Legislature(2005 - 2006)HOUSE FINANCE 519

04/06/2006 08:30 AM FINANCE


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08:39:05 AM Start
08:39:13 AM HB488
09:53:19 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ HCR 30 AK CLIMATE IMPACT ASSESSMENT COMMISSION TELECONFERENCED
<Bill Hearing Postponed to 1:30 PM Today>
+ HB 105 MEDICAID FOR ADULT DENTAL SERVICES TELECONFERENCED
<Bill Hearing Postponed>
+ HB 412 TUITION WAIVERS:MILITARY/POLICE/FIRE TELECONFERENCED
<Bill Hearing Postponed>
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= HB 307 KNIK RIVER PUBLIC USE AREA TELECONFERENCED
<Bill Hearing Postponed to 1:30 PM Today>
+= HB 493 SCHOOL CONSTRUCTION BOND REIMBURSEMENT TELECONFERENCED
<Bill Hearing Postponed to 1:30 PM Today>
+= HB 488 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
                  HOUSE FINANCE COMMITTEE                                                                                       
                       April 6, 2006                                                                                            
                         8:39 a.m.                                                                                              
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Chenault called the House  Finance Committee meeting                                                                   
to order at 8:39:05 AM.                                                                                                       
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Mike Chenault, Co-Chair                                                                                          
Representative Kevin Meyer, Co-Chair                                                                                            
Representative Bill Stoltze, Vice-Chair                                                                                         
Representative Richard Foster                                                                                                   
Representative Mike Hawker                                                                                                      
Representative Jim Holm                                                                                                         
Representative Reggie Joule                                                                                                     
Representative Mike Kelly                                                                                                       
Representative Beth Kerttula                                                                                                    
Representative Carl Moses                                                                                                       
Representative Bruce Weyhrauch                                                                                                  
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Marianne Kah, Chief Economist,  ConocoPhillips-Houston; Barry                                                                   
Pulliam, Senior Economist, Econ  One Research; Dan Dickinson,                                                                   
Consultant,  Tax  Division,  Department   of  Revenue;  Angus                                                                   
Walker,  Commercial  Vice  President,   British  Petroleum  -                                                                   
Alaska;  Dr.  Tony  Finizza,  Special  Consultant,  Econ  One                                                                   
Research; David  Bramley, Vice President,  CRA International;                                                                   
Representative Ethan Berkowitz                                                                                                  
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
None                                                                                                                            
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
                   Round Table Discussion                                                                                     
                                                                                                                                
HB 488    "An Act  repealing the  oil production tax  and gas                                                                   
          production  tax and providing for a  production tax                                                                   
          on the  net value of  oil and gas; relating  to the                                                                   
          relationship of the  production tax to other taxes;                                                                   
          relating to  the dates tax payments  and surcharges                                                                   
          are  due under  AS 43.55; relating  to interest  on                                                                   
          overpayments  under   AS  43.55;  relating  to  the                                                                   
          treatment  of  oil  and  gas production  tax  in  a                                                                   
          producer's  settlement   with  the  royalty  owner;                                                                   
          relating to flared gas,  and to oil and gas used in                                                                   
          the  operation of  a  lease or  property, under  AS                                                                   
          43.55; relating  to the prevailing value  of oil or                                                                   
          gas  under  AS  43.55; providing  for  tax  credits                                                                   
          against  the tax  due  under AS  43.55 for  certain                                                                   
          expenditures,  losses, and surcharges;  relating to                                                                   
          statements  or  other  information required  to  be                                                                   
          filed  with  or  furnished  to  the  Department  of                                                                   
          Revenue,  and relating to  the penalty  for failure                                                                   
          to file  certain reports, under AS  43.55; relating                                                                   
          to the powers of the  Department of Revenue, and to                                                                   
          the disclosure  of certain information  required to                                                                   
          be  furnished to the  Department of Revenue,  under                                                                   
          AS  43.55;  relating   to  criminal  penalties  for                                                                   
          violating  conditions governing  access to  and use                                                                   
          of  confidential information  relating  to the  oil                                                                   
          and gas production tax;  relating to the deposit of                                                                   
          money collected by the  Department of Revenue under                                                                   
          AS 43.55; relating to  the calculation of the gross                                                                   
          value  at the point  of production  of oil  or gas;                                                                   
          relating to  the determination of the  net value of                                                                   
          taxable  oil and gas  for purposes of  a production                                                                   
          tax on  the net value  of oil and gas;  relating to                                                                   
          the definitions of 'gas,'  'oil,' and certain other                                                                   
          terms for  purposes of AS 43.55;  making conforming                                                                   
          amendments; and providing for an effective date."                                                                     
                                                                                                                                
