Legislature(2011 - 2012)HOUSE FINANCE 519

03/15/2011 08:00 AM FINANCE


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08:03:29 AM Start
08:03:59 AM HB110
10:26:16 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 110 PRODUCTION TAX ON OIL AND GAS TELECONFERENCED
Heard & Held
+ Presentations by: TELECONFERENCED
- Dept. of Revenue
- Roger Marks
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      March 15, 2011                                                                                            
                         8:03 a.m.                                                                                              
                                                                                                                                
                                                                                                                                
8:03:29 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Stoltze called the House Finance Committee meeting                                                                     
to order at 8:03 a.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Bill Thomas Jr., Co-Chair                                                                                        
Representative Anna Fairclough, Vice-Chair                                                                                      
Representative Mia Costello                                                                                                     
Representative Mike Doogan                                                                                                      
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative David Guttenberg                                                                                                 
Representative Reggie Joule                                                                                                     
Representative Mark Neuman                                                                                                      
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Representative Mike Hawker; Senator Cathy Giessel; Roger                                                                        
Marks, Legislative Consultant, Legislative Budget and Audit                                                                     
Committee.                                                                                                                      
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 110    PRODUCTION TAX ON OIL AND GAS                                                                                         
                                                                                                                                
          HB 110 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
HOUSE BILL NO. 110                                                                                                            
                                                                                                                                
     "An  Act relating  to the  interest rate  applicable to                                                                    
     certain amounts due for fees,  taxes, and payments made                                                                    
     and property  delivered to  the Department  of Revenue;                                                                    
     relating  to  the  oil and  gas  production  tax  rate;                                                                    
     relating to  monthly installment payments  of estimated                                                                    
     oil and  gas production  tax; relating  to oil  and gas                                                                    
     production  tax   credits  for   certain  expenditures,                                                                    
     including  qualified capital  credits for  exploration,                                                                    
     development,   and   production;    relating   to   the                                                                    
     limitation  on assessment  of  oil  and gas  production                                                                    
     taxes;  relating to  the determination  of oil  and gas                                                                    
     production  tax values;  making conforming  amendments;                                                                    
     and providing for an effective date."                                                                                      
                                                                                                                                
8:03:59 AM                                                                                                                    
                                                                                                                                
ROGER MARKS, LEGISLATIVE  CONSULTANT, LEGISLATIVE BUDGET AND                                                                    
AUDIT COMMITTEE, offered  a synopsis of his  experience as a                                                                    
petroleum    economist.   He    introduced   a    PowerPoint                                                                    
presentation,  "Evaluation of  ACES  with  HB 110  Proposal,                                                                    
Roger Marks, Logsdon & Associates,  March 15, 2011" (copy on                                                                    
file).                                                                                                                          
                                                                                                                                
Mr. Marks  explained that  he had been  asked to  present an                                                                    
evaluation of Alaska  Clear and Equitable Share  (ACES) as a                                                                    
foundation  for the  need for  HB 110.  He noted  that since                                                                    
ACES passed in  2007, there had been  updated information on                                                                    
its performance.                                                                                                                
                                                                                                                                
Mr. Marks  informed the committee that  his basic conclusion                                                                    
was  that  the  progressivity   structure  within  ACES  was                                                                    
dysfunctional; at high prices  it generated very high taxes,                                                                    
which  was  making  Alaska  uncompetitive  in  international                                                                    
markets and having harmful effects  in the state. He thought                                                                    
that  progressivity   itself  was  a  fine   concept  and  a                                                                    
straightforward philosophy  when income was lower  and there                                                                    
was a  lower ability  to pay  as well as  a lower  tax rate.                                                                    
However, there was a problem  with ACES and the structure of                                                                    
progressivity  with higher  income, higher  ability to  pay,                                                                    
and a higher tax rate.                                                                                                          
                                                                                                                                
Mr. Marks  noted that  the progressivity  structure predated                                                                    
ACES.  The structure  was put  in place  with the  petroleum                                                                    
production tax  (PPT) in 2006; ACES  made progressivity more                                                                    
aggressive,  but  the  same  problematic  structure  carried                                                                    
over. He stated  that he had been concerned  about the issue                                                                    
since  2006 when  PPT passed.  He  pointed out  that he  had                                                                    
published on the issue the previous  fall in the Oil and Gas                                                                    
Financial Journal.                                                                                                              
                                                                                                                                
Mr.  Marks   reviewed  the  four   planned  topics   of  his                                                                    
presentation (Slide 2):                                                                                                         
                                                                                                                                
     I. How ACES Operates / Problems it Creates                                                                                 
     II. International Competitiveness                                                                                          
     III. Current Evidence of Problems from ACES                                                                                
     IV. Proposal to Fix ACES (HB 110)                                                                                          
                                                                                                                                
8:08:04 AM                                                                                                                    
                                                                                                                                
Mr. Marks provided  a summary of how ACES  worked ("Tax Rate                                                                    
under ACES," Slide 3):                                                                                                          
                                                                                                                                
   · Base rate of 25% of net value (after deducting all                                                                         
     costs)                                                                                                                     
   · Progressivity element when net value per barrel                                                                            
     exceeds $30/bbl:                                                                                                           
        o (Net value per barrel value -$30) X .004                                                                              
   · If oil market price is $90/bbl:                                                                                            
        o Net value per barrel is $58/bbl                                                                                       
        o Progressivity = ($58 -$30) X .004 = 11.2%                                                                             
        o Total tax rate = 25% + 11.2 = 36.2%                                                                                   
        o 36.2% X $58 X 0.875 (non-royalty) = $18.37/bbl                                                                        
        o APPLIES TO ENTIRE NET VALUE                                                                                           
                                                                                                                                
Mr. Marks detailed that ACES  was the oil and gas production                                                                    
or severance  tax, and was  based on net income.  He defined                                                                    
"net income"  as starting  out with  the "market  value," or                                                                    
the Alaska North  Slope (ANS) price listed  in the newspaper                                                                    
each  morning (currently  over $100).  The  "net value"  was                                                                    
derived  when  all  the  costs  were  subtracted,  including                                                                    
transportation, operating,  and capital  costs. There  was a                                                                    
base rate  of 25  percent of net  income. Costs  were around                                                                    
$32 per barrel (from the  Department of Revenue (DOR) latest                                                                    
Revenue Sources Book on the taxable amount of barrels).                                                                         
                                                                                                                                
Mr. Marks  continued that  progressivity was  triggered when                                                                    
the  net  value per  barrel  exceeded  $30 per  barrel.  The                                                                    
progressivity equation  took the net value  per barrel minus                                                                    
$30,  and  multiplied  the  result by  0.004.  The  $30  was                                                                    
referred to  as the "trigger" (where  progressivity started)                                                                    
and  0.004 was  referred to  as the  "slope" (the  rate that                                                                    
progressivity increased  as value  went up). When  net value                                                                    
reached $92.50,  the slope would  drop from 0.004  to 0.001.                                                                    
For example,  if the price  of oil  was $90 per  barrel, and                                                                    
the cost for tax was $32  per barrel, the net value would be                                                                    
$58 per  barrel. The  progressivity would  be $58  minus $30                                                                    
times 0.004,  or 11.2 percent.  The total tax rate  would be                                                                    
the  base  rate (25  percent)  plus  11.2 percent,  or  36.2                                                                    
percent.                                                                                                                        
                                                                                                                                
8:09:57 AM                                                                                                                    
                                                                                                                                
Mr. Marks  continued that  the 36.2  percent applied  to the                                                                    
entire net  value with $58;  the number would  be multiplied                                                                    
times the non-royalty amount, since  taxes would not be paid                                                                    
on the royalty portion, which  would be $18.37 per barrel as                                                                    
the severance tax before credits.                                                                                               
                                                                                                                                
Mr. Marks  stressed that the  36.2 percent tax  rate applied                                                                    
to  the entire  net  value,  the entire  $58,  not just  the                                                                    
portion of the $58 above the $30.                                                                                               
                                                                                                                                
Mr.  Marks directed  attention to  a line  graph on  Slide 4                                                                    
("ACES  Severance Tax  Rate"). The  bottom axis  depicts the                                                                    
net value ($/bbl)  and the side axis the  ACES severance tax                                                                    
rate. At  $30, the line shows  the flat 25 percent  rate; at                                                                    
the $30  trigger, the amount  increases at a rate  of 0.004.                                                                    
The slope goes down to 0.001 at $92.50.                                                                                         
                                                                                                                                
Mr. Marks  reminded the committee  that the main  credit was                                                                    
20 percent of the capital  costs, which he would cover later                                                                    
in the presentation.                                                                                                            
                                                                                                                                
Mr.  Marks  underlined  that when  triggered,  progressivity                                                                    
would apply to the entire  net value, an attribute unique to                                                                    
Alaska. He  stated that progressivity worked  differently in                                                                    
Alaska  than in  most other  places where  progressivity was                                                                    
used (whether connected  to oil or non-oil).  One example of                                                                    
how progressivity  usually worked  was the  Internal Revenue                                                                    
Service  (IRS)  2010 U.S.  tax  rates  for single  taxpayers                                                                    
(Slide  5).  He described  the  system  as "bracketed."  The                                                                    
incremental tax rate only applied to the incremental value.                                                                     
                                                                                                                                
   2010 U.S. Tax Rate for Single Taxpayer                                                                                       
                                                                                                                                
   · First $8,375             10%                                                                                               
   · Next $25,625             15%                                                                                               
   · Next $48,400             25%                                                                                               
   · Next $89,450             28%                                                                                               
   · Next $201,800            33%                                                                                               
   · Anything over $373,650   35%                                                                                               
                                                                                                                                
Mr. Marks stressed that no  matter how much money a taxpayer                                                                    
made in  the bracketed system,  the first $8,375  would only                                                                    
pay  at the  10  percent rate.  That  was how  progressivity                                                                    
usually worked;  however, it  worked very  differently under                                                                    
ACES. Under ACES, when progressivity  was triggered, it went                                                                    
back and grabbed the tax for  the very first dollar of value                                                                    
and every single dollar of value and dragged it up.                                                                             
                                                                                                                                
Mr. Marks  directed attention to  Slide 6, "What  Happens to                                                                    
the  First Dollar  of Value  under  ACES" with  a bar  graph                                                                    
depicting what  happens to the  first dollar of  value under                                                                    
ACES. He maintained that up to  $30 per barrel, the tax rate                                                                    
was 25 percent;  as the net value went up,  the tax rate for                                                                    
the very first dollar was  dragged up as well. He underlined                                                                    
that  he  had  considered  several  different  progressivity                                                                    
systems, both  oil and  non-oil; Alaska  was the  only place                                                                    
with the described mechanism.                                                                                                   
                                                                                                                                
Mr. Marks  added that the tax  rate was not only  dragged up                                                                    
on  the  first  dollar  of   value;  it  happened  to  every                                                                    
subsequent  dollar as  well. Going  from $89  to $90  of net                                                                    
value  dragged the  value up  from the  first dollar  to the                                                                    
eighty-ninth dollar. Every  time the value went  up, the tax                                                                    
was drawn  up on  more and more  dollars. The  mechanism was                                                                    
depicted through something called the "marginal tax rate."                                                                      
                                                                                                                                
8:13:46 AM                                                                                                                    
                                                                                                                                
Mr. Marks pointed to a graph  on Slide 7, "Marginal Tax Rate                                                                    
under  ACES (All  States and  Federal Taxes  and Royalties):                                                                    
How Much  Gov't Gets When  Price Goes Up $1."  He maintained                                                                    
that  the  marginal tax  rate  reflected  how much  of  each                                                                    
dollar went to the government when  the value of oil went up                                                                    
one dollar. The  line on the graph  illustrated the marginal                                                                    
tax rate  under ACES,  and showed the  rate for  Alaska with                                                                    
all the taxes, including  royalties, property tax, state and                                                                    
federal corporate income tax, and the severance tax.                                                                            
                                                                                                                                
Mr. Marks pointed  out that at $90 per  barrel, the marginal                                                                    
tax rate was  80 percent; when the value of  oil went to $89                                                                    
to  $90 per  barrel, the  producers only  got $0.20  and the                                                                    
other  $0.80 went  to government.  At $120  per barrel,  the                                                                    
marginal tax rate  was 93 percent; when the  price went from                                                                    
$120 to  $121 per  barrel, the producers  only got  $0.07 of                                                                    
the dollar, and the government  got the other $0.93. Because                                                                    
at $92.50  the float  dropped from  0.4 to  0.1 and  the tax                                                                    
rate was dragged up, the marginal  tax rate would drop to 80                                                                    
percent, and then  would start increasing at  a slower rate.                                                                    
The increase  in the marginal  tax rate was entirely  due to                                                                    
the severance tax (to the  ACES progressivity). The royalty,                                                                    
property, and corporate income taxes were a flat rate.                                                                          
                                                                                                                                
Mr.  Marks  continued  that  the  high  marginal  tax  rates                                                                    
provided   limited  upside   potential   for  producers   or                                                                    
investors,  who would  not  make that  much  money when  the                                                                    
price of  oil went  up. He  argued that  that was  a problem                                                                    
when investors  or producers were  evaluating where to  do a                                                                    
project,  because they  have to  forecast oil  prices. There                                                                    
was  a  great deal  of  uncertainty  around oil  prices.  He                                                                    
pointed to a  line graph on Slide  8 ("Hypothetical Expected                                                                    
Price Outlook"), which  he felt was a  reasonable example of                                                                    
how oil  companies would  look at  the possibilities  of oil                                                                    
prices. He said  that the entire area under  the curved line                                                                    
represented 100  percent. In the  example on the  graph, the                                                                    
most likely price was $100 per  barrel; but there was only a                                                                    
20 percent chance of that.  However, when considering future                                                                    
oil prices,  most people would  think that there were  a lot                                                                    
more things that could happen to  make oil prices go up than                                                                    
down, which caused the curve to be skewed to the right.                                                                         
                                                                                                                                
