Legislature(2013 - 2014)BUTROVICH 205

02/13/2013 03:30 PM RESOURCES


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Teleconference <Listen Only> --
+= SB 21 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
Dept. of Revenue and Dept. of Natural Resources
and Consultants
*+ SJR 8 MINING/PROCESSING OF RARE EARTH ELEMENTS TELECONFERENCED
Moved CSSJR 8(RES) Out of Committee
Bills Previously Heard/Scheduled
               SB  21-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                                
3:41:18 PM                                                                                                                    
CHAIR  GIESSEL announced  SB 21  to be  up for  consideration and                                                               
said the Department of Revenue  (DOR) had answered questions from                                                               
Senators  French and  Gardner  and those  were  available to  the                                                               
committee. She invited  Mr. Pulliam from Econ  One, consultant to                                                               
the sponsor, to testify.                                                                                                        
                                                                                                                                
3:42:01 PM                                                                                                                    
BARRY  PULLIAM,  Managing  Director,  Econ  One  Research,  Inc.,                                                               
consultant for  the sponsor  of SB 21,  Juneau, AK,  presented an                                                               
analysis of Alaska's  tax system, North Slope  investment and the                                                               
administration's   proposal,  SB   21.  He   started  with   some                                                               
background saying that the North  Slope to date had produced 16.2                                                               
billion barrels  of oil, a  lot more  than people thought  it was                                                               
going to produce when it  was first discovered; about 5.5 billion                                                               
barrels of economically recoverable oil  are left in those fields                                                               
today. About 90 percent of  the discovered resources to date were                                                               
discovered prior to 1970 and  largely in Prudhoe Bay and Kuparuk.                                                               
The following  discoveries are smaller  and more typical  of what                                                               
can be expected going forward.                                                                                                  
                                                                                                                                
SENATOR FRENCH asked  if they should look  at incumbent producers                                                               
in analyzing  ACES, since that  is who  is producing oil  now and                                                               
will likely be producing oil in the future.                                                                                     
                                                                                                                                
MR. PULLIAM answered that the  incumbent producers are important,                                                               
but a  lot of  the oil  that is  left to  be produced  is sitting                                                               
outside  of the  Legacy  Fields  and waiting  to  be produced  by                                                               
anybody  and  that  Alaska  would benefit  from  a  much  broader                                                               
participation by  companies that are  here and those  that aren't                                                               
here yet.  Less than half of  the North Slope potential  has been                                                               
produced  to  date  and  an   estimated  40  billion  barrels  of                                                               
economically oil is  available to be produced  at today's prices,                                                               
a  majority of  it being  conventional oil  much of  which is  on                                                               
federal property.                                                                                                               
                                                                                                                                
3:46:16 PM                                                                                                                    
According to the United State  Geological Survey (USGS) estimate,                                                               
about 3 billion barrels of  recoverable oil at $90/barrel remains                                                               
in the  central North  Slope in smaller  fields of  32-64 million                                                               
barrels and  significant resource  still remains in  the Beaufort                                                               
and  Chukchi  Seas;  efforts  are   just  starting  to  tap  that                                                               
resource. In NPRA the estimates  are about .5 billion barrels are                                                               
economic  to recover  and ANWR  has close  to 10  billion barrels                                                               
with some bigger field sizes  on average (not approaching Prudhoe                                                               
Bay).                                                                                                                           
                                                                                                                                
USGS knows there  is some shale in Alaska, but  they don't have a                                                               
number for  what is  economic, because  they are  just scratching                                                               
the surface.  The heavy  oil resource in  place estimates  are in                                                               
the 25 billion barrel range  and about 15 percent are recoverable                                                               
according to  current estimates,  but those figures  are expected                                                               
to go up with anticipated technology developments.                                                                              
                                                                                                                                
3:49:56 PM                                                                                                                    
Briefly, the  history of Alaska's  production tax  system started                                                               
at 12.25  percent, similar to the  rate in the Lower  48, in 1977                                                               
when oil  first flowed off the  North Slope. It was  increased to                                                               
15  percent in  1981 with  an exemption  for new  fields for  the                                                               
first five years.                                                                                                               
                                                                                                                                
SENATOR DYSON  asked him  to explain the  impact of  the economic                                                               
limit factor (ELF) in 1977.                                                                                                     
                                                                                                                                
MR. PULLIAM  explained that the  ELF modified the  production tax                                                               
based on  a well's production.  Royalties at that time  were 12.5                                                               
percent  and the  gross  production tax  was  12.25 percent.  The                                                               
impact  wasn't  great initially,  but  by  2005 the  ELF  greatly                                                               
reduced the  tax rate  for fields  like Kuparuk  down to  the 2-4                                                               
percent range.                                                                                                                  
                                                                                                                                
SENATOR DYSON asked if it was a gross tax at the time.                                                                          
                                                                                                                                
MR. PULLIAM replied yes.                                                                                                        
                                                                                                                                
SENATOR FRENCH said according to  DNR numbers in 1996 Kuparuk was                                                               
paying about 12  percent tax and went down  continuously until in                                                               
2005 it was under 1 percent and  asked if the state saw an uptick                                                               
in  investment in  that time.  Did  dropping the  tax at  Kuparuk                                                               
produce enormous new investments and with that more oil?                                                                        
                                                                                                                                
MR. PULLIAM said he would get  to that later in the presentation,                                                               
but that  Senator French  was right about  the tax  rate dropping                                                               
over that  period due to  how the  ELF worked. Yes,  putting more                                                               
wells  in the  ground reduced  the nominal  tax rate  at Kuparuk,                                                               
which was  15 percent at  the time.  By 2006, PPT  was introduced                                                               
and  that fundamentally  changed a  gross-based tax  system to  a                                                               
net-based system. So, instead of taxing  the value of the oil and                                                               
determining the  taxable value  at the  wellhead, it  allowed the                                                               
producer  to take  deductions for  operating  and capital  costs.                                                               
Therefore, the taxable  value under our net system  is lower than                                                               
it was  under the gross system.  The tax rate under  PPT was 22.5                                                               
percent and then  a progressivity piece was added to  it, so that                                                               
when the net  value of the oil exceeded $40/barrel,  the tax rate                                                               
went up  by .25 percent per  dollar a barrel (or  2.5 percent for                                                               
every $10 increase in value of the oil).                                                                                        
                                                                                                                                