          HB 488 was heard and HELD in Committee for further                                                                    
          consideration.                                                                                                        
                                                                                                                                
8:39:13 AM                                                                                                                    
                                                                                                                                
HOUSE BILL NO. 488                                                                                                            
                                                                                                                                
     "An  Act  repealing  the  oil  production  tax  and  gas                                                                   
     production  tax and  providing for  a production  tax on                                                                   
     the  net  value   of  oil  and  gas;  relating   to  the                                                                   
     relationship  of  the  production  tax to  other  taxes;                                                                   
     relating to  the dates tax  payments and  surcharges are                                                                   
     due   under   AS   43.55;  relating   to   interest   on                                                                   
     overpayments under  AS 43.55; relating to  the treatment                                                                   
     of  oil   and  gas  production   tax  in   a  producer's                                                                   
     settlement  with the royalty  owner; relating  to flared                                                                   
     gas,  and to  oil and  gas used  in the  operation of  a                                                                   
     lease  or  property, under  AS  43.55; relating  to  the                                                                   
     prevailing  value   of  oil  or  gas  under   AS  43.55;                                                                   
     providing for  tax credits against the tax  due under AS                                                                   
     43.55 for certain expenditures,  losses, and surcharges;                                                                   
     relating to statements or  other information required to                                                                   
     be  filed  with  or  furnished   to  the  Department  of                                                                   
     Revenue,  and relating  to  the penalty  for failure  to                                                                   
     file certain  reports, under  AS 43.55; relating  to the                                                                   
     powers  of  the  Department   of  Revenue,  and  to  the                                                                   
     disclosure  of   certain  information  required   to  be                                                                   
     furnished to the Department  of Revenue, under AS 43.55;                                                                   
     relating to criminal penalties  for violating conditions                                                                   
     governing access to and use  of confidential information                                                                   
     relating to the oil and gas  production tax; relating to                                                                   
     the  deposit of  money collected  by  the Department  of                                                                   
     Revenue under  AS 43.55; relating to the  calculation of                                                                   
     the gross  value at  the point of  production of  oil or                                                                   
     gas; relating  to the determination of the  net value of                                                                   
     taxable oil and gas for purposes  of a production tax on                                                                   
     the  net  value   of  oil  and  gas;  relating   to  the                                                                   
     definitions  of 'gas,'  'oil,' and  certain other  terms                                                                   
     for purposes of AS 43.55;  making conforming amendments;                                                                   
     and providing for an effective date."                                                                                      
                                                                                                                                
Co-Chair  Chenault  introduced  the speakers  for  the  round                                                                   
table discussion.  He summarized  the PPT process so far.  He                                                                   
noted that  each oil corporation  has had a little  different                                                                   
opinion on the proposed tax.                                                                                                    
                                                                                                                                
8:42:16 AM                                                                                                                    
                                                                                                                                
Co-Chair Chenault read the first  question for the PPT panel:                                                                   
                                                                                                                                
     1. Legislators  took an oath  to maximize the  return on                                                                   
     resources  for the  benefit of  Alaskans.   What do  you                                                                   
     believe  is the best  proposal to  maximize this  return                                                                   
     while  at  the  same  time  encouraging  investment  and                                                                   
     exploration  to  extend   the  production  life  of  our                                                                   
     oil/gas resources?                                                                                                         
                                                                                                                                
8:42:49 AM                                                                                                                    
                                                                                                                                
DAN  DICKINSON,  CONSULTANT,   TAX  DIVISION,  DEPARTMENT  OF                                                                   
REVENUE, began by challenging  the basis of the question.  He                                                                   
opined that encouraging investment  and exploration to extend                                                                   
the production  life of oil  and gas resources  is maximizing                                                                   
the benefit of our resources for  all Alaskans.  He suggested                                                                   
that  the governor's  bill  does that  and  strikes the  best                                                                   
balance.   It is important  to account  for the long  term as                                                                   
well as the short term.                                                                                                         
                                                                                                                                