Mr. Marks stated  that it was possible to  find very serious                                                                    
oil price forecasts  that went up to $200 per  barrel by the                                                                    
year 2020. He believed that  was how investors looked at the                                                                    
possibility of oil prices. Producers  and investors who were                                                                    
evaluating  the  economics of  a  project  would consider  a                                                                    
range  of outcomes.  The results  would  revolve around  the                                                                    
average  price, not  the high  mean.  With the  distribution                                                                    
depicted  on the  graph, the  average would  be towards  the                                                                    
high-price side, or about $140  per barrel. What happened in                                                                    
the high-price area could have  a big impact on the results,                                                                    
even with a  relatively low probability; if a  great deal of                                                                    
money could be  made when the high side  occurred, a project                                                                    
could  be  worth  developing,  but  if  the  high  side  was                                                                    
suppressed  (like  under ACES),  the  project  might not  be                                                                    
worth developing.                                                                                                               
                                                                                                                                
8:17:35 AM                                                                                                                    
                                                                                                                                
Representative  Gara did  not think  the companies  paid the                                                                    
marginal tax rates. He asked for  a list of actual tax rates                                                                    
paid  by  companies. Mr.  Marks  replied  that he  would  be                                                                    
showing  the effective  tax rates  under the  production tax                                                                    
under  ACES,  which was  what  companies  actually paid.  He                                                                    
pointed to Slide  4, illustrating the actual  tax rate under                                                                    
ACES.                                                                                                                           
                                                                                                                                
Representative  Gara  directed  attention to  Slide  6  with                                                                    
progressivity  triggered at  $30  per  barrel. He  clarified                                                                    
that  progressivity triggered  at $30  of profit.  Mr. Marks                                                                    
responded net value.                                                                                                            
                                                                                                                                
Representative Hawker  referred back  to a  DOR presentation                                                                    
to the  House Finance Committee  (March 14, 2011, 8  AM). He                                                                    
compared  Slide  18  from  the  DOR  presentation  ("Nominal                                                                    
Production  Tax  Rates")  to  Mr.  Marks's  Slide  4  ("ACES                                                                    
Severance  Tax  Rate").  He  asked   whether  the  two  were                                                                    
similar. Mr. Marks agreed that  for ACES the tax happened to                                                                    
be both the  nominal tax rate and the  effective rate. Under                                                                    
HB 110, the meaning of  nominal and effective rates would be                                                                    
different.  He called  the nominal  rate a  "mushy" concept;                                                                    
the word  nominal had  to be  used because  it meant  a name                                                                    
only,  because something  else was  going on.  Nominal rates                                                                    
generally meant that something else  was going on and it was                                                                    
not what should be focused on.  He said he would address the                                                                    
issue later in his presentation.                                                                                                
                                                                                                                                
8:20:11 AM                                                                                                                    
                                                                                                                                
Co-Chair Thomas  noted that the  concern in  rural districts                                                                    
was the  price of  diesel oil, currently  at $4.50  to $6.00                                                                    
per gallon.  He asked whether  the tax break proposed  in HB                                                                    
110 would  show up in the  villages as a drop  in oil prices                                                                    
if ACES were dropped 20 or  30 percent. He had problems with                                                                    
changing practices  if there were no  measurable benefits to                                                                    
Alaskans.  Mr.  Marks  responded  that the  price  paid  for                                                                    
petroleum products  was determined  separately from  the tax                                                                    
rate. He stated  that the price of  petroleum products would                                                                    
not  change  because  of  a  change in  the  tax  rate;  the                                                                    
perceived need  for change in  the tax  rate had to  do with                                                                    
making  the   production  of  oil  more   rational  for  the                                                                    
producers.                                                                                                                      
                                                                                                                                
Representative Doogan  asked for a  breakdown of Slide  7 by                                                                    
each of  its components. Mr.  Marks responded that  he could                                                                    
not do  so off the  top of his head,  but would be  happy to                                                                    
get the information later.                                                                                                      
                                                                                                                                
Representative  Doogan questioned  Mr. Marks's  inability to                                                                    
tell the committee  what the slide said, even  though he had                                                                    
made the slide.  Mr. Marks answered that  the important part                                                                    
of  the presentation  had to  do  with Alaska  international                                                                    
competitiveness  and  looking  at  the  entire  fiscal  take                                                                    
compared to  the entire fiscal take  of other jurisdictions.                                                                    
He  maintained that  was the  reason for  the entire  fiscal                                                                    
picture  in  the  slide.  He  added  that  the  increase  in                                                                    
marginal tax rates illustrated  was 100 percent attributable                                                                    
to  the severance  tax, but  he did  not have  the breakdown                                                                    
available. He offered to get the information.                                                                                   
                                                                                                                                
Representative  Doogan  stated   that  the  committee  would                                                                    
decide what  was important about  the presentation  and what                                                                    
was  not. He  wanted the  requested information  as soon  as                                                                    
possible.                                                                                                                       
                                                                                                                                
Co-Chair Stoltze  thought the breakdowns  had been  shown in                                                                    
slides the previous day.                                                                                                        
                                                                                                                                
Representative  Hawker believed  that Mr.  Marks was  taking                                                                    
the committee member questions  very literally. He suggested                                                                    
speaking to the components in approximations.                                                                                   
                                                                                                                                
8:23:22 AM                                                                                                                    
                                                                                                                                
Mr. Marks replied that he preferred  to be careful and get a                                                                    
precise answer. He said he  could get the information within                                                                    
an hour of adjournment.                                                                                                         
                                                                                                                                
Representative  Costello referenced  Slide  4. She  believed                                                                    
the discussion  was based on  the assumption  that companies                                                                    
were motivated to  invest and risk more as the  price of oil                                                                    
went  up.  She  referred  to  material  by  Scott  Goldsmith                                                                    
regarding   what  motivated   companies.  She   queried  the                                                                    
particular price  per barrel  of Alaskan  oil that  was more                                                                    
competitive on  a world scale.  Mr. Marks replied  that with                                                                    
the high  marginal tax rates,  the higher the price  of oil,                                                                    
the greater  the schism between  Alaska and the rest  of the                                                                    
world. He  believed that  the higher the  price of  oil got,                                                                    
the  more  relatively  uncompetitive  Alaska  would  be.  He                                                                    
believed   the  question   was   related  to   international                                                                    
competitiveness  with  other investment  opportunities  that                                                                    
producers had. He stated that  ACES created higher tax rates                                                                    
at  high  prices relative  to  the  rest  of the  world.  He                                                                    
believed  that   the  higher  the   prices  got,   the  more                                                                    
uncompetitive  Alaska would  be and  the less  oil it  would                                                                    
get.  He claimed  he had  empirical evidence  to demonstrate                                                                    
his claim and that the  evidence would be presented later in                                                                    
the meeting.                                                                                                                    
                                                                                                                                
Co-Chair Stoltze acknowledged the  presence of Senator Cathy                                                                    
Giessel.                                                                                                                        
                                                                                                                                
Mr. Marks  continued that there were  many factors affecting                                                                    
a  jurisdiction's  international competitiveness,  including                                                                    
resource potential,  costs, fiscal stability,  and political                                                                    
stability. He  claimed that  a major  factor was  the fiscal                                                                    
piece, which could often exceed  costs. The fiscal aspect of                                                                    
jurisdiction    had   significant    impact   on    relative                                                                    
competitiveness.                                                                                                                
                                                                                                                                
Mr. Marks  directed attention to  a bar graph  comparing the                                                                    
marginal  tax   rates  of  Alaska  under   ACES  with  other                                                                    
industrialized   petroleum   jurisdictions   ("International                                                                    
Marginal Tax Rates  @ $100/bbl Market Price  Tax and Royalty                                                                    
Regimes,"  Slide 10).  He explained  that the  jurisdictions                                                                    
covered  in the  slide were  ones that  track taxes  through                                                                    
statutes:  the U.S.  Gulf of  Mexico  (GOM), United  Kingdom                                                                    
(UK), Alberta,  Thailand, Australia, Brazil, and  Norway. He                                                                    
noted that except for Thailand,  all the countries had about                                                                    
the same amount  or more oil than  Alaska; Thailand produced                                                                    
about 350,000  barrels per day.  The listed  countries could                                                                    
be  called  the  "tax  and royalty  regimes"  and  could  be                                                                    
juxtaposed  with the  "production-sharing contract  regimes"                                                                    
prevailing  in  the  Middle East,  Africa,  and  the  former                                                                    
Soviet Republic,  where fiscal  terms were  administrated by                                                                    
contract (often entailing  fiscal stability provisions). The                                                                    
later list  of countries had greater  resource potential and                                                                    
lower  costs,  but he  did  not  believe  the terms  of  the                                                                    
production-sharing   contracts   in   the   countries   were                                                                    
transparent.                                                                                                                    
                                                                                                                                
8:27:44 AM                                                                                                                    
                                                                                                                                
Mr. Marks noted that the  figures included all taxes and all                                                                    
royalties. He  pointed out that  none of the regimes  on the                                                                    
graph (except  for Alaska)  had progressivity.  The marginal                                                                    
tax  rates  displayed  at  $100 per  barrel  were  also  the                                                                    
marginal tax rates  at $50 or $60 per barrel,  and they were                                                                    
also the effective  tax rates at $50 and $60  per barrel. At                                                                    
$100 per barrel, Alaska's marginal  tax rate was 83 percent,                                                                    
the highest of all the  listed regimes. He believed that the                                                                    
highest marginal  tax rate meant  the most limits  on upside                                                                    
potential  relative  to  anywhere   else.  He  believed  the                                                                    
second-place country, Norway,  had to be taken  with a grain                                                                    
of salt,  because most  of the  equity production  there was                                                                    
owned by  Statoil, which was  owned by the government;  to a                                                                    
large  extent,  the  Norwegian   government  paid  taxes  to                                                                    
itself. The next  highest country was Brazil  at 63 percent,                                                                    
a  full 20  percentage points  less than  Alaska. There  was                                                                    
some interest in  Texas and North Dakota;  both had marginal                                                                    
tax rates in the mid-50s percentages.                                                                                           
                                                                                                                                
Mr. Marks wanted to address  the worth of the differences in                                                                    
the  marginal tax  rates.  He planned  to  present two  case                                                                    
studies that showed palpable results  of how the differences                                                                    
in tax  rates manifested themselves  and how much  money the                                                                    
investors earned  in the different jurisdictions  due to tax                                                                    
rates.  Before addressing  the differences  in marginal  tax                                                                    
rates, he  intended to look  at what had happened  in Alaska                                                                    
in 2008.                                                                                                                        
                                                                                                                                
Mr. Marks  directed attention  to a pie  graph on  Slide 11,                                                                    
"Where $100/bbl ($25B) Went in  2008." Since oil prices were                                                                    
very  high in  2008 (averaging  about $100  per barrel),  it                                                                    
would  illuminate  what happened  at  high  prices. The  pie                                                                    
chart depicted how the $100  per barrel was divided in 2008,                                                                    
given the amount  of production and the costs.  The $100 per                                                                    
barrel oil  was worth  about $25 billion  in gross  value of                                                                    
the oil.  The first $24  per barrel (about $6  billion) went                                                                    
to costs (the  costs to produce the oil and  transport it to                                                                    
market; the  number represented the  cash costs and  not the                                                                    
sunk  investments). The  next $56  per barrel  ($14 billion)                                                                    
went  to  government: the  state  received  $11 billion,  of                                                                    
which  $7  billion  was  the   severance  tax;  the  federal                                                                    
government  received $3  billion.  He noted  that the  taxes                                                                    
that went to the government  amounted to more than twice the                                                                    
amount  of  the costs.  The  producers  got $20  per  barrel                                                                    
(about $5 billion).  Some would say $5 billion was  a lot of                                                                    
money; others would disagree.                                                                                                   
                                                                                                                                
Mr. Marks wanted to show  two analyses of what the producers                                                                    
would have made in other places.                                                                                                
                                                                                                                                
8:30:54 AM                                                                                                                    
                                                                                                                                
Mr. Marks turned to the first  case study on the next slide,                                                                    
"After-Tax Income that  Would Have Been Earned  in Alaska in                                                                    
2008   With  Rates   from  Other   Tax  &   Royalty  Regimes                                                                    
($billions)" (Slide 12):                                                                                                        
                                                                                                                                
     Gulf of Mexico      $10.3                                                                                                  
     U.K.                $9.0                                                                                                   
     Alberta             $8.2                                                                                                   
     Thailand            $8.2                                                                                                   
     Australia           $6.9                                                                                                   
     Brazil              $6.6                                                                                                   
     Alaska              $5.0                                                                                                 
     Norway              $4.1                                                                                                   
                                                                                                                                
Mr. Marks  pointed out  that the  producers would  have made                                                                    
twice  as much  in  the Gulf  of Mexico  than  they made  in                                                                    
Alaska;  working  down  the  list,  with  the  exception  of                                                                    
Norway,  producers would  have made  considerably more  with                                                                    
the tax rates available in other regimes.                                                                                       
                                                                                                                                
Mr. Marks emphasized  that the issue was not  how much money                                                                    
producers made in Alaska, but  how much more they could have                                                                    
made in other places.                                                                                                           
                                                                                                                                