3:54:40 PM                                                                                                                    
SENATOR MCGUIRE said  they had heard that at high  oil prices the                                                               
progressivity  factor itself  changes behavior  because companies                                                               
have  more  money to  invest.  They  want  to put  their  capital                                                               
somewhere,  but  if  a  jurisdiction   takes  more,  they're  not                                                               
necessarily going  to continue  to invest  there. And  she wanted                                                               
him to factor oil prices into  his comments about behavior of oil                                                               
companies.                                                                                                                      
                                                                                                                                
MR. PULLIAM  agreed that  price of  oil is  a key  determinant in                                                               
what the producer gets to keep.                                                                                                 
                                                                                                                                
SENATOR DYSON asked if field  wide aggregating of the calculation                                                               
is what happened when the ELF was eliminated.                                                                                   
                                                                                                                                
MR. PULLIAM answered  that when the Prudhoe  Bay satellites first                                                               
started producing the ELF was very  low, so the tax rate was very                                                               
low.  But  in 2005,  the  Murkowski  administration decided  that                                                               
those  satellites would  be aggregated  with the  main field  for                                                               
purposes of  calculated the ELF  making the new rate  much closer                                                               
to 15 percent than zero.                                                                                                        
                                                                                                                                
SENATOR DYSON asked when we got rid of ELF.                                                                                     
                                                                                                                                
MR. PULLIAM said that technically we  still have it, but we don't                                                               
use it.  The PPT eliminated it  from the tax calculation  for the                                                               
first time in 2006.                                                                                                             
                                                                                                                                
3:58:23 PM                                                                                                                    
After one year, PPT was amended  to ACES increasing the base rate                                                               
by  2.5 percent  and the  progressivity  from .25  percent to  .4                                                               
percent,  and the  base rate  at  which it  applied was  lowered.                                                               
Progressivity was flattened  out at $92.50. The  overall tax rate                                                               
increased more quickly with the  progressivity under ACES and was                                                               
capped at a higher level than under PPT.                                                                                        
                                                                                                                                
3:59:25 PM                                                                                                                    
He said comparing  activity on the North Slope  relative to other                                                               
locations  was challenging  because  overall  prices and  general                                                               
economic conditions  impact activity there.  So, in order  to get                                                               
the  most meaningful  comparison the  other places  have to  have                                                               
similar  characteristics, for  instance, in  political and  legal                                                               
structure, prospectivity and have  readily available data like in                                                               
the major Organization for  Economic Co-operation and Development                                                               
(OECD) producing areas (the North  Sea, Canada, Australia and the                                                               
rest of  the U.S.). These provinces  are not running out  of oil,                                                               
but producing  it is high cost  and technology will have  to help                                                               
out.   The resources are  also being  developed in large  part by                                                               
the  private sector  so  the incentive  structure  to invest  and                                                               
produce is similar among them.                                                                                                  
                                                                                                                                
4:02:49 PM                                                                                                                    
He related the North Slope Profile as follows:                                                                                  
-crude oil production has been declining over time                                                                              
-growth  in  capital  spending  between  2005  and  2006  then  a                                                               
flattening out from 2009 forward                                                                                                
-increase in employment 2006 to 2007 and then a leveling off                                                                    
-focus  on maintenance  and  a  downtick in  drilling/development                                                               
activity                                                                                                                        
                                                                                                                                
SENATOR  DYSON remarked  that production  was  going down  faster                                                               
before ACES  and spending and  drilling in the legacy  fields was                                                               
less.                                                                                                                           
                                                                                                                                
MR. PULLIAM responded  that there are rational  reasons for that.                                                               
A decline  in production occurred  across all fiscal  regimes and                                                               
some  decline was  inevitable regardless  of  the fiscal  regime.                                                               
Capital  spending increased  as  fiscal regimes  changed, but  it                                                               
hadn't  increased as  quickly  on  the North  Slope  as in  other                                                               
places in  response to the same  price level changes. And  as far                                                               
as employment  goes, there was probably  a need prior to  2006 to                                                               
do some maintenance work.                                                                                                       
                                                                                                                                
4:07:54 PM                                                                                                                    
He pointed  out that capital  spending grew  in the new  units of                                                               
Oooguruk and Nikiatchuq that weren't  producing oil prior to 2003                                                               
and that those were largely developed during ACES.                                                                              
                                                                                                                                
4:08:32 PM                                                                                                                    
SENATOR FRENCH  said they were  given a  fascinating presentation                                                               
recently  by ConocoPhillips  about  their exploding  use of  coil                                                               
tubing units  to do multiple  completions from a single  well and                                                               
asked if that  had changed the state's method  of counting wells.                                                               
For instance,  he wondered whether  20 years ago  eight different                                                               
completions off of  one well bore would count as  eight wells and                                                               
now be counted as one.                                                                                                          
                                                                                                                                
MR.  PULLIAM answered  that he  thought that  number referred  to                                                               
down-hole completion.                                                                                                           
                                                                                                                                
4:10:38 PM                                                                                                                    
SENATOR FRENCH  asked if  he was  using consistent  capital spend                                                               
units of measurement between graphs.                                                                                            
                                                                                                                                
MR. PULLIAM replied that he used nominal dollars of the day.                                                                    
                                                                                                                                
He explained that  the production pattern in the  North Sea looks                                                               
very similar  to Alaska's: capital  investment for the  first few                                                               
years plateaued around 2010 with  a significant uptick in capital                                                               
expenditure in the  last few years (but with a  flattening off in                                                               
drilling particularly for the U.K.).                                                                                            
                                                                                                                                
SENATOR  FRENCH asked  him to  comment on  what seemed  to be  an                                                               
interesting set  of comparisons: $50  billion being spent  in the                                                               
North Sea for 3 million barrels  of production and in Alaska $2.5                                                               
billion being spent for .5 million barrels of production.                                                                       
                                                                                                                                
