -  if  that's   the  case."  There  is  also  the                                                               
difference between a  cost and investment and part  of the reason                                                               
there's $200 million less is that  people went out and spent $500                                                               
million more in drilling new wells, not just new cost increases.                                                                
3:39:52 PM                                                                                                                    
COMMISSIONER GALVIN  responded that it's important  to reflect on                                                               
who  knew what  when. The  companies clearly  paid less  than the                                                               
state expected and  it's true that a company's  margins are going                                                               
shrink with increased costs. From a  year ago, they may have paid                                                               
exactly  what  they thought  they  were  going  to pay,  it  just                                                               
wasn't' necessarily what  the state thought they  would pay. It's                                                               
an important distinction.                                                                                                       
SENATOR WIELECHOWSKI  asked how  much of the  state's information                                                               
he was  relying on when  the state's  estimates were made  and if                                                               
this is one of the things ACES is going to fix.                                                                                 
COMMISSIONER GALVIN replied  in a way. A year ago  the state came                                                               
up with  estimates and provided  them to the companies  that kind                                                               
of said  well maybe you're a  little low here or  over there, but                                                               
the  information didn't  come  from the  companies  per se.  They                                                               
didn't   actually  report   anything;   they   didn't  sign   any                                                               
certificates;  it's not  like this  year when  they had  actually                                                               
filed  returns  where they  certify  these  are their  costs  and                                                               
provided  them to  the state  and that's  what it  is basing  its                                                               
information on now.                                                                                                             
SENATOR  WIELECHOWSKI  asked  if  it's  fair  to  say  the  state                                                               
suffered a  shortfall because  the department  underestimated how                                                               
much their expenses would be.                                                                                                   
COMMISSIONER  GALVIN replied  the department  underestimated what                                                               
their costs actually were.                                                                                                      
SENATOR  WIELECHOWSKI said  the  department  got its  information                                                               
from them.                                                                                                                      
COMMISSIONER GALVIN  replied that  the got its  information based                                                               
on  a variety  of sources;  he  then had  conversations with  the                                                               
companies; and that  they didn't correct it is  probably the more                                                               
accurate was of putting it -  as opposed to that they didn't give                                                               
it to him.                                                                                                                      
CHAIR HUGGINS said  when he listened to Dan describe  his old job                                                               
with the Division of Tax,  that the projections were surprisingly                                                               
MR. DICKINSON  added that on one  level it was a  classic case of                                                               
the division overestimating  volume, which it had done  18 out of                                                               
19  of   the  past  times,   and  underestimating   expenses  and                                                               
underestimating price.  The net  effect of  those was  the number                                                               
that  came within  8 percent  of the  projected number.  He added                                                               
that Commissioner  Galvin described the process  exactly, but one                                                               
step further - the information  he had from companies was blended                                                               
from  a  lot  sources  including  partnership  returns  for  unit                                                               
investments  on   the  North  Slope.   That's  really   the  only                                                               
information  the companies  provided.  Other  estimates were  put                                                               
together from Wood MacKenzie, for  instance. Among the people who                                                               
reviewed  it  were  the  companies,  but  also  the  legislators'                                                               
consultants - looking at ballparks  and sensitivities. "I guess I                                                               
would just  characterize it there  was a lot of  discussion about                                                               
them, but  no flags about whether  they were way off,  but you're                                                               
right. Nobody  put someone under  oath and said do  these numbers                                                               
represent X, Y and Z."                                                                                                          
SENATOR  MCGUIRE  remembered  that   there  was  a  clear  policy                                                               
decision to incentivize their industry.                                                                                         
     But the  spirit I would  like to convey when  you think                                                                    
     about legislative  intent and the debates  that went on                                                                    
     for eight months of last year  is that there was a very                                                                    
     clear policy decision to  incentivize your industry and                                                                    
     I think you should really  walk away feeling good about                                                                    
     that. The  legislature has debated  taxes in  my tenure                                                                    
     on  alcohol and  tobacco  and car  dealerships and  all                                                                    
     kinds of  things. And in  no case  have I ever  heard a                                                                    
     desire on  the part  of lawmakers  across the  state to                                                                    
     say let's incentivize this industry.  I mean we are not                                                                    
     saying to  liquor stores  we're going  to go  ahead and                                                                    
     give you  some credits,  because we  would like  to see                                                                    