ANGUS WALKER, COMMERCIAL VICE  PRESIDENT, BRITISH PETROLEUM -                                                                   
ALASKA, responded  that barrels in the ground  have no value,                                                                   
so  production and  investment  need to  be  maximized.   The                                                                   
lowest tax  rate would  be best for  Alaska because  it would                                                                   
stimulate investment.   He maintained that a  15/25 structure                                                                   
would  be  better than  a  20/20  structure, which  would  be                                                                   
better than a 20/25 structure.                                                                                                  
                                                                                                                                
8:44:24 AM                                                                                                                    
                                                                                                                                
MARIANNE  KAH,  CHIEF ECONOMIST,  CONOCOPHILLIPS  -  HOUSTON,                                                                   
agreed  with Mr.  Walker, but  added  that a  lower tax  rate                                                                   
combined  with  tax   credits  would  do  the   best  job  of                                                                   
maximizing production, investment, and revenues.                                                                                
                                                                                                                                
BARRY   PULLIAM,  SENIOR   ECONOMIST,   ECON  ONE   RESEARCH,                                                                   
responded that  maximizing investment for investment  sake is                                                                   
not the goal.  The ultimate goal  is to maximize the value of                                                                   
the  resource.     If  you   only  maximize  production   and                                                                   
investment, there would  not be a tax or a royalty.   As Econ                                                                   
One   views  the   proposals,  20/20   does  not   discourage                                                                   
investment.                                                                                                                     
                                                                                                                                
8:47:20 AM                                                                                                                    
                                                                                                                                
DR.  TONY FINIZZA,  SPECIAL  CONSULTANT,  ECON ONE  RESEARCH,                                                                   
echoed  Mr. Pulliam's  comments.   He opined  that there  are                                                                   
enough incentives  for the  new fields.   He thought  the ELF                                                                   
tax was  not onerous and movements  from it would  not stifle                                                                   
investment.                                                                                                                     
                                                                                                                                
Mr.  Walker  responded   that  PPT  is  not   investment  for                                                                   
investment sake, but  to stem the 6 percent  per year decline                                                                   
of  Alaska North  Slope  oil production.    In  10 years  the                                                                   
production  and revenue  will be  half of what  it is  today.                                                                   
This is  a matter of great  importance for Alaska  because it                                                                   
is about getting investment to  Alaska to develop the barrels                                                                   
on the North Slope that are difficult to develop.                                                                               
                                                                                                                                
Ms. Kah added to the comment about  investment for investment                                                                   
sake.   Just  providing tax  credits and  incentives for  new                                                                   
players  to come in  for new  exploration, versus  supporting                                                                   
more production from existing  fields, sounds like investment                                                                   
for investment  sake.  To  maximize the value  of investment,                                                                   
the industry should  get more reserves from  existing fields,                                                                   
particularly  heavy oil.    She pointed  out  that the  20/20                                                                   
proposal is a  17-23 percent increase in the  government take                                                                   
and is bound to have an impact on investment.                                                                                   
                                                                                                                                
8:50:21 AM                                                                                                                    
                                                                                                                                
Co-Chair Meyer requested Econ One's response to Ms. Kah.                                                                        
                                                                                                                                
Mr.  Pulliam stated  that the  increase  would be  only a  4-                                                                   
percentage  point  increase in  government  take.   At  lower                                                                   
prices the  take would be  even lower.   Ms. Kah agreed.   He                                                                   
addressed  the  intent of  the  bill,  which  is to  reach  a                                                                   
balance and  keep investment going.   He suggested  that even                                                                   
at higher prices,  the take is not out of line  in comparison                                                                   
to the industry in the rest of  the world.  He suggested that                                                                   
Mr. Johnston could comment further.                                                                                             
                                                                                                                                
8:51:57 AM                                                                                                                    
                                                                                                                                
Dr.  Finizza observed  that  when he  first  came to  Alaska,                                                                   
major producers agreed  to a 20/20 tax, so he  thought it was                                                                   
not  too  onerous,  but  a reasonable  starting  point.    He                                                                   
advised not going higher than that.                                                                                             
                                                                                                                                