MR. PULLIAM answered  that the comparison was  attempting to look                                                               
at  spending  for  the  future,   which  doesn't  have  a  direct                                                               
relationship to current production.  Both places have significant                                                               
resources yet  to be exploited  and it would  be nice to  see the                                                               
same kind of spending in Alaska as seen in the North Sea.                                                                       
                                                                                                                                
4:13:36 PM                                                                                                                    
The next profile  was of the U.S. excluding the  North Slope that                                                               
showed an  uptick in production  - as a  result of shale  oil and                                                               
conventional oil production. California  has a much lower decline                                                               
rate  than  Alaska  as  a   result  of  increased  investment  in                                                               
conventional production. That  is seen in Texas as  well. Much of                                                               
the increase in Canada has been  from heavy oil. And he said that                                                               
prices  are  a  key  aspect  of what  has  made  that  production                                                               
possible.                                                                                                                       
                                                                                                                                
4:15:15 PM                                                                                                                    
SENATOR  MICCICHE  remarked  that it's  interesting  that  Texas'                                                               
production  increased  in  2007-2010  largely  before  any  shale                                                               
production, yet drilling declined  significantly between 2008 and                                                               
2010.                                                                                                                           
                                                                                                                                
MR. PULLIAM said he knew  drilling activity went down, because of                                                               
the  price drop  in 2009  and  that Texas  and the  Lower 48,  in                                                               
general, are very responsive to price.                                                                                          
                                                                                                                                
SENATOR MICCICHE asked if Texas'  fields are better at curtailing                                                               
production while waiting for price than Alaska is.                                                                              
                                                                                                                                
MR.  PULLIAM  replied   that  probably  some  of   that  goes  on                                                               
especially around the margin, because a  well can be shut in more                                                               
quickly in a  place like Texas or the Lower  48 without impacting                                                               
overall  operations.  There are  also  have  a lot  more  smaller                                                               
producing  wells down  there. Australia  has  a little  bit of  a                                                               
different story  where declining  oil production was  replaced by                                                               
LNG. So, a  lot of their capital spend has  been to develop their                                                               
LNG gas resources.                                                                                                              
                                                                                                                                
4:18:43 PM                                                                                                                    
He displayed  another graph of aggregated  production relative to                                                               
price  in these  areas starting  in 2003  that indicated  950,000                                                               
barrels a  day were  produced initially on  the North  Slope, but                                                               
that had  gone down by  50 percent to  515,000 barrels a  day. In                                                               
that same time period  the price of oil went from  $35 up to over                                                               
$100 a  barrel in 2012. The  OECD declined through 2008  and then                                                               
had an uptick that corresponded  with the increase in prices. The                                                               
U.S. had the same pattern as the OECD countries.                                                                                
                                                                                                                                
4:21:20 PM                                                                                                                    
SENATOR  BISHOP asked  what a  million barrels  a day  production                                                               
would do to the ANS market price.                                                                                               
                                                                                                                                
MR. PULLIAM replied that it  wouldn't have a material impact. The                                                               
West Coast is supplied by foreign  oil at about 1 million barrels                                                               
a day. So increasing ANS would simply cut back on the imports.                                                                  
                                                                                                                                
SENATOR  MICCICHE said  it  looks  like it  takes  some time  for                                                               
conventional oil  production to  respond to  oil price  but while                                                               
the  rest of  the market  responded to  the higher  oil price  in                                                               
2009, Alaska continued to decline.                                                                                              
                                                                                                                                
MR.  PULLIAM  said looking  back,  2008/09  was a  very  volatile                                                               
period; within  six months oil  prices dropped by $100  a barrel.                                                               
But industry realized the low  price was not sustainable, because                                                               
the cost of  finding and producing oil had  risen. Therefore, the                                                               
drop in price  was from a combination of  an overinflated market,                                                               
a  financial crisis  and the  following  recession. He  explained                                                               
that investors look  at the long term and that  while the drop in                                                               
2008/09 impacted their margin, the  longer term view was that the                                                               
price of oil would not go back to $40 or $60 a barrel.                                                                          
                                                                                                                                
SENATOR MICCICHE said everyone was  in decline prior to 2008, but                                                               
Alaska didn't  respond to  the higher  price while  other markets                                                               
did and asked if other factors contributed to that difference.                                                                  
                                                                                                                                
4:25:43 PM                                                                                                                    
MR.  PULLIAM replied  that a  number  of factors  like the  take,                                                               
technology  and the  ability to  get at  some of  these resources                                                               
all add  up very quickly.  He added that  a lot of  production in                                                               
the U.S. is readily accessible.                                                                                                 
                                                                                                                                
4:26:33 PM                                                                                                                    
He continued  that capital  spending in  Alaska and  other places                                                               
doubled between  2003 and 2006; then  Alaska's spending flattened                                                               
out  for a  couple of  years and  rises a  little after  2008 and                                                               
flattened again. Spending  in the rest of the  world continued to                                                               
respond to  the higher price  level and  came down again  in 2009                                                               
and  matched where  Alaska  was, but  has  continued to  increase                                                               
since  then  as the  price  of  oil has  gone  up.  We know  that                                                               
spending  was  taking place  in  the  legacy fields  during  that                                                               
period;  much of  the Alpine  oil  was developed  in the  2003/05                                                               
period.                                                                                                                         
                                                                                                                                
He  said that  it  takes a  while for  industry  to adjust  their                                                               
expectations to changing prices, especially  when it was at $40 a                                                               
barrel, and that accounts for the period between 2003-2006/8.                                                                   
                                                                                                                                
4:30:06 PM                                                                                                                    
MR. PULLIAM  explained how ACES  works: the tax is  calculated on                                                               
the net  value of the  taxable production (all of  the production                                                               
minus  the royalties).  The per  barrel  net value  is the  gross                                                               
wellhead value  (West Coast minus transportation)  minus the cost                                                               
of  production.  That  cost of  production  consists  of  capital                                                               
expenses, operating  expenses and property tax  payments, and the                                                               
cost associated with  actually finding and pulling it  out of the                                                               
ground to the  wellhead. A 25 percent base tax  is applied to the                                                               
net value  and the progressivity  increases by 4 percent  per $10                                                               
over $30/barrel  and then  1 percent for  every $10  over $92.50;                                                               
the progressive piece is capped at  50 percent. So, the total tax                                                               
rate  if  prices are  that  high  (around $300/barrel)  would  be                                                               
capped at 75 percent.                                                                                                           
                                                                                                                                