Mr.  Marks  directed attention  to  the  second case  study,                                                                    
noting  that ConocoPhillips  isolated Alaska  as a  separate                                                                    
segment, so it  could be seen how  Alaska performed relative                                                                    
to  the  rest  of   the  world  (Slide  13,  "ConocoPhillips                                                                    
Financial Performance: Alaska vs.  Rest of World ($millions)                                                                    
2008 ($100/bbl) vs. 2009 ($60/bbl)"):                                                                                           
                                                                                                                                
                                   Alaska    Rest of                                                                        
                         the World                                                                                            
                                                                                                                                
     Additional pre-tax income                                                                                                  
     2009 over 2008                $3,673    $14,707                                                                            
                                                                                                                                
     Additional taxes                                                                                                           
     2009 over 2008*               $2,898    $7,163                                                                             
                                                                                                                                
     Additional after-tax income                                                                                                
     2009 over 2008                $775      $7,544                                                                             
                                                                                                                                
     Percentage of additional                                                                                                   
     pre-tax income retained                                                                                                    
     after-tax                     21%       51%                                                                                
                                                                                                                                
     * Alaska: 80% severance tax / 20% income tax; Rest of                                                                      
     World: 10% severance tax / 90% income tax                                                                                  
                                                                                                                                
Mr.  Marks detailed  that ConocoPhillips  was  a true  major                                                                    
international oil company with a  major presence in about 30                                                                    
countries  around the  world. He  emphasized  that what  the                                                                    
rest of  the world looked like  was a good barometer  of the                                                                    
international  investment  climate  compared to  Alaska.  He                                                                    
explained that he  had considered ConocoPhillips's financial                                                                    
reporting for  Alaska and the  rest of the world.  First, he                                                                    
looked at 2008, when oil  prices were $100 per barrel. Then,                                                                    
he looked at  2009, when oil prices were $60  per barrel. He                                                                    
then looked  at what  happened to  the additional  money the                                                                    
company  made  in 2008  compared  to  2009. In  Alaska,  the                                                                    
additional pre-tax income (2009  relative to 2008) was about                                                                    
$3.7 billion.  The comnpany's additional taxes  in Alaska in                                                                    
2008 versus 2009 (when prices  were high) were $2.9 billion.                                                                    
Of that  $2.9 billion,  about 80  percent was  severance tax                                                                    
and 20  percent was  corporate income tax.  Their additional                                                                    
after-tax income in 2009 relative  to 2008 was $775 million.                                                                    
So ConocoPhillips got  to keep 21 percent  of the additional                                                                    
pre-tax income after tax.                                                                                                       
                                                                                                                                
Mr. Marks then compared the  numbers to what had happened in                                                                    
the rest of the world. In  the rest of the world, the prices                                                                    
were $100  per barrel in 2008  and $60 in 2009.  In the rest                                                                    
of  the  world, the  additional  pre-tax  income (2009  over                                                                    
2008) was $14.7 billion, and  the additional taxes were $7.2                                                                    
billion. In the  rest of the world, of  that additional $7.2                                                                    
billion, at 10  percent severance tax and  90 percent income                                                                    
tax,  the company's  additional  after-tax  income was  $7.5                                                                    
billion. In  the rest  of the  world, ConocoPhillips  got to                                                                    
keep 51  percent of  the additional  income; in  Alaska they                                                                    
only got to keep 21 percent of it.                                                                                              
                                                                                                                                
Mr.  Marks questioned  why any  oil producer  would want  to                                                                    
invest in  Alaska, given the  huge disparities  between what                                                                    
the producers got to keep after tax.                                                                                            
                                                                                                                                
8:34:31 AM                                                                                                                    
                                                                                                                                
Mr. Marks  turned to Slide  14, "Oil Severance Tax  Rates by                                                                    
State" (Slide 14):                                                                                                              
                                                                                                                                
     State               Rate (% of gross)                                                                                      
     Iowa                NONE                                                                                                   
     New York            NONE                                                                                                   
     Pennsylvania        NONE                                                                                                   
     Ohio                10 cents/bbl                                                                                           
     California          0.10%                                                                                                  
     Indiana             1.00%                                                                                                  
     Nebraska            3.00%                                                                                                  
     New Mexico          3.75%                                                                                                  
     Alabama             4.00%                                                                                                  
     Kansas              4.30%                                                                                                  
     Kentucky            4.50%                                                                                                  
     South Dakota        4.50%                                                                                                  
     Texas               4.60%                                                                                                  
     Arkansas            5.00%                                                                                                  
     Illinois            5.00%                                                                                                  
     Colorado            5.00%                                                                                                  
     West Virginia       5.00%                                                                                                  
     Utah                5.00%                                                                                                  
     Mississippi         6.00%                                                                                                  
     Wyoming             6.00%                                                                                                  
     Michigan            6.60%                                                                                                  
     Oklahoma            7.00%                                                                                                  
     Florida             8.00%                                                                                                  
     North Dakota        11.50%                                                                                                 
     Louisiana           12.50%                                                                                                 
     Montana             12.50%                                                                                                 
                                                                                                                                
     ALASKA @ $90 market (25 % of gross equivalent)                                                                           
                                                                                                                                
Mr.  Marks  noted  that  there  were  27  states  (including                                                                    
Alaska) that produced  oil. The slide showed  a breakdown of                                                                    
the  severance  tax  rates,  which for  most  states  was  a                                                                    
percentage  of gross.  Since  Alaska was  based  on net,  he                                                                    
converted  the  net  tax  to  a  gross  equivalent  at  $90.                                                                    
Alaska's  tax   rate  at  $90   was  25  percent   of  gross                                                                    
equivalent,  twice  as  high as  the  next  highest  states,                                                                    
Montana and  Louisiana. About two-thirds of  the states have                                                                    
severance tax rates of 6 percent or less.                                                                                       
                                                                                                                                
Vice-chair  Fairclough   directed  attention  to   Slide  11                                                                    
(breaking down  costs, producers, and government  take). She                                                                    
asked whether  the proportion  represented the  credits that                                                                    
Alaska  provided  to producers  or  whether  the costs  were                                                                    
borne  by  the  producers.  Mr.  Marks  responded  that  the                                                                    
government part  was net  of credits, so  the $5  billion to                                                                    
the  producers  included  the  credits  that  reduced  their                                                                    
taxes.                                                                                                                          
                                                                                                                                
Vice-chair  Fairclough asked  whether the  costs shown  were                                                                    
actual  costs borne  by the  producers. Mr.  Marks responded                                                                    
that the number  represented the costs in  terms of breaking                                                                    
down  the $100  per barrel.  The $24  per barrel  costs were                                                                    
borne by  the producers  and were the  costs to  produce and                                                                    
deliver the oil to market.                                                                                                      
                                                                                                                                
Vice-chair  Fairclough  wanted  a  yes  or  no  answer.  She                                                                    
wondered whether  the costs were  borne by the  producers or                                                                    
by  Alaska through  credit incentives.  Mr. Marks  responded                                                                    
that the  costs were  costs before  credits. The  values the                                                                    
producers and  the state made  were net of the  credits. The                                                                    
credits were just a transfer  payment from one to the other;                                                                    
the  $24 per  barrel represented  the actual  costs incurred                                                                    
without regard  to who  paid for them.  The $100  per barrel                                                                    
was reduced  by $24 per  barrel because of the  costs. After                                                                    
tax, the  value of  the oil  was $76  per barrel,  which was                                                                    
split $56/$20.                                                                                                                  
                                                                                                                                
8:37:40 AM                                                                                                                    
                                                                                                                                
Representative  Gara  pointed  to  Slide  10  (international                                                                    
marginal tax  rates). He  noted that  the industry  used the                                                                    
term  marginal  tax rates  when  referring  to Alaska's  tax                                                                    
rates, as the rate was higher  than that the actual tax rate                                                                    
paid  in the  state. Slide  10 used  the term  "marginal tax                                                                    
rate."  He asked  whether there  was a  slide comparing  the                                                                    
actual tax  rate companies  pay in  Alaska compared  to what                                                                    
they pay  in the  listed regimes.  Mr. Marks  responded that                                                                    
the other regimes  did not have progressivity,  so the slide                                                                    
showed  the effective  tax rate  (all  taxes included).  For                                                                    
Alaska, the marginal  tax rate was ever  increasing and drew                                                                    
the  effective  tax  rate  up. He  offered  to  provide  the                                                                    
effective tax rate for Alaska versus the other regimes.                                                                         
                                                                                                                                
Representative Gara  pointed to  Slide 4 showing  the actual                                                                    
tax rate  for ACES (not  including royalties) at  50 percent                                                                    
for $80  per barrel. He  directed attention to Slide  10 and                                                                    
asked  whether Alaska  would be  at 50  percent if  only the                                                                    
ACES portion was counted and  actual tax rates were measured                                                                    
and  not  marginal tax  rates.  He  wondered whether  Alaska                                                                    
would  then  be  placed  below other  jurisdictions  in  the                                                                    
model. Mr. Marks answered that he  had the slide, but it was                                                                    
not  part of  the presentation  he was  giving that  day. He                                                                    
stated that in terms of  the effective tax rates, Alaska was                                                                    
below  Norway  but  above all  the  other  jurisdictions  at                                                                    
prices between $50 and $100 per barrel.                                                                                         
                                                                                                                                
Representative  Gara continued  that the  marginal tax  rate                                                                    
would go up,  but the marginal tax rate was  the rate on the                                                                    
last highest  dollar, not  the rate paid  on all  the taxes.                                                                    
Mr. Marks agreed.                                                                                                               
                                                                                                                                
                                                                                                                                
Representative Gara  continued that  Mr. Marks had  picked a                                                                    
price ($100)  that had  only been matched  once in  last 100                                                                    
years. He asked  whether there was a  chart showing marginal                                                                    
tax rates at  the average price of the last  five years. Mr.                                                                    
Marks  pointed to  Slide 7  to show  the marginal  tax rates                                                                    
from $50  to $150  per barrel. He  maintained over  the last                                                                    
five  years the  marginal tax  rate was  at $70  or $80  per                                                                    
barrel.                                                                                                                         
                                                                                                                                
Representative  Gara clarified  that he  wanted the  numbers                                                                    
compared to the  other regimes. Mr. Marks  answered that the                                                                    
marginal tax  rate at $50  to $60  to $70 for  other regimes                                                                    
was the same, since they did not have progressivity.                                                                            
                                                                                                                                
8:41:28 AM                                                                                                                    
                                                                                                                                
Representative Gara noted that  Mr. Marks had chosen certain                                                                    
countries  [for Slide  10];  he did  not  see Russia,  Iraq,                                                                    
Azerbaijan,  Libya,  or  Venezuela  on the  list.  He  asked                                                                    
whether there  were countries that charged  actual tax rates                                                                    
in the  80 and 90 percent  range. Mr. Marks answered  in the                                                                    
affirmative.                                                                                                                    
                                                                                                                                
Representative  Gara believed  Alaska's tax  rates would  be                                                                    
lower than those places. Mr. Marks agreed                                                                                       
                                                                                                                                
Representative  Gara asked  for the  names of  the countries                                                                    
with tax  rates in  the 80  to 90  percent range.  Mr. Marks                                                                    
answered  that  the  marginal  rates  were  in  the  mid-80s                                                                    
percentile for  the production-sharing  countries, according                                                                    
to  work done  for  the  state by  PSC  Energy  in 2007.  He                                                                    
discounted  the  production-sharing countries  because  they                                                                    
had higher  resource potential and lower  costs than Alaska.                                                                    
There  was  an  element  of  fiscal  stability  because  the                                                                    
production-sharing contracts were  administered by contract.                                                                    
He opined  that Alaska  was competing  more with  the listed                                                                    
jurisdictions  [on Slide  10] for  investment than  with the                                                                    
other countries.                                                                                                                
                                                                                                                                
Representative  Gara asked  for  examples  of the  countries                                                                    
taxed  in the  80 and  90 percent  range. Mr.  Marks replied                                                                    
that he  could not give the  information off the top  of his                                                                    
head, but median  in the PSC Energy marginal  tax rates data                                                                    
was the mid-80s.                                                                                                                
                                                                                                                                
8:43:20 AM                                                                                                                    
                                                                                                                                
Representative  Costello understood  that marginal  tax rate                                                                    
was the  tax on the  next barrel  of oil. Mr.  Marks replied                                                                    
that the  question was how much  of each dollar went  to the                                                                    
government when the net value went up one dollar.                                                                               
                                                                                                                                
Representative  Costello surmised  that  it was  not a  look                                                                    
backward  as much  as  a look  forward.  She questioned  the                                                                    
value  of  considering  the marginal  tax  rate  versus  the                                                                    
effective tax rate.  Mr. Marks answered that  he had focused                                                                    
on the  marginal tax rate  because it  was the best  tool to                                                                    
measure the upside potential. With  high marginal tax rates,                                                                    
there was  not that much more  money as prices went  up. The                                                                    
problem  with  ACES  was  what happened  to  taxes  at  high                                                                    
prices; the marginal tax rate depicted that.                                                                                    
                                                                                                                                
Representative  Costello summarized  that the  effective tax                                                                    
rate was then  not the best indicator of  what oil companies                                                                    
were looking  at; they were  looking at marginal  tax rates.                                                                    
Mr.  Marks answered  that companies  were  looking at  both.                                                                    
Under  ACES  and  the   progressivity  structure,  when  the                                                                    
marginal tax rate  went up as prices went  up, the effective                                                                    
tax rate was dragged up as  well. The effective tax rate was                                                                    
what companies paid the actual  tax on, but the marginal tax                                                                    
rate was the  metric showing upside potential;  that was why                                                                    
he focused on it.                                                                                                               
                                                                                                                                