8:52:47 AM                                                                                                                    
                                                                                                                                
DAVID BRAMLEY,  VICE PRESIDENT,  CRA INTERNATIONAL,  referred                                                                   
to Slide  91 from Econ One's  presentation yesterday.   Price                                                                   
projections  at  $52.7  per  barrel   show  calculations  for                                                                   
government  take  figures  go   from  54.4  percent  to  62.3                                                                   
percent.  He highlighted Alaska's  competitive position.  The                                                                   
step proposed  by Econ One is  a step from a  high government                                                                   
take  to  an even  higher  one.    He pointed  out  that  his                                                                   
company's  view is pessimistic.   He  termed this trend  very                                                                   
onerous with a negative impact on investment.                                                                                   
                                                                                                                                
8:54:39 AM                                                                                                                    
                                                                                                                                
Mr.  Pulliam said  when you  look  at those  take figures  at                                                                   
$52.7, at real  prices, in time, with 2.5  percent inflation,                                                                   
the prices are high.                                                                                                            
                                                                                                                                
Mr. Walker said  it important to remember that  what has been                                                                   
proposed  in the  new  CS and  in  the governor's  bill  will                                                                   
create the highest tax rate in  the United States for a state                                                                   
that has  the highest cost structure.   He disputed  the idea                                                                   
that if  the producers  agreed to  it, it must  be good.   He                                                                   
emphasized that the agreement  was part of a negotiation as a                                                                   
steppingstone to gas.  He reiterated  that it would be better                                                                   
for Alaska to have a lower tax rate.                                                                                            
                                                                                                                                
8:56:31 AM                                                                                                                    
                                                                                                                                
Co-Chair Meyer pointed out that  the legislators take an oath                                                                   
of office to maximize returns  to citizens.  He noted that at                                                                   
Kuparuk  the tax  rates went  down and  investments went  up.                                                                   
Pioneer is  trying to decide whether  to invest in  Alaska or                                                                   
Texas.   He  suggested  improving regulatory  and  permitting                                                                   
processes.  He  asked if there would be any  difference, from                                                                   
the investor's point of view,  between the various tax rates.                                                                   
                                                                                                                                
Mr. Walker repeated  the statement, "The lower  the tax rate,                                                                   
the  more investment.   The  higher  the tax  rate, the  less                                                                   
investment."                                                                                                                    
                                                                                                                                
Co-Chair Meyer asked  if oil price would impact  the decision                                                                   
about tax  rate.  Ms.  Kah noted that  most of the  remaining                                                                   
reserves  are in small  fields  and in heavy  oil outside  of                                                                   
ANWR.    She  suggested  that   is  why  there  is  not  more                                                                   
investment today.  The effect  of lowering the tax rate would                                                                   
make  a marginal  field  more  economic  and result  in  more                                                                   
investment.                                                                                                                     
                                                                                                                                
8:59:40 AM                                                                                                                    
                                                                                                                                
Mr. Dickinson  agreed with Mr.  Walker's "the lower  the tax"                                                                   
statement.   He  said  people are  faced  with a  competitive                                                                   
situation and with a limited capital  budget.  He wondered if                                                                   
dropping the tax would create  a window.  Dr. Van Meurs' work                                                                   
suggests that investment  is more likely with  the 20 percent                                                                   
PPT, but  there will  not be a  dramatic shift in  investment                                                                   
opportunities.                                                                                                                  
                                                                                                                                
9:00:50 AM                                                                                                                    
                                                                                                                                
Mr. Bramley pointed  out a statistic that over  the last five                                                                   
years, for  every $1 invested  in exploration, more  than $10                                                                   
has been  invested in known reserves.   The reason has  to do                                                                   
with  the   underlying  prospectivity.     When   looking  at                                                                   
investment  attractiveness,  there  is  a concern  about  the                                                                   
extent of  focus on  exploration.   He found  it hard  to see                                                                   
that  new exploration  would  be  more prospective  than  old                                                                   
exploration.      Changing   the    balance   of   investment                                                                   
attractiveness between  investment and development,  in favor                                                                   
of investment,  does not  seem the  sensible way  to go.   To                                                                   
contemplate a tax system focused  on incentives does not make                                                                   
sense.                                                                                                                          
                                                                                                                                