SENATOR  DYSON asked  at the  range  Alaska prices  have been  in                                                               
($90-120) what has been the highest tax rate.                                                                                   
                                                                                                                                
MR. PULLIAM replied close to 50 percent at current prices.                                                                      
                                                                                                                                
SENATOR  DYSON asked  what  the highest  effective  tax rate  has                                                               
been.                                                                                                                           
                                                                                                                                
MR. PULLIAM  said he couldn't  quote that figure exactly  - maybe                                                               
40-45  percent  varying across  producer  (in  the current  price                                                               
range). For  example, assuming $100/barrel production  tax value,                                                               
that would correspond to $130/barrel  (West Coast), the base rate                                                               
of  25 percent  and progressivity  at $25  at .75  percent for  a                                                               
total tax  rate of  50.75 percent.  Once that  tax rate  has been                                                               
applied  to the  taxable value  of  the oil,  the production  tax                                                               
credit  allows  20 percent  over  a  two-year period,  a  smaller                                                               
producer  credit of  $12  million/year that  is  phased out  when                                                               
production exceeds  50,000 barrels  a day,  and a  provision that                                                               
the  state  will  purchase  credits  and  operating  losses  from                                                               
companies that do not have a  tax obligation against which it can                                                               
be  applied.  Most  of  this involves  capital  expenses  in  the                                                               
earlier phases  of exploration and development.  So, in combining                                                               
the 20 percent credit with the  25 percent tax rate, the state is                                                               
purchasing a total of about 45 percent of those expenditures.                                                                   
                                                                                                                                
4:35:18 PM                                                                                                                    
SENATOR  DYSON asked  which capital  expenditures  within a  unit                                                               
could not be deducted as an operating expense.                                                                                  
                                                                                                                                
MR.  PULLIAM  answered  generally  if a  capital  expenditure  is                                                               
charged to  all of  the working  interest owners  as part  of the                                                               
joint billing  it could be  deducted. There are  some exceptions,                                                               
but he  didn't know what  they are  because he wasn't  an expert.                                                               
There is  also a 30-cent  exception overall; so, for  instance if                                                               
your  Capex  were $10/barrel,  you  are  only allowed  to  deduct                                                               
$9.70. Sometime  between the  corrosion event in  2006 and  a few                                                               
years ago  a limitation  was put  on deductible  capital expenses                                                               
based on  where they  had been  in 2006,  but that  provision has                                                               
expired.                                                                                                                        
                                                                                                                                
SENATOR DYSON  replied you can't  get any better watchdog  than a                                                               
partner in a unit.                                                                                                              
                                                                                                                                
MR.  PULLIAM agreed.  He said  the next  several slides  revealed                                                               
some examples  of how  the tax is  calculated at  various prices:                                                               
$80, $100 and $120 using 50 million barrels after royalty.                                                                      
                                                                                                                                
4:40:22 PM                                                                                                                    
CHAIR GIESSEL asked where the royalty was calculated.                                                                           
                                                                                                                                
MR. PULLIAM  answered that  the royalty  volumes are  not taxable                                                               
and had already been deducted.                                                                                                  
                                                                                                                                
SENATOR  MICCICHE said  it would  be  interesting to  incorporate                                                               
corporate income tax,  property tax, royalty and  federal tax for                                                               
an overall government take in his example.                                                                                      
                                                                                                                                
MR.  PULLIAM said  total government  take would  be more  like 75                                                               
percent (41 percent of it production tax).                                                                                      
                                                                                                                                
4:42:17 PM                                                                                                                    
Another slide held  the price at $100/barrel but  varied the cost                                                               
of the  fields from a  relatively low  cost to a  relatively high                                                               
cost.  With  only  $20  in  expenses,  there  is  a  pretty  high                                                               
progressive rate (16  percent), but if the expenses go  up to $50                                                               
that  progressive piece  drops to  4 percent.  The effective  tax                                                               
rate could be as high as 38 percent or as low as 19 percent.                                                                    
                                                                                                                                
4:43:39 PM                                                                                                                    
CHAIR GIESSEL asked  if this illustrated the  potential impact of                                                               
gold-plating  where companies  would spend  more to  reduce their                                                               
taxes as well  as the benefit to the small  new producers in that                                                               
they would have more capital expenses initially.                                                                                
                                                                                                                                
MR. PULLIAM responded that the  ability to reduce the progressive                                                               
rate is  a benefit to the  incumbent that the new  small producer                                                               
doesn't have,  because they don't  get to  buy down their  rate -                                                               
although they  do get  to sell  their losses to  the state  - but                                                               
just at the base rate of 25 percent.                                                                                            
                                                                                                                                
4:44:46 PM                                                                                                                    
The next  slide (22) varied the  costs, but at $80/barrel  as the                                                               
starting price. At this level  the progressive piece was lower at                                                               
all the  cost scenarios  and actually  went away  in a  high cost                                                               
scenario.  So, the  effective  tax  rates varied  from  29 to  50                                                               
percent.  He  explained   in  a  low-price/high-cost  environment                                                               
you'll  have very  low  effective tax  rates.  The taxable  value                                                               
before expenditures  was $40/barrel. The expenditure  itself when                                                               
amortized over  production equated  to about $5/barrel.  So, that                                                               
expenditure reduced  the taxable per  barrel value the  tax could                                                               
be applied to;  it also has the effect of  reducing the tax rate.                                                               
So,  before the  expenditure  his  tax rate  would  have been  29                                                               
percent  (25 plus  4 percent  progressive) and  after taking  the                                                               
credits there was a $280 million tax obligation.                                                                                
                                                                                                                                