Representative Costello asked whether  the marginal tax rate                                                                    
could  make Alaska  less competitive.  Mr.  Marks turned  to                                                                    
Slide 8 (Hypothetical Expected Price  Outlook) and said that                                                                    
was  his  judgment,  because in  evaluating  projects,  what                                                                    
happens  on  the  upside  can  have a  huge  impact  on  the                                                                    
viability of a project; there  could be a significant impact                                                                    
if  the  upside potential  was  suppressed  because of  high                                                                    
marginal tax rates.                                                                                                             
                                                                                                                                
Representative Edgmon  directed attention  to Slide  11 (pie                                                                    
chart illustrating where 2008  money went). He asked whether                                                                    
the $6  billion listed  under "Costs" included  tariff costs                                                                    
that  the  owners  of Alyeska  paid  themselves.  Mr.  Marks                                                                    
responded  that the  tariff was  included;  there were  some                                                                    
costs, but it was mostly the tariff.                                                                                            
                                                                                                                                
Representative Edgmon  asked how  the $6 billion  number was                                                                    
related to the $11 billion that went to the state.                                                                              
                                                                                                                                
8:47:03 AM                                                                                                                    
                                                                                                                                
Mr. Marks  responded that there  was a  relationship between                                                                    
the two.  What was paid  to the state  was based on  the net                                                                    
after  costs, and  the  money going  to  the government  was                                                                    
generated  based  on  what happened  after  the  costs  were                                                                    
deducted.                                                                                                                       
                                                                                                                                
Representative  Edgmon  surmised  that the  $6  billion  was                                                                    
related to  the $11 billion; it  was also related to  the $3                                                                    
billion,  but the  situation was  not as  "cut-and-dried" as                                                                    
the  slide might  suggest. The  costs were  investments that                                                                    
the  companies  had  and  profit  they  accrued.  Mr.  Marks                                                                    
responded  that he  was correct;  producers retained  a very                                                                    
small piece  (the profit component TAPS  tariff). He thought                                                                    
perhaps $1 or  so went to the producer  category; other than                                                                    
that, it was  cash outlays incurred to produce  and ship the                                                                    
oil.                                                                                                                            
                                                                                                                                
Representative  Neuman  turned  to Slide  10  (International                                                                    
Marginal Tax Rates). He  wanted clarity regarding effective,                                                                    
marginal, and nominal taxes. He  queried the different types                                                                    
of taxes used internationally, such  as those used by Norway                                                                    
and Alberta (countries  not charging 100 percent  of the tax                                                                    
base  until after  expenditures  were  fully amortized).  He                                                                    
thought  the systems  were  potentially  very different.  He                                                                    
requested  a  description  of  the  differences.  Mr.  Marks                                                                    
answered  that each  of the  countries  had unique  features                                                                    
related  to taxation.  He said  that most  of the  oil would                                                                    
come from  developments occurring  in the North  Slope (such                                                                    
as  Prudhoe and  Kuparuk  fields). The  fields were  already                                                                    
developed  and  a  lot  of  the  capital  had  already  been                                                                    
incurred. Companies  would need to incur  more capital costs                                                                    
if they  wanted to develop.  All of the countries  listed on                                                                    
the slide had  their own ways of dealing  with what happened                                                                    
with  capital   expenditures  and  their  own   features  to                                                                    
incentivize development.  Alaska had credits (a  company can                                                                    
deduct  costs) as  incurred. In  many Alberta  fields, there                                                                    
was  only  a  5  percent  royalty for  the  first  year.  In                                                                    
Australia,  a company  could deduct  $1.50 when  it incurred                                                                    
$1.00 for exploration.                                                                                                          
                                                                                                                                
8:51:05 AM                                                                                                                    
                                                                                                                                
Mr. Marks continued  that in Norway, a  company could deduct                                                                    
$1.20 for  every dollar  of capital  incurred and  a company                                                                    
would  not owe  taxes  until investment  was recovered.  The                                                                    
various countries were different  in that they had different                                                                    
features,  but  the slide  showed  the  end result  of  what                                                                    
happened after  the taxes  were taken  when looking  at what                                                                    
happens on the upside for already developed fields.                                                                             
                                                                                                                                
Representative  Neuman  surmised  that  Alaska's  system  of                                                                    
taxation was  unique compared to other  countries because of                                                                    
progressivity. Mr.  Marks replied that all  the systems were                                                                    
unique, but Alaska was unique for the reasons stated.                                                                           
                                                                                                                                
Representative Doogan asked whether  most of the world's oil                                                                    
was produced  in countries of  the sort listed on  the chart                                                                    
or in countries not listed  on the chart. Mr. Marks answered                                                                    
that most  of the oil was  produced in countries not  on the                                                                    
chart. His judgment was that  the countries listed [on Slide                                                                    
10] were the ones Alaska  competed with most directly, given                                                                    
Alaska's  resource   potential,  costs,   and  the   way  it                                                                    
administered taxes through statute.                                                                                             
                                                                                                                                
Representative  Doogan stated  that  he was  not happy  that                                                                    
only a small segment  of the world's oil-producing countries                                                                    
were listed.                                                                                                                    
                                                                                                                                
Representative Wilson  directed attention  to Slide  14 (Oil                                                                    
Severance Tax  Rates by  State) and  noticed that  the gross                                                                    
was listed  rather than the  net. She asked how  the credits                                                                    
worked within  the systems. Mr.  Marks answered that  he had                                                                    
not looked at how every state's credit structure worked.                                                                        
                                                                                                                                
Representative  Wilson thought  that listing  Alaska on  the                                                                    
slide in relation to one piece  made it look like Alaska was                                                                    
way above. She thought it  would be easier to judge Alaska's                                                                    
comparative position without looking  at the tax structures.                                                                    
She asked  for a  comparative analysis of  at least  part of                                                                    
the  states listed,  such  as North  Dakota  and Texas.  Mr.                                                                    
Marks  responded that  he  could provide  a  summary of  the                                                                    
information.                                                                                                                    
                                                                                                                                
Co-Chair Stoltze  noted that there  would be  opportunity to                                                                    
come back to the committee with more refined answers.                                                                           
                                                                                                                                
8:54:22 AM                                                                                                                    
                                                                                                                                
Representative  Guttenberg addressed  Slide  14. He  thought                                                                    
Alaska was  unique as far  as who  owned the oil;  the state                                                                    
owned  all  the  subsurface.  He   asked  how  much  private                                                                    
property  owners took  in  other states  such  as Texas.  He                                                                    
wondered how the  numbers on the slide would  be affected by                                                                    
factoring  in private  property.  Mr.  Marks responded  that                                                                    
most of the states had  royalties, either public or private.                                                                    
The  royalty rates  varied up  to  30 percent;  many of  the                                                                    
royalties in  Texas were private.  In Texas, there  could be                                                                    
an effective  tax rate in  the mid-50s when coupling  the 30                                                                    
percent royalty and  a tax rate of 4.6  percent. There could                                                                    
be marginal tax rates in the mid-50s.                                                                                           
                                                                                                                                
Representative Guttenberg  pointed to  Slide 10.  He thought                                                                    
the countries left off the list  were in many cases the ones                                                                    
Alaska was  competing with, because Alaska's  producers were                                                                    
exploring  in those  places as  well. He  thought the  chart                                                                    
would  be  different if  it  showed  the places  with  which                                                                    
Alaska was  actually competing. He  did not think  Mr. Marks                                                                    
was  saying  that  the  marginal   tax  rate  was  the  only                                                                    
influential  factor in  making an  investment decision.  Mr.                                                                    
Marks responded certainly not; there  was the resource base,                                                                    
costs,  as  well  as  the  issue  of  political  and  fiscal                                                                    
stability.  He  noted that  he  had  included the  countries                                                                    
listed  for  a  reason.  A   higher  fiscal  take  could  be                                                                    
commanded when  there was a  spectacular resource  base with                                                                    
lower costs  (as there were  in the countries that  were not                                                                    
included)  than  with a  lower  base  and higher  costs.  He                                                                    
stated  that he  did not  include the  jurisdictions because                                                                    
the   comparison  was   "apples   to  oranges."   Countries,                                                                    
investors,  and producers  would  put up  with  a lot  (high                                                                    
taxes, political  instability) to  get to huge  resource, as                                                                    
in  Venezuela, Libya,  or Iraq.  He did  not believe  it was                                                                    
appropriate  to   compare  Alaska  with  those   places,  as                                                                    
investors would  not pay  so much for  the kind  of resource                                                                    
base Alaska has.                                                                                                                
                                                                                                                                
8:57:35 AM                                                                                                                    
                                                                                                                                
Mr.  Marks argued  that  some of  the  jurisdictions on  the                                                                    
list,  such as  Brazil, were  some of  the most  prospective                                                                    
places in  the world.  Brazil had huge  discoveries offshore                                                                    
and was  one of the hottest  places in the world  to develop                                                                    
oil  and  gas;  he  noted  that  it  administered  taxes  by                                                                    
statute.                                                                                                                        
                                                                                                                                
Representative  Guttenberg  emphasized  that his  point  was                                                                    
that  there were  a lot  more factors  besides the  tax rate                                                                    
affecting what happened in Alaska and other jurisdictions.                                                                      
                                                                                                                                
Representative  Gara noted  that when  companies decided  to                                                                    
invest,  they  took  into  consideration  the  danger  of  a                                                                    
location. For example, ConocoPhillips  had invested in Libya                                                                    
and  Venezuela, but  had to  remove  employees. He  wondered                                                                    
whether  political  stability  should  be  considered  in  a                                                                    
comparison;  he thought  Alaska  would rank  highly in  that                                                                    
regard. Mr.  Marks responded that political  stability was a                                                                    
factor  in where  companies invested.  He did  not know  how                                                                    
much  weight investors  placed  in  political stability;  he                                                                    
thought that  producers would  risk a lot  if a  good return                                                                    
was likely.                                                                                                                     
                                                                                                                                
Representative  Gara  turned  to  Slide  13  (ConocoPhillips                                                                    
Financial  Performance  2008  and   2009).  He  had  thought                                                                    
ConocoPhillips had  a world-wide  loss in  one of  the years                                                                    
because   they   wrote   off  assets   in   Venezuela   when                                                                    
nationalized. Mr.  Marks replied that  that had not  been in                                                                    
2008 and 2009, unless it  showed up as an extraordinary loss                                                                    
outside the regular income statement.                                                                                           
                                                                                                                                
Representative  Gara discussed  ConocoPhillips's income;  he                                                                    
had  looked   at  the  company's  Securities   and  Exchange                                                                    
Commission (SEC) filings and noted  it took in approximately                                                                    
$7.5 billion in  Alaska profits during the  four years under                                                                    
ACES (2007  to 2010).  He asked  whether Mr.  Marks believed                                                                    
the company would  have invested in Alaska more  if it taken                                                                    
in higher profits.                                                                                                              
                                                                                                                                
9:01:33 AM                                                                                                                    
                                                                                                                                
Mr.  Marks responded  that ConocoPhillips  was  both an  oil                                                                    
company and  a gas company.  Most companies were one  or the                                                                    
other;  oil  and  gas  were  worth  very  different  figures                                                                    
currently. In  Alaska, about 94 percent  of ConocoPhillips's                                                                    
assets  were  oil  (North  Slope,  Beluga  River,  and  Cook                                                                    
Inlet). In  the lower 48,  the company was about  30 percent                                                                    
oil,  and worldwide  it  was  about 50  percent  oil and  50                                                                    
percent gas.  He thought ConocoPhillips was  relatively more                                                                    
profitable in Alaska, but that  only reflected the fact that                                                                    
it  had more  oil in  Alaska. Worldwide,  oil was  competing                                                                    
against  oil; the  issue  was what  the  company was  making                                                                    
worldwide  on oil  and not  what the  company was  making in                                                                    
Alaska.                                                                                                                         
                                                                                                                                
Representative  Gara pointed  to  the  $7.5 billion  profits                                                                    
taken in Alaska  during the four years.  He wondered whether                                                                    
the company would  have been investing more in  Alaska if it                                                                    
had  made  higher  profits. Mr.  Marks  answered  that  when                                                                    
prices  were high,  ConocoPhillips  kept 20  percent of  the                                                                    
increased  value in  Alaska; in  the rest  of the  world, it                                                                    
kept  50   percent  of   the  increased   value.  Therefore,                                                                    
investment in other locations was more attractive.                                                                              
                                                                                                                                
Vice-chair Fairclough queried  working conditions in Brazil,                                                                    
Libya,   and  Algeria,   and  labor-cost   comparisons.  She                                                                    
wondered  whether  permitting processes  and  transportation                                                                    
were  more expensive  in  Alaska than  in  other areas.  Mr.                                                                    
Marks replied  in the  affirmative; regulatory  hurdles were                                                                    
another     factor     contributing     to     international                                                                    
competitiveness.                                                                                                                
                                                                                                                                
Vice-chair Fairclough  referred to  a conversation  that had                                                                    
occurred during  the ACES process.  She thought  many things                                                                    
impacted a  company's decision-making process.  She believed                                                                    
ConocoPhillips was  being picked on because  the company had                                                                    
broken  out the  Alaska numbers.  She commended  the company                                                                    
for  doing so  and  for  all it  had  done  for Alaska.  She                                                                    
thought perhaps  the state  should do  more for  the company                                                                    
and help it be more competitive.                                                                                                
                                                                                                                                