     more  people  drink. And  so  -  but  I think  it's  an                                                                    
     important  thing to  point out  that with  that benefit                                                                    
     comes  tremendous responsibility.  And that  what we're                                                                    
     expecting is not - and  I'm not implying it's occurring                                                                    
     - but  not a game of  cat and mouse or  battleship, but                                                                    
     rather that focus  on the partnership part  and that we                                                                    
     are wanting to help  you incentivize your industry. And                                                                    
     so when  you're thinking  about what  kind of  costs or                                                                    
     investments go  in, then  it's really  a matter  of are                                                                    
     you  investing in  the state?  Is  it something  that's                                                                    
     going to  grow your  industry, create more  jobs, bring                                                                    
     more  profits  for  you,  but also  for  the  State  of                                                                    
     Alaska. And  so I look  forward to a better  sharing of                                                                    
     data,  but if  it gives  you the  spirit of  what we're                                                                    
     thinking about, we may not  get it right every time, we                                                                    
     may not get every word in  the right spot of what we're                                                                    
     trying to  define. I think  that's the difficulty  of a                                                                    
     citizen  legislature; we're  not economists;  we're not                                                                    
     petroleum  engineers;  we  can't  identify  everything;                                                                    
     neither can  the department frankly. But  the spirit is                                                                    
     please  work  with  us;  we're   trying  to  grow  your                                                                    
     industry for the benefit of all of us.                                                                                     
3:47:07 PM                                                                                                                    
MS. FITZPATRICK said everyone was  collectively in agreement with                                                               
each other on the principle of getting something workable.                                                                      
COMMISSIONER GALVIN  said that the  state needs to make  it clear                                                               
exactly what is required.                                                                                                       
3:50:27 PM                                                                                                                    
SENATOR WAGONER  commented that ConocoPhillips'  chief economist,                                                               
Marianne Kah, last year sat in  this same committee room and said                                                               
something that was  probably very important and  that they didn't                                                               
pursue very  much -  that costs  were on  the increase  and could                                                               
double.  He asked  her  if labor  was included  in  that and  she                                                               
replied probably not. He thought  they needed to be more thorough                                                               
on  both sides  when the  forecasts  are being  made -  and be  a                                                               
little  more honest  with each  other because  she had  it pegged                                                               
pretty well.                                                                                                                    
MR. MITCHELL agreed that Ms. Kah is sharp and very accurate.                                                                    
3:51:55 PM                                                                                                                    
MR. HANLEY recalled  that a little bit of the  pressure last year                                                               
is  that the  companies were  padding their  costs to  make their                                                               
returns  look  lower.  So,  this  year,  they  are  sitting  here                                                               
listening to  the legislature  is telling  them they  didn't tell                                                               
them the costs were high enough.                                                                                                
3:53:48 PM                                                                                                                    
CHAIR HUGGINS said as he understands  it there is a little bit of                                                               
change  in how  they are  going to  state deductions.  Instead of                                                               
exclusions, the law will say what you can deduct.                                                                               
COMMISSIONER GALVIN  agreed and explained that  the state through                                                               
regulations will identify what can be deducted.                                                                                 
SENATOR GREEN asked if they will still have exclusions.                                                                         
3:54:36 PM                                                                                                                    
MR.  DICKINSON replied  that the  structure still  starts with  a                                                               
high level  statement (in section  165); it says  it has to  be a                                                               
direct cost of producing, exploring  for or developing oil or gas                                                               
in the state and all the  other qualifiers. Then section (e) sets                                                               
out the  current 17 (and this  bill would add two  more) specific                                                               
exclusions  -  so  that  no  matter what,  those  are  no  longer                                                               
deductible. The change, as the  commissioner said, is there's not                                                               
going to  be an intermediate  step which says the  department has                                                               
to  write regulations  and  unless  the department's  regulations                                                               
allow for it, it is prohibited  as a deduction. So the department                                                               
is taking  the general notion of  a direct cost of  exploring for                                                               
developing or producing oil or gas  in the state (with four other                                                               
qualifications) and turning those into regulations.                                                                             
3:56:29 PM                                                                                                                    
SENATOR GREEN  recalled from  the previous  years that  they were                                                               
sort of  the warned not  to list too many  things one way  or the                                                               
other for fear that something  would inadvertently be omitted and                                                               
therefore  become  litigious.  She  asked  if  the  goal  he  was                                                               