MR.  PULLIAM  explained that  after  making  his expenditure  his                                                               
taxable  value was  reduced from  $40 to  $35, which  reduced his                                                               
progressive rate.  So, his  total tax  rate was  27 percent  - as                                                               
opposed to 29 percent  - but  27 percent times  a lower price. He                                                               
gets additional  credits as  well and  after factoring  those in,                                                               
his tax obligation was $122.5 million.                                                                                          
                                                                                                                                
4:45:24 PM                                                                                                                    
The effect  of all of  that is that his  tax rate was  reduced by                                                               
$107 million before  any application of credits,  which added $50                                                               
million. So,  his total tax was  reduced by $157.5 million,  a 63                                                               
percent reduction. Twenty percent of  that was the credit, but 43                                                               
percent was simply the effect of progressivity of the buy-down.                                                                 
                                                                                                                                
4:48:16 PM                                                                                                                    
SENATOR FRENCH  commented that  this essentially  illustrates how                                                               
someone  who is  investing more  in  Alaska buys  down their  tax                                                               
obligation under the current system.                                                                                            
                                                                                                                                
MR. PULLIAM said  that was correct; it shows how  someone can buy                                                               
their   tax  obligation   in  Alaska   by  having   more  capital                                                               
expenditures. You can see going  across his chart that the higher                                                               
prices go the  more that is worth. So, at  $80/barrel his tax was                                                               
reduced by $157  million (63 percent); if  prices are $120/barrel                                                               
that would  reduce his  taxes by  almost the  full amount  of the                                                               
expenditure (95 percent) making it  effectively an amount that is                                                               
funded by the state.                                                                                                            
                                                                                                                                
SENATOR FRENCH  said in extending  that further, the  state could                                                               
be seen  as participating too  strongly in that buy  down effect.                                                               
That  number  could  be  tweaked and  still  preserve  the  basic                                                               
mechanism of rewarding people who  invest in Alaska and (the flip                                                               
side) penalizing people who ship their profits overseas.                                                                        
                                                                                                                                
MR. PULLIAM responded  that he understood what he  was saying. It                                                               
could  be changed  to  not have  that strong  of  an effect,  but                                                               
penalizing  a company  for sending  its profits  elsewhere was  a                                                               
strong assumption  and one of  the best incentives the  state can                                                               
provide, in  his view, was  to allow  investors to do  with their                                                               
profits as they see fit.                                                                                                        
                                                                                                                                
He  said  the  quality  of  the profit  generated  here  is  very                                                               
different than  the quality that is  generated elsewhere, because                                                               
elsewhere  that   money  has   no  strings   attached.  Requiring                                                               
reinvesting  here  is   kind  of  like  giving   someone  a  gift                                                               
certificate as  opposed to  giving him cash.  That is  why Alaska                                                               
hasn't had  the kind of  response it had  hoped to get  with this                                                               
system. It's set up to  greatly subsidize the investment, but the                                                               
expense  of doing  that  is  that the  state  will  take a  large                                                               
portion of it  back. It's just not as appealing  to the companies                                                               
as other places are.                                                                                                            
                                                                                                                                
SENATOR MICCICHE remarked  that what is painful to  watch is that                                                               
the  credits   are  not  tied   to  production,  so   that  "gift                                                               
certificate" brings no value to the people of Alaska.                                                                           
                                                                                                                                
4:52:39 PM                                                                                                                    
MR. PULLIAM said that is a  problem, particularly in a high price                                                               
environment when the state One of  the reasons PPT was changed to                                                               
ACES was because we didn't see the results we wanted to.                                                                        
                                                                                                                                
4:55:13 PM                                                                                                                    
SENATOR MCGUIRE said it's nice to  have an economist in the room,                                                               
because  there is  a  tendency to  inject a  lot  of emotion  and                                                               
ascribe feelings to  companies that aren't there  when often it's                                                               
just a matter  of numbers. She agreed  with eliminating qualified                                                               
capital expenditures (QCE)  because they are not  working, but as                                                               
they  move forward  she  wanted  to know  what,  if any,  credits                                                               
should be in a long-term tax system.                                                                                            
                                                                                                                                
MR. PULLIAM said  he felt the less done with  credits, the better                                                               
off you  are. For  instance, the U.K.  has instituted  the "brown                                                               
field allowance"  when they recognized  they weren't  getting the                                                               
production they  wanted. Instead of giving  credits they incented                                                               
additional production  in areas  that had already  been developed                                                               
by exempting  the first number of  barrels coming out of  the new                                                               
investment from  a portion  of the  tax. While  that can  be done                                                               
more easily there, because they tax  by field and Alaska taxes by                                                               
company,  it's a  credit in  the form  of taking  less when  it's                                                               
produced. If  a company wants  the allowance, they have  to apply                                                               
for it  and the U.K. has  a review process. Here  we give credits                                                               
to anybody who  does something that qualifies under  the law. So,                                                               
it could be a good investment or one that is poorly thought out.                                                                
                                                                                                                                
5:01:02 PM                                                                                                                    
It would be better  for Alaska if it wants to  get involved to do                                                               
something  like  AIDEA has  done  with  the Mustang  development.                                                               
There they have  a company that wants to develop  and is having a                                                               
tough time accessing  capital probably because of  their size and                                                               
newness.  But they  went  to  AIDEA and  laid  it  out and  their                                                               
economics are compelling, so they  were able to get funding. That                                                               
kind of vehicle is better  ultimately for the state than pledging                                                               
to buy the 45 percent.                                                                                                          
                                                                                                                                
SENATOR DYSON  said they keep  hearing that the  sovereign should                                                               
have some  skin in the  game and using  AIDEA gets closer  to the                                                               
idea of the state sharing the risk.                                                                                             
                                                                                                                                
MR. PULLIAM agreed  with him and said that sharing  also allows a                                                               
level of review for the  state. He explained that sometimes small                                                               
companies  will get  funding  from the  private  sector and  then                                                               
AIDEA will buy a significant portion  of that debt and be able to                                                               
reduce the capital  cost. He thought exploring ways  to make that                                                               
kind of  funding more accessible would  be a great thing  to look                                                               
at.  And while  people thought  PPT was  competitive when  it was                                                               
changed, the message Alaska needs to  send is that we will always                                                               
be competitive even though situations change.                                                                                   
                                                                                                                                