9:06:22 AM                                                                                                                    
                                                                                                                                
Representative Doogan wondered how  much money the other two                                                                    
major  oil companies  made in  Alaska during  the same  time                                                                    
period and  whether the  results would  be higher  than what                                                                    
ConocoPhillips had  made. Mr. Marks  believed ConocoPhillips                                                                    
had  about 40  percent of  the North  Slope production;  the                                                                    
other two companies would have about 30 percent each.                                                                           
                                                                                                                                
Co-Chair  Stoltze noted  that there  would be  a meeting  at                                                                    
1:30 with Commissioner Butcher.                                                                                                 
                                                                                                                                
Mr. Marks  informed the committee  that when ACES  passed in                                                                    
2007, there  was a lot of  activity on the North  Slope that                                                                    
was  not going  anywhere. The  entrenched activity  had paid                                                                    
the  tax  and  the  state  was making  lots  of  money.  The                                                                    
question was why  Alaska needed to reevaluate  the issue. He                                                                    
noted  that  there was  some  analysis  about how  ACES  was                                                                    
performing;  DOR showed  that investment  was up.  There was                                                                    
mixed  data  about  whether  employment   had  gone  up.  He                                                                    
asserted that people  had not focused on  the most important                                                                    
thing: what was actually happening to production.                                                                               
                                                                                                                                
Mr. Marks pointed to a bar  graph on Slide 16, "A History of                                                                    
DNR Forecasts  of Total Production  between 2010  and 2020."                                                                    
He  noted  that  both  DNR and  DOR  independently  put  out                                                                    
production  forecasts, and  the results  were similar.  When                                                                    
DOR  put out  forecasts, it  looked  ten years  out and  was                                                                    
always  considering  a different  ten  years.  When DNR  did                                                                    
forecasts,  it went  to  2020 or  beyond.  The DNR  forecast                                                                    
could  provide an  outlook about  what had  changed for  the                                                                    
same  set of  years. Slide  16 showed  DNR's forecast  since                                                                    
2000 for  the period between 2010  and 2020, to see  how its                                                                    
outlook for  production had changed.  The DNR  forecast came                                                                    
out about once every other  year; since 2002, there had been                                                                    
six forecasts (the last one  in November 2009). In 2002, DNR                                                                    
was forecasting that between 2010  and 2020 there would be a                                                                    
total of 2.6 billion barrels  produced. In 2003, the outlook                                                                    
went up; in  2004, the outlook went up; in  2006 the outlook                                                                    
went up  to 3.2 billion  barrels. In 2006, DNR  believed 3.2                                                                    
billion  barrels  would be  produced  from  the North  Slope                                                                    
between  2010 and  2020. Then  PPT passed  in 2006,  and the                                                                    
direction reversed.                                                                                                             
                                                                                                                                
9:11:05 AM                                                                                                                    
                                                                                                                                
Mr.  Marks  continued  that DNR's  last  forecast  (November                                                                    
2009) was for  about 2.4 billion barrels.  Prices were going                                                                    
up during the period, as they  were at the other period, but                                                                    
at the  pivotal point, the  outlook started going  down. The                                                                    
difference  between   when  before   PPT  passed   with  the                                                                    
dysfunctional  progressivity structure  and  today was  that                                                                    
the outlook had  gone from 3.2 billion barrels  over the ten                                                                    
years to 2.4  billion barrels (a 25 percent loss;  a loss of                                                                    
800 million  barrels total, or  200,000 barrels per  day for                                                                    
ten years).                                                                                                                     
                                                                                                                                
Mr.  Marks  turned  to  Slide   17  "Department  of  Natural                                                                    
Resources  ANS  Production  Forecast   Before  &  After  PPT                                                                    
(bbls/day)"  with  a blue  line  representing  the May  2006                                                                    
forecast  (last   forecast  before  PPT)  and   a  red  line                                                                    
indicating   the  current   forecast  (November   2009).  He                                                                    
emphasized that  five years prior, DNR  was forecasting that                                                                    
in 2011  there would  be 900,000  barrels per  day produced;                                                                    
now the forecast was for 600,000  barrels per day, or a loss                                                                    
of 300,000 barrels per day.                                                                                                     
                                                                                                                                
Mr. Marks  noted that the  production gap (the  area between                                                                    
the  line  curves)  represented   800  million  barrels,  or                                                                    
200,000  barrels  per  day  for   the  ten-year  period.  He                                                                    
stressed  that the  situation  was not  the  result of  some                                                                    
fields  not  coming on  as  some  had thought;  the  numbers                                                                    
represented less oil coming out of the same fields.                                                                             
                                                                                                                                
Mr.  Marks  did  not  think  the  reduction  was  completely                                                                    
attributable  to ACES,  but  he believed  ACES  was a  major                                                                    
contributing  factor.  He  referred  to a  track  record  of                                                                    
producers announcing that projects  and development had been                                                                    
deferred  explicitly because  of the  tax. When  the 900,000                                                                    
barrel per day forecast had  been made five years prior, the                                                                    
price forecast  for 2011 was  $50 per barrel; the  price was                                                                    
actually $90 per barrel or  more. People might think that as                                                                    
prices went  up, companies would  want to produce  more oil;                                                                    
however, because of the progressivity  structure in ACES, he                                                                    
believed there  was an increasing schism  between Alaska and                                                                    
the rest  of the  world. Alaska  had become  relatively less                                                                    
competitive as prices went up,  resulting in less investment                                                                    
and less production.                                                                                                            
                                                                                                                                
Mr. Marks  directed attention  to a bar  graph on  Slide 18,                                                                    
"Oil Production  Forecast 2010-2050." The  graph illustrated                                                                    
that DNR production  forecast going out to  2050 showed that                                                                    
about 85 percent  of the oil would come  from core, existing                                                                    
fields  (Prudhoe Bay,  Kuparuk,  Alpine).  The fields  would                                                                    
have  a   combination  of   in-field  drills,   hundreds  of                                                                    
individual pockets of oil that did  not drain to the rest of                                                                    
the field  and had  to be drilled  explicitly, and  about 85                                                                    
percent  of  the  oil  would come  from  the  existing  core                                                                    
fields.                                                                                                                         
                                                                                                                                
Mr. Marks  pointed out  that two-thirds  of the  800 million                                                                    
barrel production  gap between  2006 and  2011 was  from the                                                                    
existing fields. About 530  million barrels (132,000 barrels                                                                    
per day) was from the existing fields.                                                                                          
                                                                                                                                
9:14:28 AM                                                                                                                    
                                                                                                                                
Mr.  Marks  turned  to  (Slide   20)  "Investment:  The  Big                                                                    
Picture":                                                                                                                       
                                                                                                                                
   · Production requires capital investment                                                                                     
   · At the corporate level Alaska competes for capital                                                                         
     with other jurisdictions                                                                                                   
        o Capital is finite                                                                                                     
        o Capital is fluid                                                                                                      
        o Capital will go to where it gets the best deal                                                                        
                                                                                                                                
Mr.   Marks   emphasized    that   given   the   comparative                                                                    
international  rates showed  earlier, he  did not  think the                                                                    
drop in  production was a  surprise, as  production required                                                                    
capital  investment  and  at  the  corporate  level,  Alaska                                                                    
competed  for capital  with other  jurisdictions, and  there                                                                    
was  only  so  much  capital   to  invest.  In  the  age  of                                                                    
globalization, the  capital was  fluid. He  questioned where                                                                    
the capital would go.                                                                                                           
                                                                                                                                
Mr.  Marks  maintained that  the  basic  cornerstone of  all                                                                    
economic  theory was  the simple  principal that  more money                                                                    
was better  than less money.  Two notions come out  of that:                                                                    
first, companies will do what  gets them the most money, and                                                                    
second, companies  will change their behavior  if structures                                                                    
are changed  to give them  either more money or  less money.                                                                    
The  credit  structure  makes  things  less  expensive,  and                                                                    
induces  investment. He  compared the  oil credits  with the                                                                    
film credits given by the state for films made in Alaska.                                                                       
                                                                                                                                
Mr. Marks maintained  that on the flip  side, structures can                                                                    
be  created  that make  people  do  less of  something.  For                                                                    
example,  increasing the  cigarette  tax can  get people  to                                                                    
smoke less.  He believed the structure  created through ACES                                                                    
would cause companies to invest  in places in the world with                                                                    
more advantageous  structures, because they could  make more                                                                    
money.                                                                                                                          
                                                                                                                                
Mr.  Marks noted  argument that  there was  still a  decline                                                                    
rate under the ELF structure,  under which some fields had a                                                                    
very  low tax  rate. However,  it was  not known  what would                                                                    
have happened  during the  ELF years if  there had  been tax                                                                    
rates of 30  to 50 percent. During the  ELF years, literally                                                                    
billions of  dollars were  invested in  gas capacity  on the                                                                    
North Slope; about  25 percent of the oil coming  out of the                                                                    
North Slope  was the  direct result  of the  investments. He                                                                    
wondered whether  the investments  would have  occurred with                                                                    
tax rates  at 30 to  50 percent  relative to what  they were                                                                    
under the low ELF years.                                                                                                        
                                                                                                                                
Mr. Marks  noted that  DOR analysis  had shown  that capital                                                                    
spending  was  up after  ACES;  he  wanted to  consider  the                                                                    
context of that spending (Slide 23, "Context of Spending"):                                                                     
                                                                                                                                
   · Core fields down*                                                                                                          
   · Non-core fields up* (Nikaitchuq and Pt. Thomson)                                                                           
        o A small share of potential reserves                                                                                   
   · No other new fields on the horizon                                                                                         
   · Gold-plating                                                                                                               
                                                                                                                                
   *Department of Revenue "Oil and Gas Production Tax Status                                                                    
   Report to the Legislature," January 18, 2011, p. 8.                                                                          
                                                                                                                                
Mr. Marks  introduced the  concept of  "gold-plating," which                                                                    
he  defined as  a  company spending  more  than it  normally                                                                    
would because someone  else was picking up the  tab. The way                                                                    
ACES worked (with  high marginal tax rates),  less money was                                                                    
spent by a company after  taxes because state government was                                                                    
picking  up a  big  part of  the tab.  He  claimed that  the                                                                    
concept of  gold-plating was  complicated, but  important to                                                                    
understand because of what was going on in the state.                                                                           
                                                                                                                                
9:17:56 AM                                                                                                                    
                                                                                                                                
Mr.  Marks returned  to Slide  7 (Marginal  Tax Rates  Under                                                                    
ACES). He explained that the  marginal tax rate was how much                                                                    
the government  received as  the price  went up.  The reason                                                                    
the marginal  tax rate went up  under ACES was that  the tax                                                                    
was drawn  up on  more and  more dollars  of value  as value                                                                    
went up. He  pointed out that going the  other direction, or                                                                    
right  to left  on  the graph  (representing  the net  value                                                                    
going down  either because  prices went  down or  more money                                                                    
was spent) would  make the exact opposite  occur. Instead of                                                                    
drawing up  the tax  value for all  the previous  dollars of                                                                    
value, going  from right to  left when spending  money would                                                                    
make the  tax rate  from all the  previous dollars  of value                                                                    
get drawn down.  Going from left to right,  the marginal tax                                                                    
rate was  what the government  got as prices went  up; going                                                                    
from right  to left and  costs went up, the  government gave                                                                    
up  money  as the  producer  spent  it.  As a  result,  when                                                                    
producers spend money, it has  not cost them that much after                                                                    
tax because  the government has  paid a  lot of the  cost in                                                                    
reduced taxes.                                                                                                                  
                                                                                                                                
Mr. Marks directed  attention to a slide  with details about                                                                    
gold  plating  (Slide  24,   "Gold  Plating:  Spending  more                                                                    
because someone else is picking  up the tab"). He noted that                                                                    
the information was the same as  on Slide 3 related to ACES.                                                                    
The beginning point  on the first column is  $90 (ANS market                                                                    
price); there are  $32 in costs for $58 in  net value. Given                                                                    
a tax  rate of  36.2 percent  and capital  costs at  $13 per                                                                    
barrel at  20 percent  ($2.60), the  severance tax  would be                                                                    
$15.77,  and an  income tax  of $17.31;  the bottom  line is                                                                    
income of $24.91 per barrel after tax.                                                                                          
                                                                                                                                
Mr. Marks  pointed to the  second column, what  would happen                                                                    
when an  extra dollar is  spent. The capital cost  goes from                                                                    
$13 to  $14, and  four things happen.  First, the  net value                                                                    
goes  from $58  to  $57.  Second, the  tax  rate goes  down,                                                                    
because  the  net  value  has  gone  down  (from  $36.20  to                                                                    
$35.80). Three, because  the net value has  gone down, there                                                                    
is a lower  tax rate to a lower net  value. Four, because an                                                                    
extra dollar  is spent, the  credit has gone up.  The bottom                                                                    
line  is that,  even though  an extra  dollar is  spent, the                                                                    
reduction in  income is only  $0.17. The purchase  only cost                                                                    
the  producer $0.17  after  tax; the  other  $0.83 has  been                                                                    
picked  up by  the  government in  reduced  taxes (about  90                                                                    
percent of the $0.83 is the state).                                                                                             
                                                                                                                                
Mr.  Marks emphasized  that the  reason for  the change  was                                                                    
that at  high marginal  tax rates at  high prices,  a dollar                                                                    
spent  meant a  big drop  in the  tax rate  that applied  to                                                                    
reduced  value,  resulting  in  a   big  drop  in  tax.  The                                                                    
mechanism would be exacerbated more at high prices.                                                                             
                                                                                                                                