Co-Chair Meyer referred to a graph  produced by Econ One with                                                                   
scenarios of 18/10  and 19/15.  He noted that  the government                                                                   
take does  not differ so much  from the 20/20  scenario, with                                                                   
the price  of oil between  $35 and $60.   He suggested  18/10                                                                   
and wondered  if that  would be  more beneficial to  existing                                                                   
producers  and  less  attractive   to  the  independents  and                                                                   
explorers.   Mr. Pulliam  addressed the  credit mechanism  in                                                                   
the  bill, which  encourages reinvestment.   Producers  would                                                                   
like  a  lower tax  rate,  but  also  a higher  credit.    He                                                                   
suggested that the producers would not view it as better.                                                                       
                                                                                                                                
9:04:48 AM                                                                                                                    
                                                                                                                                
Mr. Walker  responded that  the credit  mechanism in  the PPT                                                                   
bill  is of  the least  concern  because it  is powerful  and                                                                   
appropriate.  The tax rate is of most concern.                                                                                  
                                                                                                                                
Mr.  Dickinson  said that  at  today's  prices the  tax  rate                                                                   
overwhelms  the effect of  the credit,  but at lower  prices,                                                                   
the  two  strike  a better  balance.  At  medium  prices  the                                                                   
credits  become   a  significant   portion  of  the   overall                                                                   
economics.                                                                                                                      
                                                                                                                                
Mr. Pulliam maintained that the two work together.                                                                              
                                                                                                                                
Mr. Walker  did not disagreed  with that.  He  voiced concern                                                                   
for the very high tax rates.                                                                                                    
                                                                                                                                
9:06:41 AM                                                                                                                    
                                                                                                                                
Representative  Holm stated appreciation  for the  discussion                                                                   
about  tax rates.   He  requested information  about how  the                                                                   
price of the commodity affects investment in Alaska.                                                                            
                                                                                                                                
Ms.  Kah   replied  that  the   price  upside  is   of  great                                                                   
consideration.  If that is taken  away it is of concern.  She                                                                   
commented that if prices are high,  it is going to be because                                                                   
replacement costs  are that high.   The upstream  margin will                                                                   
not change that much and costs will have caught up.                                                                             
                                                                                                                                
9:08:59 AM                                                                                                                    
                                                                                                                                
Representative  Kerttula said that  at the current  price the                                                                   
tax rate is overwhelmed.  She  asked if we are banking on the                                                                   
higher price.  Mr. Dickinson clarified  that the credits will                                                                   
reward  investment at  the  same amount  no  matter what  the                                                                   
price.  He provided  an example.  Banking needs  to create an                                                                   
environment that is pro-investment.                                                                                             
                                                                                                                                
Mr.  Walker responded  to  Representative  Kerttula and  said                                                                   
that everyone is banking on higher  prices.  Price is masking                                                                   
the  real  issue  that  production  is  declining.    British                                                                   
Petroleum is very concerned about the decline of prices.                                                                        
                                                                                                                                
9:11:50 AM                                                                                                                    
                                                                                                                                
Co-Chair Chenault read question 2:                                                                                              
                                                                                                                                
     2. Econ One  stated that 25/20 was better in  a low rate                                                                   
     environment.    What  tax/credit  rate  best  meets  the                                                                   
     balance  between government  and industry  and high  and                                                                   
     low  prices?   Should we  consider  a two-tiered  system                                                                   
     dependent on price?                                                                                                        
                                                                                                                                
Dr. Finizza said  that is a comment that came  out of the new                                                                   
fields analysis  for low  prices.   If you  look only  at new                                                                   
fields and  the EIA price  distribution, the 20/20  is better                                                                   
for producers and  brings in more revenue for the  state.  He                                                                   
suggested not having  a high tax rate at average  prices, but                                                                   
rather at higher prices.                                                                                                        
                                                                                                                                
Ms.  Kah  commented  about  the  economics  of  25/20.    She                                                                   
speculated that  the only reason  it appears to be  better is                                                                   
because dry  hole costs are being  subsidized.  She  asked if                                                                   
the state  wants to  be in  the business  of subsidizing  dry                                                                   
hole costs.                                                                                                                     
                                                                                                                                
Dr. Finizza  spoke  to dry hole  costs, a  necessary part  of                                                                   
investment.   Ms. Kah countered that  was her point  - a high                                                                   
success rate with known reserves.                                                                                               
                                                                                                                                