5:06:31 PM                                                                                                                    
SENATOR  MICCICHE said  he hears  concerns from  folks that  they                                                               
believe in being competitive, but  how do they keep from starting                                                               
a tax reduction war with  Exxon's competitors across the board in                                                               
OECD countries.                                                                                                                 
                                                                                                                                
MR.  PULLIAM said  that  was  a good  question.  He didn't  think                                                               
matching them or  being in the same ballpark that  they are would                                                               
constitute  a   price  reduction.  What  happened   is  that  our                                                               
government take jumped up above theirs' and we've stayed there.                                                                 
                                                                                                                                
5:07:19 PM                                                                                                                    
SENATOR  DYSON  asked  if  those   figures  include  royalty  and                                                               
property taxes.                                                                                                                 
                                                                                                                                
MR. PULLIAM replied everything.                                                                                                 
                                                                                                                                
5:08:54 PM                                                                                                                    
SENATOR FRENCH asked  what his assumption was  for federal income                                                               
taxes.                                                                                                                          
                                                                                                                                
MR. PULLIAM answered 35 percent.                                                                                                
                                                                                                                                
SENATOR   FRENCH  said   he  believes   BP,  ConocoPhillips   and                                                               
ExxonMobil pay  significantly less than  35 percent and  that his                                                               
slide overstated  the tax rate  of the majority of  the taxpayers                                                               
on the North Slope.                                                                                                             
                                                                                                                                
MR. PULLIAM  replied if it does  for the North Slope  it does for                                                               
every place in the world.                                                                                                       
                                                                                                                                
SENATOR  FRENCH said  they don't  pay federal  income tax  in the                                                               
U.K. or Norway.                                                                                                                 
                                                                                                                                
MR.  PULLIAM responded  that they  do if  they are  a U.S.  based                                                               
company. He didn't  know of anybody who  does investment analysis                                                               
who doesn't use  the marginal rate of 35 percent  for the federal                                                               
take.  They could  get their  effective rate  lower with  certain                                                               
deductions, but  it couldn't  be applied  to the  marginal income                                                               
and that  is why it's  appropriate to  use the marginal  rate for                                                               
this analysis.                                                                                                                  
                                                                                                                                
5:11:08 PM                                                                                                                    
SENATOR BISHOP  said they are  all trying to  find a tax  that is                                                               
fair  for everybody  at  the end  of  the day  and  asked if  his                                                               
calculation factored in the credits.                                                                                            
                                                                                                                                
MR. PULLIAM replied yes.                                                                                                        
                                                                                                                                
5:12:53 PM                                                                                                                    
SENATOR MICCICHE asked Mr. Pulliam to answer his question.                                                                      
                                                                                                                                
MR. PULLIAM  said PFC was  kind enough to send  their calculation                                                               
of government  take across different  regimes so he could  put it                                                               
into  his graph.  All government  take averages  65 percent;  and                                                               
it's  fairly  constant  among progressive,  regressive  and  flat                                                               
systems, he  said. The  OECD areas  - Australia,  Canada, Norway,                                                               
U.K., and  the U.S.  - all  come in  a little  bit lower  than 60                                                               
percent, but  slightly higher than  SB 21  in the $100  and above                                                               
range. Anything calculated on the  gross will create a regressive                                                               
component,  which reflects  the royalties  that get  paid in  the                                                               
U.S., but  that is minor.  But the  proposal would put  us within                                                               
spitting distance  of the average  for other areas and  he didn't                                                               
think it would start any tax war if prices stay where they are.                                                                 
                                                                                                                                
If  prices  drop considerably,  jurisdictions  may  be forced  to                                                               
lower  their  tax rates,  but  what  would  make prices  drop?  A                                                               
significant change in technology  or a discovery someplace. Right                                                               
now we know  that the marginal barrel coming out  of the Lower 48                                                               
is in the  $80/barrel range and the same for  Canada. With prices                                                               
below  that  you start  to  shut  in  production and  that  isn't                                                               
sustainable.  High prices  might increase  takes as  in the  mid-                                                               
2000s, but  that isn't likely either.  It will incent a  shift to                                                               
other technologies.                                                                                                             
                                                                                                                                
CHAIR  GIESSEL asked  him to  define regressive,  progressive and                                                               
progressivity.                                                                                                                  
                                                                                                                                
5:17:12 PM                                                                                                                    
MR. PULLIAM said  that progressive refers to an  increase in take                                                               
as prices rise (tax rate is 25  percent at $100 but 35 percent at                                                               
$120).  Regressive  refers to  decreasing  take  as prices  rise,                                                               
because  take is  always  calculated on  the  net (after  costs).                                                               
Progressivity increases the tax rate  as prices rise; we did that                                                               
by going  to the net,  which tends to  flatten out the  take, and                                                               
then adding the progressive component  to the tax, which made the                                                               
overall system progressive as prices go up.                                                                                     
                                                                                                                                
5:19:05 PM                                                                                                                    
Next  he said  the high  cost scenario  (slide 30)  looks at  the                                                               
economics  of  producing  both  light  and  heavy  oil  and  ACES                                                               
provides an  incentive in the form  of the net present  value and                                                               
the internal rate of return  (IRR). Producing heavy oil under the                                                               
ACES system  for an  incumbent at above  $90/barrel looks  like a                                                               
positive net present value (attractive),  but if you look at what                                                               
happens if there  is no production tax at all,  that same project                                                               
doesn't  look very  attractive.  What makes  the difference?  The                                                               
ACES  provisions that  allows buying  down the  rate and  the tax                                                               
credit. ACES turns revenues associated  with that production into                                                               
a negative return for the state.                                                                                                
                                                                                                                                
MR.  PULLIAM  said that  producing  heavy  oil is  a  "challenged                                                               
activity." If we had no  production tax, things still wouldn't be                                                               
quite right;  the technology  isn't quite  there yet.  Yet, under                                                               
ACES we  might make those look  attractive, but at an  expense to                                                               
the  state and  "We might  be jump  starting something  here that                                                               
even if we had no tax wouldn't make sense to do."                                                                               
                                                                                                                                