shooting for was to avoid listing too many items.                                                                               
COMMISSIONER GALVIN replied that it  really depends on the nature                                                               
of the definitions. As Mr.  Dickinson said, you can define things                                                               
in  the  broad  category  and  leave  a  lot  of  open  room  for                                                               
interpretation  within them.  The  limitation is  if  you try  to                                                               
identify all of the nits and  you miss something, then there's an                                                               
inverse  interpretation that  you intended  to exclude  that nit.                                                               
The balance is to find things in  such a way that you insure that                                                               
you have maximum inclusion of what  you are trying to include and                                                               
minimize things that you clearly don't  want to have in there. He                                                               
said his  regulations would be  two or  three steps down  in that                                                               
fine tuning.                                                                                                                    
SENATOR GREEN asked  if that could be done  with maximum accuracy                                                               
and fairness  or does it advantage  the department to be  able to                                                               
define passed legislation in regulation.                                                                                        
COMMISSIONER GALVIN  replied that  the regulatory  process allows                                                               
more  interaction  with  the  taxpayers  being  able  to  have  a                                                               
discussion of the technical details  in a context that allows for                                                               
them to be  fleshed out a bit  more. It adds a  level of avoiding                                                               
unexpected exclusions  and flexibility to have  the conversations                                                               
with industry before going through litigation.                                                                                  
3:59:11 PM                                                                                                                    
CHAIR HUGGINS followed up saying  his concern was more elementary                                                               
and if  the department hadn't  been able  to do audits,  how well                                                               
could it do definitions.                                                                                                        
COMMISSIONER GALVIN replied  that the language of  the statue and                                                               
the intention  of the effort is  going to be based  upon industry                                                               
standards,  not   upon  going   into  the  audits   and  deciding                                                               
retroactively what should or shouldn't be included.                                                                             
4:00:10 PM                                                                                                                    
MR.  HAYMES  said  he  was  concerned that  the  draft  bill  was                                                               
ambiguous. He said  the 30-cent allowance was  objective, but any                                                               
time you get into prescription  it's going to be very subjective.                                                               
It will create  a lot of confusion and ambiguity  and auditing of                                                               
auditors. He was very concerned  that regulations could be easily                                                               
modified. "And again it kind of gets  back to if there's a lot of                                                               
ambiguity;  then  we need  to  assume  a worse-case  scenario  in                                                               
future investments  - not  knowing how it  will be  treated until                                                               
you're way  down the pipeline so  to speak." He implored  them to                                                               
make the definitions as objective and transparent as they can.                                                                  
4:01:41 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked Commissioner  Galvin if  his position                                                               
has evolved in any way  after hearing the testimony about credits                                                               
over one year versus two years.  It seems it benefits the smaller                                                               
independents  to go  one year  and  the larger  companies say  it                                                               
doesn't have that big of an impact.                                                                                             
COMMISSIONER  GALVIN  replied  that  his  position  never  really                                                               
evolved. He  recognized that it  was basically a trade  off issue                                                               
and the difference  going from one year to two  years is simply a                                                               
matter of taking  50 percent and discounting it by  time value of                                                               
money in  one year.  Clearly a  project would  have to  be fairly                                                               
marginal for  that to  make a  difference between  whether you're                                                               
making  money or  not. But  it's just  whether the  value to  the                                                               
state is  really offset by  that. He  saw value in  the smoothing                                                               
aspect of  it in terms of  blending variable costs from  one year                                                               
to the next for simple forecasting.                                                                                             
MR. DICKINSON  emphasized that the  value to the state  is really                                                               
small for a  technical reason. He explained  that the projections                                                               
the state  has to deal  with are based on  a fiscal year.  So, as                                                               
you make an  investment in the later part of  a calendar year and                                                               
then are forced  to move half of it into  the next calendar year,                                                               
it's  still going  to  be  on the  same  fiscal  year plate.  So,                                                               
instead of half being moved  forward, it's more that quarter gets                                                               
moved out  to that  next fiscal  year and  three quarters  of the                                                               
effect of it could be in that first fiscal year.                                                                                
4:05:28 PM                                                                                                                    
SENATOR WAGONER  said it's  the same  dollars in  the end  to the                                                               
state  no matter  how  the  pie is  cut.  He  wanted to  simplify                                                               
anywhere they could.                                                                                                            
SENATOR WAGONER  said this provision only  affects the explorers.                                                               