9:15:40 AM                                                                                                                    
                                                                                                                                
Representative  Kerttula pointed out  that in Norway  a great                                                                   
deal of  credit was  successfully given.   Ms. Kah  commented                                                                   
about how successful how those  credits were.  Norway did not                                                                   
see  the increase  in exploration  and  had rig  availability                                                                   
problems.  The success of those credits is debatable.                                                                           
                                                                                                                                
Representative  Holm asked  what the  rig availability  is in                                                                   
Alaska.   Mr. Walker said he  does not know, but  he observed                                                                   
that  oil is a  big industry  and it  takes time  to ramp  up                                                                   
investment.  It is very important  to have a fiscal policy to                                                                   
rely on.                                                                                                                        
                                                                                                                                
9:18:01 AM                                                                                                                    
                                                                                                                                
Representative  Foster spoke  of his  air service  experience                                                                   
with fares and taxes.  He wondered  if the consumer would pay                                                                   
for any  operating increases in  costs.  Ms. Kah  agreed that                                                                   
in a  tight supply and demand  environment, costs  get passed                                                                   
to the consumer.   She gave an example of  demand destruction                                                                   
from last  year.   Prices are  still high  because of  supply                                                                   
disruptions in places like Nigeria.                                                                                             
                                                                                                                                
Dr. Finizza generally  agreed, but commented  that one cannot                                                                   
expect the same level of demand  as prices rise.  Mr. Pulliam                                                                   
questioned Ms. Kah's statement  that if taxes rose in Alaska,                                                                   
it would cause  crude oil prices generally to rise.   Ms. Kah                                                                   
clarified  if the  cost of  global production  went up,  that                                                                   
will happen.   Mr. Pulliam agreed.   He maintained  that what                                                                   
happens  in  Alaska will  not  have  an effect  on  consumers                                                                   
around the world.                                                                                                               
                                                                                                                                
9:21:04 AM                                                                                                                    
                                                                                                                                
Co-Chair Chenault read question 3:                                                                                              
                                                                                                                                
     3.  Substantial   discussion   has  occurred   over  the                                                                   
     progressivity surcharges  in the House and Senate bills.                                                                   
     Outstanding  issues of  concern  include inflation,  the                                                                   
     slope,  and the  cap.   What  do you  consider  to be  a                                                                   
     reasonable way to address these issues?                                                                                    
                                                                                                                                
Mr. Kah  maintained that the ideal  solution would be  not to                                                                   
have  a windfall  profits  tax.   If there  were  to be  one,                                                                   
inflation  adjustment is  a must because  otherwise  it would                                                                   
make the  investment incentive  go away over  time.   The cap                                                                   
would have  to be set high enough  at a relevant range.   The                                                                   
tax would  have to be  set wider and  more upside.   It would                                                                   
have to  start the tipping  point at  a much higher  level in                                                                   
order to not affect investment.    It would need to be capped                                                                   
it at a lower level in order to maintain investment.                                                                            
                                                                                                                                
Dr.  Finizza agreed  somewhat.   He  suggested  a minimum  of                                                                   
indexing.   Mr. Pulliam  suggested taking  increase  in costs                                                                   
into  account when  looking at  progressivity, otherwise  the                                                                   
margin  between cost  production  and delivering  the oil  to                                                                   
market,  relative  to the  price  at  which the  trigger  for                                                                   
progressivity,  shrinks.    He advocated  for  the  threshold                                                                   
price to be adjusted annually.                                                                                                  
                                                                                                                                
Ms.  Kah asked  about cost  inflation  increasing beyond  2.5                                                                   
percent general inflation.  Mr.  Pulliam suggested increasing                                                                   
it dollar for dollar with increasing  costs.  He spoke to the                                                                   
threshold and  where it  should kick in.   He suggested  that                                                                   
one couldn't  divorce progressivity  from the underlying  tax                                                                   
rate.  If the tax  rate is  higher, the  threshold should  be                                                                   
moved up.   A lower tax rate  allows for a higher  slope.  He                                                                   
agreed with moving  higher into the $50 range.   He concurred                                                                   
with the index level.                                                                                                           
                                                                                                                                
9:25:22 AM                                                                                                                    
                                                                                                                                
Mr. Walker thought  that if progressivity were  to be chosen,                                                                   
it needs  to be simple, balanced,  and based on  the realized                                                                   
price  of  crude on  the  North  Slope.    That is  what  the                                                                   
economics is based on.                                                                                                          
                                                                                                                                