5:23:04 PM                                                                                                                    
An  excerpt from  a CERA  report (consulting  firm) for  the U.S.                                                               
Department of Interior  on government take in  areas they thought                                                               
were competitive  with the U.S. federal  properties characterized                                                               
Alaska's system as  a profits tax in the range  of 25-75 percent,                                                               
and when people  look at Alaska's terms without  digging too deep                                                               
that is  what they  see. Another  page in  the report  showed the                                                               
attractiveness of  fiscal systems and  Alaska was the  number two                                                               
least attractive  - sandwiched between  Venezuela and  Russia. If                                                               
companies look at  these things without digging  too deeply, this                                                               
paints an impression that is not real good for Alaska.                                                                          
                                                                                                                                
SENATOR DYSON asked him to go down the list of categories.                                                                      
                                                                                                                                
MR. PULLIAM  listed them as total  government take, profitability                                                               
index  (measure of  the efficiency  of capital  investment (PI)),                                                               
internal rate of return (IRR),  and a component for progressivity                                                               
and regressivity.  He noted that  you get a more  favorable score                                                               
the flatter your system is and  a less favorable score if you are                                                               
highly progressive  or highly regressive. Revenue  risk refers to                                                               
the time in which the state  receives the payments; to the extent                                                               
you are sharing  equally in the risk you get  a higher score. For                                                               
instance, a gross system would have  a bad score and a net system                                                               
would have a better score. The  type of change refers to the type                                                               
of fiscal  change that has  occurred over  a number of  years and                                                               
the applicability of the change.                                                                                                
                                                                                                                                
SENATOR DYSON asked what types of change.                                                                                       
                                                                                                                                
MR. PULLIAM replied that they  are looking here at fiscal systems                                                               
in each jurisdiction.                                                                                                           
                                                                                                                                
SENATOR  DYSON  asked  if  that  meant  the  sovereign's  wisdom,                                                               
strength and reliability.                                                                                                       
                                                                                                                                
MR. PULLIAM answered  yes; he added that they also  looked at the                                                               
applicability, degree  and frequency of the  change. Alaska needs                                                               
to be concerned with frequency, especially between 2005/06/07.                                                                  
                                                                                                                                
5:27:26 PM                                                                                                                    
SENATOR FAIRCLOUGH asked if Alaska  takes the lion's share of the                                                               
hit in  terms of  revenue risk  during the  monthly progressivity                                                               
payments.                                                                                                                       
                                                                                                                                
MR. PULLIAM answered that he  didn't know if the monthly payments                                                               
factor in or the gross royalty.                                                                                                 
                                                                                                                                
SENATOR  DYSON said  that  nothing in  this  rating system  talks                                                               
about geo-political stability.                                                                                                  
                                                                                                                                
MR.  PULLIAM replied  nothing  directly, but  there  would be  an                                                               
indirect relation through changes to the system itself.                                                                         
                                                                                                                                
5:29:44 PM                                                                                                                    
SENATOR DYSON asked  if any others marked as  "changed" were more                                                               
likely to show geopolitical risk in the evaluation.                                                                             
                                                                                                                                
MR.  PULLIAM  replied  that  he   didn't  directly  measure  geo-                                                               
political risk,  but it  comes in indirectly  with the  manner in                                                               
which  a  fiscal  system  changes  in  frequency.  For  instance,                                                               
Norway,  a relatively  good place  to invest  from an  investor's                                                               
perspective, is  towards the bottom of  the list and they  have a                                                               
high take.                                                                                                                      
                                                                                                                                
SENATOR BISHOP said he was confused.                                                                                            
                                                                                                                                
MR.  PULLIAM said  one must  be careful  in using  just the  take                                                               
statistic.   Norway's   take  is   high   but   it's  flat   (not                                                               
progressive). Norway has been fairly  stable and has some aspects                                                               
that provide for  accelerated cost recovery. But  Norway is still                                                               
struggling with  some of the  same things  that the U.K.  is, and                                                               
the U.K. has responded aggressively.  A lot of activity in Norway                                                               
is state funded by Statoil, a majority owned state company.                                                                     
                                                                                                                                
SENATOR FRENCH  asked what Norway's  capital spending  record has                                                               
been recently.                                                                                                                  
                                                                                                                                
MR. PULLIAM replied that it has trended up.                                                                                     
                                                                                                                                
SENATOR FRENCH remarked, "and with  a higher government take than                                                               
we have."                                                                                                                       
                                                                                                                                
MR. PULLIAM  added that  other aspects come  into play:  the cash                                                               
generation  in Norway  has been  a  little bit  higher than  what                                                               
Alaska has had  and it has the presence of  a state-owned company                                                               
with  significant activity  - and  maybe a  little bit  different                                                               
requirements. Yet  they have  also seen  a decline  in production                                                               
and might have to make  a change. Norway's recent discoveries are                                                               
large and that encourages prospectivity,  which is important when                                                               
investors make decisions; they also look at reserves remaining.                                                                 
                                                                                                                                
5:34:02 PM                                                                                                                    
SENATOR DYSON said  he was surprised to see  Texas between Angola                                                               
and Kazakhstan  as an attractive  place and that he  was reacting                                                               
to all the  criticism Alaska gets for being amongst  the worst in                                                               
the world. He has often  thought Alaska's critics don't take into                                                               
account that it has a net tax and credits.                                                                                      
                                                                                                                                
MR. PULLIAM said he suspected  that Texas is there because theirs                                                               
is  a purely  gross system  and at  lower prices  takes in  Texas                                                               
don't look  that great.  His point is  that the  companies Alaska                                                               
would like to have  here look at things like this  and have to be                                                               
dissuaded that it isn't as bad as is being reported.                                                                            
                                                                                                                                