The producers take those credits against their production tax.                                                                  
COMMISSIONER GALVIN said they only get half.                                                                                    
4:06:07 PM                                                                                                                    
MR.  MITCHELL said  it's not  a huge  financial impact,  but it's                                                               
still a form of tax increase and  an erosion in value if you look                                                               
at  project  economics.  However,  the  allowing  credits  to  be                                                               
deducted over  two versus over one  year is not a  huge factor in                                                               
considering whether a project gets done or not.                                                                                 
MR. HAYMES  said the  key for Exxon  is that it  adds a  lot more                                                               
administrative burden to  both the investors and the  DOR. If the                                                               
intent is to incent more investments, this doesn't do it.                                                                       
SENATOR  STEDMAN said  he would  be considering  this along  with                                                               
forecasting and planning the state's  budget cycle in the Finance                                                               
Committee.  He wanted  to  get as  much  predictability into  the                                                               
process as possible.                                                                                                            
CHAIR  HUGGINS announced  that Senators  Thomas, French,  Hoffman                                                               
were in attendance.                                                                                                             
4:08:44 PM                                                                                                                    
CHAIR  HUGGINS went  to the  issue  of changing  from monthly  to                                                               
annual  reporting  and  asked the  commissioner  to  explain  the                                                               
rationale behind that.                                                                                                          
COMMISSIONER   GALVIN   explained   that   in   calculating   the                                                               
progressivity he realized  that they are asking  the companies to                                                               
do a little  bit of an artificiality where they  would take their                                                               
anticipated annual  costs and  have to divide  that by  12 months                                                               
and calculate  their income  for a  particular month.  That would                                                               
establish  their  net  value,  which   would  then  kick  in  the                                                               
progressivity.  Thinking through  the basic  fairness of  it with                                                               
constantly changing prices and price  spikes that may last a week                                                               
or  two, the  inherent randomness  of having  a spike  that takes                                                               
place between  the 10   and  the 30   of the  month may  create a                                                               
tremendous  progressivity  payment  whereas   if  it  took  place                                                               
between the 20  of one month  and the 10  of the following month,                                                               
it may  have no impact  at all. And he  thought there was  just a                                                               
basic  fairness aspect  to having  progressivity calculated  over                                                               
the entire year -  have it be the annual price  and have it apply                                                               
basically to one chunk on an average basis.                                                                                     
He said  when he ran the  models for last few  years, prices were                                                               
pretty  volatile  and he  figured  the  state  would be  out  $10                                                               
million to $20 million per year from doing it on annual basis.                                                                  
     Basically   given   that    we   are   increasing   the                                                                    
     progressivity across the  board, it was sort  of one of                                                                    
     those  trade off  things that  was well  okay, it  will                                                                    
     make  it a  little bit  easier to  calculate and  a bit                                                                    
     more fair in its application  and although it does cost                                                                    
     the state  in the  end, it was  from my  perspective an                                                                    
     appropriate tradeoff.                                                                                                      
4:11:35 PM                                                                                                                    
MR.  HANLEY said  annualizing it  generally  saves the  companies                                                               
money, which means  it would cost the state some  money. And that                                                               
in itself wasn't hugely significant,  but it's important to point                                                               
out that in  his view the changes that were  made to the starting                                                               
point and the escalator were  actually a significant tax increase                                                               
at a $60 price.                                                                                                                 
4:13:28 PM                                                                                                                    
COMMISSIONER  GALVIN said  it was  not the  intent to  make these                                                               
equivalent   tradeoffs   and   he  recognized   the   change   in                                                               
progressivity  that  would  bring the  state  significantly  more                                                               
money. Going  to the annual  was a nod  to fairness and  a little                                                               
bit easier calculation.                                                                                                         
CHAIR HUGGINS asked if they agree that annualization is simpler.                                                                
MR. HANLEY replied yes.                                                                                                         
MR.  DICKINSON  added  in  that   the  creation  of  the  monthly                                                               
progressivity was  one of  the uglier things  in PPT,  but having                                                               
said that, one  of the reasons it was done  was because there was                                                               
a definite focus  on capturing spikes. "If that's  not a concern,                                                               
then clearly  an annual  return is much  simpler than  12 monthly                                                               
CHAIR HUGGINS thanked everyone for their comments and adjourned                                                                 
the meeting at 4:15:43 PM.                                                                                                    

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