Representative  Weyhrauch   thought  that  the   bill  had  a                                                                   
progressivity feature in it.  Ms. Kah agreed.                                                                                   
                                                                                                                                
Ms.  Kah,  in  response  to  a   question  by  Representative                                                                   
Weyhrauch,  replied that when  a certain  cap is reached  the                                                                   
rate increase should  be leveled off.  Mr.  Pulliam responded                                                                   
to a  question by  Representative Weyhrauch  about moving  up                                                                   
the threshold for progressivity.   Mr. Pulliam clarified that                                                                   
he was talking  about adjusting the threshold  in response to                                                                   
changes in cost.   Representative Weyhrauch said  that agrees                                                                   
with Ms. Kah's  point on inflation.  Mr. Pulliam  agreed that                                                                   
there should  be a cap.   Representative Weyhrauch  suggested                                                                   
finding specific language.                                                                                                      
                                                                                                                                
Mr. Dickinson  pointed out  that there  is a real  difference                                                                   
between   merely   acknowledging    general   inflation   and                                                                   
acknowledging  specific  costs.   He  spoke  to the  possible                                                                   
ranges.                                                                                                                         
                                                                                                                                
Dr. Finizza said  it is possible to have a  decrease in costs                                                                   
from year  to year, which could  change the threshold  in the                                                                   
other direction.  Mr. Dickinson  agreed.  Ms. Kah referred to                                                                   
20 years  of cost  decline.   Mr. Pulliam  asked whether  the                                                                   
state  is  collecting cost  information  as  a part  of  this                                                                   
program.   Mr. Dickinson  said yes.   Ms. Kah added  that the                                                                   
$20-$80  dollar range  is  the working  range  ConocoPhillips                                                                   
uses.  She emphasized that starting  at $50 would result in a                                                                   
negative impact on investment.                                                                                                  
                                                                                                                                
9:30:39 AM                                                                                                                    
                                                                                                                                
Representative  Hawker  asked  about  progressivity  and  the                                                                   
windfall profits  tax approach.   He suggested finding  a way                                                                   
to  inflation-adjust  the  index.     He  wondered  if  other                                                                   
approaches to  progressivity should  be taken off  the table.                                                                   
He questioned  if a gross receipts  surtax should be  kept in                                                                   
place or a tax on the margins should be looked at.                                                                              
                                                                                                                                
Mr. Walker replied that it is  a difficult question.  What is                                                                   
on the  table would create  an unworkable outcome  for Alaska                                                                   
and would not serve the industry  well.  Progressivity is not                                                                   
appropriate  for  Alaska.    If  it  is  part  of  the  final                                                                   
solution,  then   an  option  based  on  margins,   which  is                                                                   
inflation-proofed  and balanced,  should be  found.   British                                                                   
Petroleum  does recognize  that there  are different  ways to                                                                   
approach this.                                                                                                                  
                                                                                                                                
9:34:25 AM                                                                                                                    
                                                                                                                                
Dr. Finizza suggested that progressivity  should be addressed                                                                   
now.   Ms. Kah repeated that  investment will be  impacted if                                                                   
the top is shaved off.  $50 is not high enough.                                                                                 
                                                                                                                                
Representative  Hawker said he  heard two different  opinions                                                                   
from   the  two   companies.     Ms.   Kah  emphasized   that                                                                   
ConocoPhillips is strongly against  the windfall profits tax.                                                                   
Representative Hawker asked for Mr. Dickinson's comments.                                                                       
                                                                                                                                
9:36:29 AM                                                                                                                    
                                                                                                                                
Dan  Dickinson  responded,  "The  flatter the  better.    The                                                                   
further to  the right it starts,  the better."   He mentioned                                                                   
when cost consideration is less  relevant.  In the governor's                                                                   
proposal there is nothing addressing that.                                                                                      
                                                                                                                                
Representative  Hawker asked if  it would  be better  to keep                                                                   
progressivity on  a gross receipts  surcharge as  a component                                                                   
of the state  income tax, rather  than as a component  of the                                                                   
production tax.                                                                                                                 
                                                                                                                                
Mr. Dickinson  replied that he  has not thought  through that                                                                   
point.   Representative Hawker said  he is thinking  in terms                                                                   
of simplicity.  If PPT is worked  out at a flat rate, then it                                                                   
is easier to  write a gross-receipts calculation  and tack it                                                                   
onto corporate income tax.                                                                                                      
                                                                                                                                