5:38:40 PM                                                                                                                    
Mr. Pulliam said the advantage  to moving to SB 21, specifically,                                                               
is that it:                                                                                                                     
-provides balance between the state and producer incentives                                                                     
-reduces tax rates  at high prices and that is  balanced with the                                                               
elimination of credits                                                                                                          
-continues largest  percentage of oil production  revenues at any                                                               
price to the state                                                                                                              
-simplifies tax system and provides clarify for planning                                                                        
-eliminates  question of  marginal tax  rate/take for  investment                                                               
planning                                                                                                                        
                                                                                                                                
5:40:28 PM                                                                                                                    
CHAIR GIESSEL  said that  large companies say  they model  in the                                                               
$70-90 price range, but that is not evidenced on this chart.                                                                    
                                                                                                                                
MR. PULLIAM  explained the variety  of investment  statistics for                                                               
ACES, SB 21 with  the GRE and SB 21 without the  GRE on slide 44.                                                               
As the price of the oil  goes up SB 21 significantly improves the                                                               
present  value of  the investment  for  a new  producer. He  also                                                               
explained that the  U.K. has two systems  (the difference between                                                               
columns  10 and  11), one  for  pre-'93 discoveries  and one  for                                                               
post-'93 discovered  fields; the rate on  the post-'93 discovered                                                               
fields is lower. So column 10  (post-'93) has a net present value                                                               
of $6.04/barrel  and they  wanted to  get more  oil out  of those                                                               
fields, so they  instituted the "brown field  allowance" that had                                                               
the effect of  increasing the present value by  $2.25, which puts                                                               
it much higher than ACES.                                                                                                       
                                                                                                                                
CHAIR GIESSEL  asked if  the brown field  allowance is  for their                                                               
legacy fields.                                                                                                                  
                                                                                                                                
MR. PULLIAM answered  yes. Their new field  allowance operates in                                                               
a  similar  fashion,  but  it would  be  legacy  and  non-legacy,                                                               
anything  in production  really. When  we think  about legacy  we                                                               
think  about Prudhoe  and Kuparuk,  but theirs  would be  applied                                                               
more broadly.                                                                                                                   
                                                                                                                                
5:45:56 PM                                                                                                                    
SB 21 with the GRE is  a significant boost to a new participant's                                                               
economics. There is a big benefit  in cash generation, but not in                                                               
the  IRR.  And  at  $100/barrel   a  new  development  by  a  new                                                               
participant  moves the  government  take from  75  percent to  61                                                               
percent.                                                                                                                        
                                                                                                                                
The next slide  showed the same set of metrics  for the incumbent                                                               
whose MPV  numbers, because of  the buy  down, were at  $6.14 (as                                                               
opposed to $3).  This change really elevates  the new participant                                                               
to the level  where the incumbent is already with  the benefit of                                                               
the tax  buy down. It  does it without progressivity  and without                                                               
providing credits,  which makes it more  efficient than providing                                                               
that incentive.  The producers'  incentive at  the $100  level is                                                               
not  all  that different  in  looking  at  the NPV.  Margins  are                                                               
significantly increased  under SB 21  and that will be  viewed as                                                               
attractive.  The  net  present  value  of  the  state's  take  is                                                               
actually  a little  better under  SB 21  at $100  oil and  that's                                                               
because it doesn't provide all of  that upfront money. So, at the                                                               
net present value basis the state is actually better off.                                                                       
                                                                                                                                
SENATOR MICCICHE  asked if the  crossover happened at  around $82                                                               
and if it had been reconciled with company modeling on slide 38.                                                                
                                                                                                                                
MR. PULLIAM replied  that was a good point and  he noted that all                                                               
of their analysis was done  in constant 2012 dollars assuming 2.5                                                               
percent inflation. If one were  instead to do this analysis using                                                               
inflated prices that  would correspond to $80 today  in 2015 that                                                               
might be  at $83 or $84.  The crossover point would  be different                                                               
and  that   accounts  for   some  of   the  differences   in  the                                                               
ConocoPhillips analysis. But  if you use real  prices, they would                                                               
both have the same slide.                                                                                                       
                                                                                                                                
5:50:31 PM                                                                                                                    
MR. PULLIAM  added that there was  a lot of useful  detail in the                                                               
appendix of his presentation.                                                                                                   
                                                                                                                                
CHAIR GIESSEL asked for closing remarks.                                                                                        
                                                                                                                                
MR. PULLIAM said  a lot of significant analysis had  gone on this                                                               
problem and  SB 21 strikes  the right  balance that will  be well                                                               
received and  does a good job  of presenting a fair  take for the                                                               
state.  Taking less  is  a much  more  attractive and  additional                                                               
monies will come into the state  if it gives industry the freedom                                                               
to do what they see fit.                                                                                                        
                                                                                                                                
SENATOR  GIESSEL thanked  Mr. Pulliam  for  his presentation  and                                                               
held SB 21 in committee.                                                                                                        

Document Name Date/Time Subjects
SJR 8 Version A.pdf SRES 2/13/2013 3:30:00 PM
SJR 8
SJR 8 Recent Press N60MN Press Release 2013.01.31.pdf SRES 2/13/2013 3:30:00 PM
SJR 8
SJR 8 Sponsor Statement.pdf SRES 2/13/2013 3:30:00 PM
SJR 8
SJR 8 Support Doc-Rare Earth Elemnts- AK ADGGS- 2011.pdf SRES 2/13/2013 3:30:00 PM
SJR 8
SJR 8 Amendment 1 Supp Doc S. 181.pdf SRES 2/13/2013 3:30:00 PM
SJR 8
SJR 8 Bokan-Niblack Road Map 2013.02.13.pdf SRES 2/13/2013 3:30:00 PM
SJR 8
SJR 8 Presentation UCore 2013.02.13.pdf SRES 2/13/2013 3:30:00 PM
SJR 8
SJR 8 Supp Letter- Ucore 2013.1.30.pdf SRES 2/13/2013 3:30:00 PM
SJR 8
SJR 8 Supp Resolution POWCAC 2011.11.22.pdf SRES 2/13/2013 3:30:00 PM
SJR 8
SB 21 Econ One Presentation SRES 2013 02 13 pdf.pdf SRES 2/13/2013 3:30:00 PM
SB 21