Mr.  Marks  turned  to  a  graph  depicting  "Gold  Plating:                                                                    
Percentage  of  Capital  Cost Paid  by  Producers  After-Tax                                                                    
under ACES (with  20% capital credit)" (Slide  25). He noted                                                                    
that the  flip side was  that the  state would pay  what the                                                                    
producers  did not  pay. At  $90, the  producers would  only                                                                    
incur 17  percent of  the cost when  spending a  dollar; the                                                                    
state would pay the other  83 percent. At $120, the producer                                                                    
would incur  only 3 percent  of costs; the  government would                                                                    
pay the other 97 percent.                                                                                                       
                                                                                                                                
Mr.  Marks illustrated  what happens  to  the numbers  under                                                                    
ACES through  the metaphor  of a company  buying a  truck on                                                                    
the North  Slope. The company wants  to buy a Ford  F-150 at                                                                    
$20,000. At  $100 per barrel,  they incur 10 percent  of the                                                                    
cost, so the  $20,000 would only cost them  $2000 after tax.                                                                    
The company  could buy  a Ford F-350  at $30,000,  and could                                                                    
reason that  the government  was paying  for 90  percent, so                                                                    
the better  truck would  only cost them  an extra  $1000. So                                                                    
the  company could  buy a  Ford  F-350 only  though it  only                                                                    
needed a Ford F-150; it puts  out $30,000, but its taxes are                                                                    
reduced $27,000. The mechanism  could apply to anything, not                                                                    
just the  truck; it  could apply  to compressors,  pumps, or                                                                    
valves. The  company may even  pay itself more  money. Under                                                                    
the tax  structure with the  high marginal tax  rates, there                                                                    
was an  incentive for a  producer to pay more  for something                                                                    
than it normally  would or buy things that  were not needed,                                                                    
because  someone else  was paying.  He noted  that producers                                                                    
may not know that they  were gold-plating. A receipt for the                                                                    
Ford F-350 might come across the  desk of an auditor, but he                                                                    
did not believe an auditor would  deny the claim and say the                                                                    
producer only needed a Ford F-150.                                                                                              
                                                                                                                                
9:23:57 AM                                                                                                                    
                                                                                                                                
Mr. Marks  listed the "Implications of  Gold-Plating" (Slide                                                                    
26):                                                                                                                            
                                                                                                                                
   · Gold-plating is not efficient spending (spending to                                                                        
     produce barrels)                                                                                                           
   · Gold-plating happens because of high marginal tax                                                                          
     rates at high prices under ACES                                                                                            
   · Gold-plating may explain a lot of spending without the                                                                     
     commensurate increase in production                                                                                        
                                                                                                                                
Mr. Marks  argued that gold-plating  was not in  the state's                                                                    
best  interests because  the state  was contributing  to the                                                                    
spending through deductions and credit.                                                                                         
                                                                                                                                
Representative Doogan  pointed to  Slide 16 (related  to the                                                                    
history  of   forecasts).  He  asked  whether   the  numbers                                                                    
forecasted happened. He believed the  amount of oil had been                                                                    
going down steadily during the  years represented on the bar                                                                    
graph. Mr.  Marks replied that generally  the forecasts have                                                                    
been  too high  because  of unanticipated  things that  went                                                                    
wrong, such as brief shutdowns.                                                                                                 
                                                                                                                                
Representative Doogan  asked what good  it did to look  at a                                                                    
sheet  of  wrong forecasts.  Mr.  Marks  responded that  the                                                                    
forecast history  showed what the  outlook was;  be believed                                                                    
it represented  the most intelligent view  available of what                                                                    
would be  happening. He  knew the  forecasts would  be wrong                                                                    
(like any forecast),  but experts in the field  would have a                                                                    
better recent  perspective of what  would happen.  The graph                                                                    
showed what experts believed the outlook was.                                                                                   
                                                                                                                                
Representative Doogan understood, but  since the outlook was                                                                    
wrong  and always  showed declining  production, he  did not                                                                    
understand the  purpose. Mr. Marks  answered that  the chart                                                                    
showed that what the experts  thought would unfold was going                                                                    
up before  PPT passed  and what  they believed  would happen                                                                    
after  PPT was  declining. He  noted that  the experts  have                                                                    
access to  the company's  development plans  and information                                                                    
about the resource base.                                                                                                        
                                                                                                                                
9:27:00 AM                                                                                                                    
                                                                                                                                
Representative Doogan  asked why he should  care what people                                                                    
thought  was  going to  happen  when  he already  knew  what                                                                    
actually happened.                                                                                                              
                                                                                                                                
Representative  Costello  asked  whether tax  credits  could                                                                    
mask unattractive  tax rates. Mr.  Marks responded  that one                                                                    
significant  element that  contributed  to gold-plating  was                                                                    
the  credit. He  added that  he would  address the  issue in                                                                    
more depth  later in  the presentation.  He stated  that the                                                                    
credit was a contributing factor.                                                                                               
                                                                                                                                
Representative Gara  referred to  an earlier  question about                                                                    
the profits  of the  other oil companies.  He noted  that BP                                                                    
had reported (with a caveat)  roughly $8.4 billion in profit                                                                    
in Alaska  for the  last four years  under ACES.  The caveat                                                                    
was  related to  a  petroleum newsletter  that had  reported                                                                    
that BP  was able  to write  of $1.5  billion of  its Alaska                                                                    
profits for  the Gulf oil  spill. He underlined that  BP did                                                                    
report its Alaska profits, and  the profits were higher than                                                                    
ConocoPhillips.                                                                                                                 
                                                                                                                                
Representative Gara directed attention  to Slide 25 (related                                                                    
to gold-plating).  He stated  that Mr.  Marks was  the first                                                                    
person he had  heard criticize the "flagship"  part of ACES-                                                                    
that  the state  would  contribute to  the  cost of  capital                                                                    
expenditures.  He  clarified that  the  state  paid for  two                                                                    
kinds of  capital expenditures under ACES.  First, a company                                                                    
could deduct  the cost of  capital expenditures;  the higher                                                                    
the tax rate, the more the  state would pay. For example, in                                                                    
years when  the company's  tax rate  was 50  percent because                                                                    
the price  of oil was  $90 per  barrel, the state  would pay                                                                    
the  other  50  percent.  Second, a  company  could  get  20                                                                    
percent for  the capital  credit (unless  the field  was one                                                                    
that got  40 percent).  He asked whether  the state  was the                                                                    
biggest investor in capital expenditures  on the North Slope                                                                    
under ACES in most cases at higher prices.                                                                                      
                                                                                                                                
9:30:52 AM                                                                                                                    
                                                                                                                                
Mr. Marks  pointed out  that the  taxes listed  included the                                                                    
federal income  tax deduction. He noted  that the government                                                                    
was the major contributor.                                                                                                      
                                                                                                                                
Representative Gara questioned  whether granting companies a                                                                    
high credit  and deduction if  they agreed to  invest inside                                                                    
the state of  Alaska was a good thing. Mr.  Marks thought it                                                                    
was good,  but could be excessive  when it got to  the point                                                                    
that spending money  after tax did not cost  a company much.                                                                    
A company could  either pay too much or pay  for things that                                                                    
were not necessary  and spend money that  was not productive                                                                    
(producing barrels of oil because  the state was bankrolling                                                                    
the operation).                                                                                                                 
                                                                                                                                
Representative  Gara stated  that  he could  be talked  into                                                                    
amending  the  tax  credit  system   if  the  focus  was  on                                                                    
exploration  wells,  for  example,  instead  of  unnecessary                                                                    
equipment. He was concerned about  lowering the tax, because                                                                    
companies  that were  already taking  $8  billion over  four                                                                    
years in  profits could take the  money out of the  state to                                                                    
other places  with more attractive  regimes. However,  a tax                                                                    
credit  could be  good because  the money  would have  to be                                                                    
spent  in  the  state.  He  thought  a  credit  system  that                                                                    
required spending  the money in  the state was  an advantage                                                                    
over  reducing  tax  credits,  if   the  goal  was  in-state                                                                    
investment.                                                                                                                     
                                                                                                                                
Mr. Marks responded that producers  wanted to make money. He                                                                    
thought there should  be a tax system that  would allow them                                                                    
to make  money as a result  of investment. He did  not think                                                                    
credits would  be successful towards  getting more oil  if a                                                                    
large share of the profits  were taxed away compared to what                                                                    
would happen if companies invested elsewhere.                                                                                   
                                                                                                                                
9:33:13 AM                                                                                                                    
                                                                                                                                
Vice-chair  Fairclough   directed  attention  to   Slide  23                                                                    
(Context  of  Spending).  She   believed  that  during  past                                                                    
discussions regarding  ACES there  had been an  amendment to                                                                    
freeze or disallow credits on  legacy fields for a period of                                                                    
time. Mr. Marks could not  recall exactly; he did remember a                                                                    
proposal related  to different tax treatment  for legacy and                                                                    
non-legacy fields.                                                                                                              
                                                                                                                                
Vice-chair Fairclough recalled  disallowing cost recovery on                                                                    
legacy fields  for a period of  18 months to two  years. Mr.                                                                    
Marks responded that what passed  was a ceiling on operating                                                                    
costs  based   on  past   operating  costs   (the  "standard                                                                    
deduction");  the practice  had  been  grandfathered out  in                                                                    
2009.                                                                                                                           
                                                                                                                                
Vice-chair  Fairclough wondered  whether reinvestment  could                                                                    
be  expected with  the ability  to recover  costs in  legacy                                                                    
fields. Mr.  Marks replied that the  deduction was standard;                                                                    
producers might  not have  been able  to recover  all costs,                                                                    
but many  of them.  He believed  the big  issue in  terms of                                                                    
incentivizing investment was what  happened to taxes at high                                                                    
rates related  to the rest  of the world. He  reiterated his                                                                    
belief  that  it was  possible  for  Alaska to  become  less                                                                    
competitive and have less production at higher prices.                                                                          
                                                                                                                                
Vice-chair  Fairclough thought  that companies  might invest                                                                    
more without any  change because of the ability  to take the                                                                    
credits and recover costs. She  was intrigued by Mr. Marks's                                                                    
analysis of the  way tax credits were  currently being used.                                                                    
She  wondered  whether  anything  else  was  going  on.  She                                                                    
surmised that it  was a global economy and  Alaska was still                                                                    
not  competitive  when  considering the  overall  take.  Mr.                                                                    
Marks  responded   that  he  believed  that   was  the  most                                                                    
important thing to look at.                                                                                                     
                                                                                                                                
9:36:52 AM                                                                                                                    
                                                                                                                                
Mr. Marks  turned to the  subject of fixing  ACES, beginning                                                                    
with "Fair Share: Economic Aspect" (Slide 28):                                                                                  
                                                                                                                                
   · Maximizing benefit to people                                                                                               
        o Long-term benefit                                                                                                     
        o Linked to maximizing long-term production                                                                             
        o Production maximized by continual investment                                                                          
   · In designing a tax need to be mindful of how Alaska                                                                        
     stacks up internationally                                                                                                  
   · What is "fair" is what you can get in a competitive                                                                        
     environment                                                                                                                
                                                                                                                                
Mr.  Marks noted  that the  concept  of "fair  share" was  a                                                                    
complicated subject and people  had different opinions about                                                                    
what it  meant. He spoke  about the subject as  an economist                                                                    
in  terms   of  international  competitiveness.   The  state                                                                    
constitution stipulates  maximizing the benefit  of resource                                                                    
development to  the people; he assumed  most people believed                                                                    
that  meant the  long-term benefit.  He believed  maximizing                                                                    
long-term  benefit   was  linked  to   maximizing  long-term                                                                    
production,   so  that   future   generations  could   avail                                                                    
themselves  of  the  resources. He  thought  production  was                                                                    
maximized by continual investment  and that it was important                                                                    
to be competitive.  He believed it was  important to compare                                                                    
Alaska internationally  when designing  a tax  structure. As                                                                    
an  economist, he  thought "fair  share" was  what could  be                                                                    
gotten in a competitive environment.                                                                                            
                                                                                                                                
Mr. Marks provided the analogy of  a loaf of bread. The fair                                                                    
share of  resource revenues  was similar  to the  fair price                                                                    
for a loaf  of bread: If bread sells everywhere  in town for                                                                    
$1.00 per loaf, a seller  believing they are entitled to get                                                                    
$2.00 per loaf  may not end up selling much  bread. He noted                                                                    
precedence for  countries that  believed they  were entitled                                                                    
to a  much larger  share of  revenues than  the rest  of the                                                                    
world  (such as  Bolivia  and Pakistan).  The countries  had                                                                    
terrific  endowments of  natural resources  and thought  for                                                                    
generations that  they were entitled  to more than  what the                                                                    
world  was  willing to  give.  The  rest  of the  world  has                                                                    
subsequently disregarded  the two  countries and  gotten the                                                                    
resources elsewhere.                                                                                                            
                                                                                                                                
9:39:32 AM                                                                                                                    
                                                                                                                                
Mr. Marks addressed  the subject of how not to  fix ACES. He                                                                    
indicated a  graph on Slide  29, "Cash Flow  Impact: Credits                                                                    
vs.  ACES  Severance  Tax."  He   detailed  that  the  graph                                                                    
depicted  the tax  per barrel  for ACES  on the  upper (red)                                                                    
line  and the  credits on  the lower  (blue) line.  He noted                                                                    
that the credits were 20  percent and the capital costs were                                                                    
about  $12 or  $13 per  barrel,  so the  credits were  about                                                                    
$2.50  per barrel,  whether the  price was  $50 or  $150 per                                                                    
barrel. He  maintained that  the table  showed that  the tax                                                                    
dwarfed the  credits. He believed  the problem was  that the                                                                    
taxes  were too  high, not  that  credits were  too low.  He                                                                    
thought  there was  a strong  credit structure  coupled with                                                                    
the ability  to deduct costs.  He maintained that  the graph                                                                    
depicted that the too-high-taxes  problem could not be fixed                                                                    
by  altering the  credits  and  that the  tax  needed to  be                                                                    
looked at directly.                                                                                                             
                                                                                                                                