9:39:41 AM                                                                                                                    
                                                                                                                                
Mr. Pulliam  felt that  mechanism, which  allows for  cost to                                                                   
increase,  strikes the right  kind of  balance.  Mr.  Bramley                                                                   
observed  that increasing  taxes  would bring  a lowering  of                                                                   
investment.   He  added   that   complexity   would  not   be                                                                   
recommended.  The  consequences are hard to  anticipate.  Mr.                                                                   
Pulliam noted  that one of  the goals  is to move  the system                                                                   
into  a  more  progressive  structure.   The  old  system  is                                                                   
regressive.   The base PPT  only moves toward  progressivity.                                                                   
The intent is to correct PPT to be more relevant.                                                                               
                                                                                                                                
9:43:39 AM                                                                                                                    
                                                                                                                                
Representative Kelly noted that  the regressive aspect can be                                                                   
changed  later, but  is in  place  now. He  thought that  the                                                                   
public might be  confused about when the rate  increase kicks                                                                   
in.  There are three separate  elements.  Although most folks                                                                   
are going for the  net and keeping it simple,  there are good                                                                   
arguments for  the other  position.  He  stressed that  it is                                                                   
not just a tax.   The issue is what the state  is getting for                                                                   
its oil.  The market will adjust  if a mistake is made on the                                                                   
high side.                                                                                                                      
                                                                                                                                
9:48:21 AM                                                                                                                    
                                                                                                                                
Mr. Walker  felt that  gross is an  unworkable solution.   He                                                                   
reviewed the share  between the industry and the  state as it                                                                   
moves to  the new system.   He explained  what the  move from                                                                   
the existing  status quo  to the 20/20  proposal does  to the                                                                   
share.    Under the status quo  at $60 per barrel,  the state                                                                   
receives  32  percent,  the federal  government  receives  25                                                                   
percent, and  the industry receives  43 percent.   Under PPT,                                                                   
the state  share moves  from 32  to 40  percent, the  federal                                                                   
government  share  goes  from  25  to  22  percent,  and  the                                                                   
industry share goes from 43 to 38 percent.                                                                                      
                                                                                                                                
In  response to  a  question  by Representative  Foster,  Mr.                                                                   
Walker observed  that there would  a substantial  increase in                                                                   
tax,  which  would  result  in  less  investment.    He  felt                                                                   
confident that there could be  an agreement and movement on a                                                                   
gas pipeline.                                                                                                                   
                                                                                                                                
9:51:39 AM                                                                                                                    
                                                                                                                                
Co-Chair Chenault read question 4:                                                                                              
                                                                                                                                
     4. What issues are different when considering a                                                                            
     progressivity surcharge on gas?                                                                                            
                                                                                                                                
Ms. Kah  noted that the  industry doesn't like  progressivity                                                                   
on anything, but it is worse on  gas.  The economics would be                                                                   
more  difficult.    Mr.  Walker noted  that  the  gas  fiscal                                                                   
contract  would govern  the terms  on the North  Slope.   The                                                                   
issue is appropriate for the Cook  Inlet and other producers.                                                                   
                                                                                                                                
9:53:19 AM                                                                                                                    
                                                                                                                                
Mr. Dickinson noted that in the  Cook Inlet, Henry Hub prices                                                                   
are used  to index  the gas, while  few are actually  getting                                                                   
that price.   There are many contracts that  are lower priced                                                                   
than that.                                                                                                                      
                                                                                                                                
Representative  Kelly asked if  Cook Inlet  was taken  out of                                                                   
the equation,  if a "WTI/ANS-type  comparison" applies.   Ms.                                                                   
Kah stressed  that it is important  to go back to  a wellhead                                                                   
value.   The world's supply is  getting more sour.   She said                                                                   
she expects  the differential  between light sweet  crude and                                                                   
sour crudes to  widen over time.  Over time,  WTI is becoming                                                                   
an increasingly poor indicator  for all of the world's crude.                                                                   
There are similar issues for natural gas.                                                                                       
                                                                                                                                
HB  488  was   heard  and  HELD  in  Committee   for  further                                                                   
consideration.                                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 9:58 AM.                                                                                           

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