Mr.  Marks directed  attention to  details  for fixing  ACES                                                                    
outlined in the "Proposal  for Fix: Bracketed Tax Structure"                                                                    
(Slide 30):                                                                                                                     
                                                                                                                                
   · The problem is not progressivity - but the                                                                                 
     progressivity structure                                                                                                    
   · Changing the progressivity structure                                                                                       
        o HB 110:                                                                                                               
        o Bracketed progressivity structure                                                                                     
   · Values within structure                                                                                                    
                                                                                                                                
Mr. Marks believed the issue  was changing the progressivity                                                                    
structure through  a bracketed tax structure  similar to the                                                                    
IRS structure outlined on Slide  5. House Bill 110 would set                                                                    
up a bracketed  tax structure with values  detailed on Slide                                                                    
29, "Proposed Bracket Structure: HB 110":                                                                                       
                                                                                                                                
     Proposed Bracket Structure: HB 110                                                                                         
     (Existing Units)*                                                                                                          
     Based on Net Value p/bbl**                                                                                                 
                                                                                                                                
     $0/bbl -$30.00/bbl 25.0%                                                                                                   
     Next $12.50/bbl ($30.00 -$42.50/bbl)    27.5%                                                                              
     Next $12.50/bbl ($42.50 -$55.00/bbl)    32.5%                                                                              
     Next $12.50/bbl ($55.00 -$67.50/bbl)    37.5%                                                                              
     Next $12.50/bbl ($67.50 -$80.00/bbl)    42.5%                                                                              
     Next $12.50/bbl ($80.00 -$92.50/bbl)    47.5%                                                                              
     Anything over $92.50/bbl                50.0%                                                                              
                                                                                                                                
     * For other fields outside existing units the tax                                                                          
     rates are 10 percentage points less                                                                                        
     ** These net values are approximately $30 less than                                                                        
     market values (the ANS West Coast price).                                                                                  
                                                                                                                                
Mr.  Marks  detailed  that  HB  110  would  establish  seven                                                                    
brackets. The  first bracket would  be the base tax  rate of                                                                    
25 percent up  to $30 per barrel  before progressivity would                                                                    
kick in. Progressivity  would then apply in  brackets and go                                                                    
up  $12.50  per  bracket  until the  price  was  $92.50  per                                                                    
barrel. As the price went from  $30 to $92.50 net value, the                                                                    
tax rate would increase from 25 percent to 50 percent.                                                                          
                                                                                                                                
Mr.  Marks turned  to a  graph on  Slide 32,  "Comparison of                                                                    
Effective  Severance Tax  Rates (Before  Credits)" depicting                                                                    
the  effective tax  rates with  ACES through  the top  (blue                                                                    
dotted) line, the HB 110  bracket for existing fields on the                                                                    
middle (green  dashes) line, and  the HB 110 system  for new                                                                    
fields on the bottom (black dashes) line.                                                                                       
                                                                                                                                
Mr. Marks noted that the  effective rate was the tax divided                                                                    
by the net value. He added that  ACES was a tax based on the                                                                    
direct  net  value.  Bracketing would  take  the  total  tax                                                                    
divided by  the total  net value to  get the  effective rate                                                                    
shown.                                                                                                                          
                                                                                                                                
9:42:49 AM                                                                                                                    
                                                                                                                                
Mr. Marks directed attention to  another line graph on Slide                                                                    
33,  "Marginal Tax  Rates  (All state  &  federal taxes  and                                                                    
royalties)." He  noted that all  taxes were  included. Under                                                                    
HB 110 for existing  fields (the middle, green-dashes line),                                                                    
the lower values would be  unaffected as the prices went up;                                                                    
the lower tax value would not  be drawn up as happened under                                                                    
ACES. The  marginal tax rate  would therefore  be stabilized                                                                    
and would peak at about 74 percent.                                                                                             
                                                                                                                                
Mr. Marks turned  to a bar graph on Slide  34 showing how HB                                                                    
110  compared with  other  systems ("International  Marginal                                                                    
Tax Rates  @$100/bbl Market Price  Tax &  Royalty Regimes").                                                                    
He noted the bar for HB  110 for existing fields (third from                                                                    
the right).  He stressed that  Alaska's tax was  higher than                                                                    
all the other regimes, except for Norway.                                                                                       
                                                                                                                                
Mr. Marks moved to a  line graph on Slide 35, "Gold-Plating:                                                                    
HB  110 (Existing  Units) vs.  ACES." He  noted that  HB 110                                                                    
would propose  a 40 percent  well-lease credit  (blue dotted                                                                    
line)  and the  graph  illustrated  the gold-plating  effect                                                                    
using the  current 20 percent  credit versus the  40 percent                                                                    
credit; the producers  would receive less money  with the 40                                                                    
percent credit.                                                                                                                 
                                                                                                                                
Mr. Marks  turned to "Revenue Losses  from Proposal?" (Slide                                                                    
36):                                                                                                                            
                                                                                                                                
   · Initial revenue losses likely                                                                                              
   · DOR's   production    forecast   does    not   consider                                                                    
     availability of capital                                                                                                    
        o Very plausible that status quo production                                                                             
          forecast is too high                                                                                                
   · Very plausible that with lower taxes there will be                                                                         
     greater investment and production                                                                                          
        o Very plausible that production forecast under HB                                                                      
          110 is too low                                                                                                      
   · Cannot compare revenues between taxes using the same                                                                       
     number of barrels                                                                                                          
                                                                                                                                
Mr.  Marks  emphasized that  the  severance  tax per  barrel                                                                    
would be  less with HB  110 and that initial  revenue losses                                                                    
would be likely.                                                                                                                
                                                                                                                                
Mr. Marks  commented on the production  forecasts backing up                                                                    
the  fiscal note.  He noted  that DOR's  production forecast                                                                    
was basically  an engineering  model that  generated decline                                                                    
curves  and assumed  that capital  was available  to develop                                                                    
the reserves in  the decline curve. He stressed  that he did                                                                    
not  intend  to  second  guess the  professionalism  of  the                                                                    
forecast; he  thought it  was the best  that could  be done,                                                                    
but though the capital availability  was a crucial input, it                                                                    
was absolutely unknowable because  of the corporation budget                                                                    
cycles worked  (more than a year  out). Production forecasts                                                                    
would  be too  high  if  the capital  was  not available  to                                                                    
develop the oil  in the forecasts and was  diverted to other                                                                    
jurisdictions because of fiscal or other reasons.                                                                               
                                                                                                                                
Mr. Marks  continued that with lower  taxes, companies would                                                                    
produce more  if they  were making  more money  producing in                                                                    
the  state.  He  thought  it was  very  plausible  that  the                                                                    
production forecast  backing up the  HB 110 fiscal  note was                                                                    
too low. In  general, he believed it was  plausible that the                                                                    
fiscal note had too many barrels  for the status quo and not                                                                    
enough  for HB  110. He  did not  think the  same number  of                                                                    
barrels could be  used to compare revenues  with and without                                                                    
the proposal.                                                                                                                   
                                                                                                                                
9:47:04 AM                                                                                                                    
                                                                                                                                
Representative Doogan referenced  Slide 31 (Proposed Bracket                                                                    
Structure)  asked how  the increments  in  the brackets  had                                                                    
been set  up. Mr. Marks responded  that he did not  know how                                                                    
the brackets  were set up for  HB 110, although he  knew how                                                                    
they  were  set up  in  HB  17.  He recommended  asking  the                                                                    
commissioner of DOR.                                                                                                            
                                                                                                                                
Representative  Doogan  referenced  Slide  32  (showing  the                                                                    
severance  tax rates).  He assumed  the amount  of severance                                                                    
tax the state would receive  was included. He asked how much                                                                    
the system would  cost in real numbers.  Mr. Marks responded                                                                    
that  assuming  the same  production  with  and without  the                                                                    
bill,  the difference  in tax  per barrel  was about  $4 per                                                                    
barrel (at current  prices). He offered to  get the specific                                                                    
numbers, but he  believed the difference in  prices would be                                                                    
$4 per barrel  at $90 per barrel, and $6  per barrel at $100                                                                    
per barrel.                                                                                                                     
                                                                                                                                
Representative Doogan wanted  to know the total  cost to the                                                                    
state; he had heard in  other committees that the total cost                                                                    
started  out at  $1.5 billion  annually and  had gone  up to                                                                    
over $2 billion  annually. Mr. Marks believed  DOR should be                                                                    
asked the question.  He was happy to provide  the numbers of                                                                    
what  would happen  to the  tax  per barrel,  but he  warned                                                                    
against using  the same number  of barrels with  and without                                                                    
the proposal,  as it  would create  an exaggerated  sense of                                                                    
what the revenue  picture would be. He said  that taking the                                                                    
number  of barrels  that people  thought  would be  produced                                                                    
five years  ago and comparing  with HB 110, even  though the                                                                    
severance tax per barrel was  less, more money would be made                                                                    
with a lower  tax and more barrels than with  the higher tax                                                                    
and less  barrels. He cautioned  that using the  same number                                                                    
of barrels  to compare with  and without the  proposal would                                                                    
give an exaggerated sense of the revenue losses.                                                                                
                                                                                                                                
9:50:55 AM                                                                                                                    
                                                                                                                                
Representative  Doogan  wanted  an  idea  of  how  much  the                                                                    
proposal  would   cost.  Mr.  Marks  replied   that  it  was                                                                    
absolutely  impossible to  forecast  the cost,  to know  how                                                                    
capital  might get  re-appropriated to  the state,  how that                                                                    
would be  spent, and  how production  would be  affected. He                                                                    
stressed that  the state  could not  know what  would happen                                                                    
under  the   proposal.  The  production   forecasts  assumed                                                                    
capital would be there, but  the capital might not be there.                                                                    
He reiterated that it was impossible to tell.                                                                                   
                                                                                                                                
Representative Gara asked Commissioner  Butcher to bring the                                                                    
Frasier  Report to  a future  meeting, as  he had  questions                                                                    
about it.                                                                                                                       
                                                                                                                                
Representative  Gara  noted  that  although  Mr.  Marks  had                                                                    
talked  about incentivizing,  he had  not mentioned  that 35                                                                    
percent  of  any tax  reductions  would  go to  the  federal                                                                    
government.  He  recalled   previous  discussion  about  the                                                                    
fiscal note indicating  that HB 110 would  reduce revenue by                                                                    
around  $3 billion  at $100  per barrel.  Assuming that  was                                                                    
accurate, he thought  roughly $1.2 billion of  the money the                                                                    
state would get back would  go to the federal government and                                                                    
not to  incentivizing anything. Mr.  Marks did not  know the                                                                    
exact  numbers,  but  agreed  in principle  that  30  to  35                                                                    
percent of  any tax reduction in  the state would go  to the                                                                    
federal government.  However, the other portion  would go to                                                                    
the producers.                                                                                                                  
                                                                                                                                
9:53:58 AM                                                                                                                    
                                                                                                                                
Representative Gara understood Mr.  Marks's point that under                                                                    
progressivity,  corporate profits  got smaller  under higher                                                                    
oil  prices.  He asked  whether  oil  company profits  would                                                                    
increase  with every  price increase,  as the  price of  oil                                                                    
increased from  $50 to $51, $100  to $101, or $150  to $151.                                                                    
Mr.  Marks  replied  that  he  was right,  as  long  as  the                                                                    
marginal tax rate was under 100 percent.                                                                                        
                                                                                                                                
Representative  Gara  pointed  to  Slide  34  (International                                                                    
Marginal Tax Rates).  He stated concerns that  Mr. Marks had                                                                    
only picked countries  that taxed less than  Alaska and left                                                                    
out countries  that taxed more.  He believed  the comparison                                                                    
was  incomplete and  wanted that  remedied. He  also thought                                                                    
that a very high oil price  had been used to make a marginal                                                                    
tax  rate argument,  when  the companies  did  not pay  that                                                                    
rate, but  paid an  actual tax  rate. He  wanted to  see the                                                                    
chart with  the actual  tax rate paid  by oil  companies. He                                                                    
thought  companies considered  the actual  taxes they  paid.                                                                    
Mr. Marks agreed  to provide the information.  He offered to                                                                    
get PFC Energy  work done for the department in  2007 on the                                                                    
production-sharing contract  regimes. He  added that  it was                                                                    
his  judgment that  it would  be unrealistic  for Alaska  to                                                                    
assume it  could command the  same fiscal take as  the other                                                                    
regimes, given the resource base in the nations.                                                                                
                                                                                                                                
Representative  Gara wanted  to  see a  comparison with  the                                                                    
countries and  with the  actual tax  rate, not  the marginal                                                                    
tax rate. Mr. Marks said he would see what he could do.                                                                         
                                                                                                                                
9:56:44 AM                                                                                                                    
                                                                                                                                
Representative  Wilson   directed  attention  to   Slide  36                                                                    
related to revenue losses from  the proposal. She understood                                                                    
that it was difficult to  project numbers for taxes into the                                                                    
future. She asked whether it was  possible to go back to the                                                                    
last two years  and consider the actual  numbers compared to                                                                    
what  the numbers  would have  been if  HB 110  had been  in                                                                    
effect. Mr. Marks  replied that could be  done. However, the                                                                    
producers   had  announced   specific  projects   that  they                                                                    
deferred because  of the tax;  the projects would  have been                                                                    
implemented if  the tax had  not been in place.  He believed                                                                    
using the same number of barrels  with ACES and HB 110 would                                                                    
exaggerate the revenue losses.                                                                                                  
                                                                                                                                
Representative  Wilson  thought  that  would  represent  the                                                                    
worst  case  scenario.  She understood  that  HB  110  would                                                                    
represent some  kind of loss, but  wanted to get an  idea of                                                                    
how  much the  losses would  be. Mr.  Marks thought  DOR was                                                                    
going to produce the numbers.                                                                                                   
                                                                                                                                
Co-Chair Stoltze noted that the commissioner of DOR nodded.                                                                     
                                                                                                                                
9:58:55 AM                                                                                                                    
                                                                                                                                
Co-Chair  Thomas   asked  whether  the  new   tax  could  be                                                                    
sunsetted if it  did not work and the state  returned to the                                                                    
ACES system. He believed there  needed to be pressure on the                                                                    
producers   to  change.   He  asked   how  to   attract  the                                                                    
independent  oil companies.  He queried  a way  to give  tax                                                                    
credits  to  independents and  not  the  big companies.  Mr.                                                                    
Marks  replied  that Alaska  already  had  good features  to                                                                    
attract  independent companies  and  that independents  were                                                                    
being attracted.  There were  already very  generous credits                                                                    
on the  exploration side  (up to  40 percent).  In addition,                                                                    
there  was  the  small-company  credit. He  stated  that  in                                                                    
general,  the   ACES  structure  was  actually   better  for                                                                    
starting fields  up than for keeping  existing fields going.                                                                    
However,  some  independents  had explicitly  addressed  the                                                                    
concern  about  the  tax  structure   being  a  barrier  for                                                                    
investing in Alaska. He  believed providing upside potential                                                                    
would be  a big incentive for  attracting independents; they                                                                    
would go to other places where they could get it.                                                                               
                                                                                                                                
Co-Chair  Thomas   thought  there  were   disadvantages  for                                                                    
independents related to  the delivery of the  oil. Mr. Marks                                                                    
pointed out that  there was plenty of space in  TAPS, and by                                                                    
law no  one who wanted to  ship could be denied  the ability                                                                    
to ship.                                                                                                                        
                                                                                                                                
10:02:16 AM                                                                                                                   
                                                                                                                                
Representative Hawker described the  two major components of                                                                    
the  tax  structure:   the  front-loaded  incentive  capital                                                                    
credits,   and   out-year   taxation   on   operations   and                                                                    
production.  He recalled  the ACES  debate four  years prior                                                                    
and a presentation offering the  premise that the higher the                                                                    
tax  rates were  set, the  more  attractive it  would be  to                                                                    
invest capital in the state.  He referred to a slide showing                                                                    
high oil  prices and  gold-plating and  the state  paying 90                                                                    
percent of  every dollar of  capital investment;  he thought                                                                    
that was  "giving away" money. Given  the premise (discussed                                                                    
under  ACES) that  high  tax rates  were  needed to  attract                                                                    
investment,  he  asked  why  there   was  not  a  frenzy  of                                                                    
investment on  the North Slope.  He wondered  why industries                                                                    
were  sending  people to  North  Dakota  instead. Mr.  Marks                                                                    
replied  that he  was amazed  that there  had not  been more                                                                    
investment with  the state picking  up 90 percent  of costs.                                                                    
He opined that  the reason was that the  companies could not                                                                    
make  money was  because too  much was  taken through  taxes                                                                    
compared  to putting  the investment  in  other places  like                                                                    
Brazil   or   Kazakhstan.   He    referred   to   Slide   13                                                                    
(ConocoPhillips  Financial Performance:  Alaska vs.  Rest of                                                                    
the World) showing  the higher profits from  other places in                                                                    
the world.                                                                                                                      
                                                                                                                                
10:05:25 AM                                                                                                                   
                                                                                                                                
Representative  Hawker stated  that  it was  not enough  for                                                                    
Alaska  to  be an  economic  province;  it  also had  to  be                                                                    
competitive  with   the  rest   of  the  world.   Mr.  Marks                                                                    
acknowledged that producers  made a good amount  of money in                                                                    
Alaska,  but the  issue was  how much  more companies  could                                                                    
make other places.  He believed the companies  were going to                                                                    
other places  because they  could make  more money  in those                                                                    
places.                                                                                                                         
                                                                                                                                
Representative   Neuman   recalled   Mr.   Marks's   earlier                                                                    
statement that  what was wrong with  ACES was progressivity.                                                                    
He  queried  the  proposed   changes  to  progressivity.  He                                                                    
pointed  to   Slide  31   regarding  the   proposed  bracket                                                                    
structure. He asked  about the reduction in  base rates with                                                                    
a cap  on exploration.  Mr. Marks  responded that  the whole                                                                    
idea of  bracketing was  to pay the  incremental tax  on the                                                                    
incremental value and  not reaching down to  every value and                                                                    
drawing it up  as ACES did. He believed the  ACES system was                                                                    
unique  in the  world and  created a  situation in  which an                                                                    
incredible amount of  tax was paid on  the incremental value                                                                    
when  the  value  went  up.  He referred  to  Slide  33  and                                                                    
marginal  tax rates  under HB  110;  as value  went up,  the                                                                    
lower values would be protected and not drawn up.                                                                               
                                                                                                                                
Representative  Neuman  asked  for  clarification  regarding                                                                    
Slide 31  (the proposed bracket  structure for HB  110). Mr.                                                                    
Marks responded  that the first  bracket was the  base rate.                                                                    
Between zero and  $30 per barrel was 25 percent;  if the net                                                                    
value was  $35 per barrel,  the company would only  pay 27.5                                                                    
percent on the  $5 above the $30, or incremental  tax on the                                                                    
incremental value.                                                                                                              
                                                                                                                                
10:08:47 AM                                                                                                                   
                                                                                                                                
Representative Joule  announced that John Baker  of Kotzebue                                                                    
had won  the Iditarod, and  that he had broken  the previous                                                                    
record.                                                                                                                         
                                                                                                                                
Representative Joule believed that one  of the reasons for a                                                                    
bill to reduce the tax  structure was to increase production                                                                    
and generate  additional revenue through new  revenue coming                                                                    
into  the  pipeline,  even   though  possibly  losing  money                                                                    
through  the  current  people paying  taxes.  He  questioned                                                                    
whether modifying the tax structure  should be based on real                                                                    
information,   such  as   about   the  resource   available;                                                                    
otherwise,  the decision  would be  a gamble.  He hoped  the                                                                    
state's  total revenues  would  be  okay because  production                                                                    
would increase.                                                                                                                 
                                                                                                                                
10:12:24 AM                                                                                                                   
                                                                                                                                
Representative Joule  stated that he  did not grasp  what HB                                                                    
110  was  trying  to  do.  He  understood  that  there  were                                                                    
different kinds  of fields to take  into consideration, such                                                                    
as  unitized  and  non-unitized fields  with  different  tax                                                                    
structures.  He   questioned  what   needed  to   happen  in                                                                    
different  fields to  encourage companies  to invest  in the                                                                    
state.                                                                                                                          
                                                                                                                                
Mr.  Marks recalled  an earlier  presentation  to the  House                                                                    
Resources  Committee  on  the  history of  the  oil  tax  in                                                                    
Alaska.  He noted  that since  before  statehood, there  had                                                                    
been  several changes  to the  production tax;  every change                                                                    
had gone  up. He stated that  HB 110 was the  first time the                                                                    
legislature had been  faced with a proposal  to decrease oil                                                                    
taxes. He understood  it was difficult. He had  laid out the                                                                    
rationale  of  why he  believed  the  state should  consider                                                                    
lowering the tax:  give people a structure  under which they                                                                    
can make more money, and they would do so.                                                                                      
                                                                                                                                
Mr.  Marks  detailed that  in  1961,  President Kennedy  had                                                                    
proposed a major tax decrease  in the country, and there was                                                                    
anxiety;  the   tax  decrease   happened  and   the  economy                                                                    
rebounded  well.  The  same thing  happened  with  President                                                                    
Reagan  in  1981. He  thought  the  present legislation  was                                                                    
modeled on similar rationale and similar hopes.                                                                                 
                                                                                                                                
Mr. Marks stated that the  resource base in Alaska was good.                                                                    
He  referred  to a  2007  U.S.  Department of  Energy  study                                                                    
establishing   that  there   was  10   billion  barrels   of                                                                    
economically  recoverable  oil  in  the  core  fields  alone                                                                    
(excluding  the  OCS,  NPR,  and  ANWR).  The  question  was                                                                    
whether  companies  would  develop  in Alaska  or  in  other                                                                    
places in the world.                                                                                                            
                                                                                                                                
10:15:38 AM                                                                                                                   
                                                                                                                                
Mr.  Marks recommended  not distinguishing  between unitized                                                                    
and non-unitized fields for two  reasons. First, the current                                                                    
unitized fields  had heavy oil,  which was as  challenged as                                                                    
the  non-unitized  oil.   In  addition,  the  small-producer                                                                    
credit was  a very  strong incentive to  bring in  people to                                                                    
develop  the   non-unitized  fields.   He  noted   that  the                                                                    
administration could have a different view.                                                                                     
                                                                                                                                
Representative  Guttenberg referred  to personal  experience                                                                    
as a North  Slope laborer for 25 years. He  liked to look at                                                                    
things  in a  solid, pragmatic  manner. He  referred to  the                                                                    
early years of the pipeline when  ELF was in place and taxes                                                                    
were very  low; the  industry put  a couple  billion dollars                                                                    
into  gas  facilities. The  result  of  not doing  that  was                                                                    
probably  a steep  decline in  production. He  described the                                                                    
process  as  a  "physical  thing, like  an  orgasm;  certain                                                                    
things  have to  happen."  There were  things  that have  to                                                                    
happen to keep  the process going on a  day-by-day basis. He                                                                    
believed  that the  loss of  revenue to  the state  could be                                                                    
catastrophic if production kept  going down and the pipeline                                                                    
had  to  shut  down,  but  there was  a  liability  for  the                                                                    
industry as well.  He questioned the value  to the liability                                                                    
if the  dismantling, removal, and restoration  (DR&R) system                                                                    
had  to  kick  in,  which  could cost  $50  billion  to  $70                                                                    
billion.  He  thought  that  calculation  was  a  pragmatic,                                                                    
physical thing to consider. He  wondered how the value would                                                                    
be calculated. Mr. Marks responded  that it was complicated.                                                                    
He did not  think the standards to fix and  replace TAPS had                                                                    
been established,  so the cost  was an unknown.  He believed                                                                    
there  were other  ways for  industry to  transport the  oil                                                                    
(depending  on  the  value  of  oil)  even  if  TAPS  became                                                                    
obsolete. For  example, a smaller  pipeline could  be built;                                                                    
oil could  be shipped out of  Prudhoe Bay if there  was less                                                                    
ice; a  pipeline could be  built to Fairbanks and  oil could                                                                    
be transported by rail to Valdez, Seward, or Wittier.                                                                           
                                                                                                                                
10:19:46 AM                                                                                                                   
                                                                                                                                
Representative Guttenberg  did not think industry  wanted to                                                                    
at  all  consider  stranding the  facilities  on  the  North                                                                    
Slope.                                                                                                                          
                                                                                                                                
Vice-chair Fairclough asked for  three things to be provided                                                                    
to the  committee. First, she understood  that producers had                                                                    
been  collecting   $0.50  per  barrel   for  decommissioning                                                                    
removal  and   restoration  of   the  environment   for  the                                                                    
pipeline;  she  wanted to  see  the  documents. Second,  she                                                                    
wanted to  hear from the  commissioner of the  Department of                                                                    
Labor and Workforce Development  about industry job loss and                                                                    
unemployment in the  state. She noted that  North Dakota was                                                                    
a "right-to-work"  state, which  she believed set  Alaska up                                                                    
differently  related  to   economic  competition.  When  she                                                                    
considered  ACES,  she was  not  only  looking at  projected                                                                    
dollars coming into  the state, but who  was being employed.                                                                    
Third,  she  believed  Alaskans  were  heavily  invested  in                                                                    
receiving the  annual permanent  fund dividend;  she thought                                                                    
the permanent  fund had investments  in the  companies being                                                                    
discussed.   She  questioned   the   economics  inside   the                                                                    
permanent fund and how the revenue would be replaced.                                                                           
                                                                                                                                
Co-Chair  Stoltze noted  that the  private  sector would  be                                                                    
testifying about jobs issues.                                                                                                   
                                                                                                                                
Co-Chair Stoltze  noted that the afternoon  meeting would be                                                                    
devoted  to DOR  Commissioner  Bryan Butcher,  and that  the                                                                    
following day  there would be  presentations by DOR  and the                                                                    
Alaska  Oil  and  Gas  Conservation  Commission.  There  was                                                                    
discussion about  scheduling for the Anchorage  hearings and                                                                    
other  hearing issues  related to  HB 110,  including public                                                                    
testimony opportunities.                                                                                                        
                                                                                                                                
10:26:16 AM                                                                                                                   
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:26 AM.                                                                                          

Document Name Date/Time Subjects
HB 110Marks HFIN Presenttion3 031511PDF.pdf HFIN 3/15/2011 8:00:00 AM
HB 110