Legislature(2005 - 2006)CAPITOL 124

03/13/2006 10:00 AM RESOURCES


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10:05:27 AM Start
10:06:10 AM HB488
01:28:28 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 488 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
+ Presentation by Legislative Consultant TELECONFERENCED
ECON 1
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                         March 13, 2006                                                                                         
                           10:05 a.m.                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Jay Ramras, Co-Chair                                                                                             
Representative Ralph Samuels, Co-Chair                                                                                          
Representative Carl Gatto                                                                                                       
Representative Gabrielle LeDoux                                                                                                 
Representative Kurt Olson                                                                                                       
Representative Paul Seaton                                                                                                      
Representative Harry Crawford                                                                                                   
Representative Mary Kapsner                                                                                                     
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Jim Elkins                                                                                                       
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
HOUSE BILL NO. 488                                                                                                              
"An Act repealing  the oil production tax and  gas production tax                                                               
and providing  for a production tax  on the net value  of oil and                                                               
gas; relating to the relationship  of the production tax to other                                                               
taxes; relating to the dates  tax payments and surcharges are due                                                               
under AS  43.55; relating  to interest  on overpayments  under AS                                                               
43.55; relating  to the treatment  of oil and gas  production tax                                                               
in a  producer's settlement with  the royalty owner;  relating to                                                               
flared gas, and to  oil and gas used in the  operation of a lease                                                               
or property, under AS 43.55;  relating to the prevailing value of                                                               
oil or gas under AS 43.55;  providing for tax credits against the                                                               
tax  due under  AS 43.55  for certain  expenditures, losses,  and                                                               
surcharges; relating to statements  or other information required                                                               
to be filed  with or furnished to the Department  of Revenue, and                                                               
relating  to the  penalty for  failure to  file certain  reports,                                                               
under  AS 43.55;  relating to  the  powers of  the Department  of                                                               
Revenue, and  to the disclosure  of certain  information required                                                               
to be  furnished to  the Department of  Revenue, under  AS 43.55;                                                               
relating   to  criminal   penalties   for  violating   conditions                                                               
governing access to and use  of confidential information relating                                                               
to the  oil and gas  production tax;  relating to the  deposit of                                                               
money  collected by  the Department  of Revenue  under AS  43.55;                                                               
relating to  the calculation of the  gross value at the  point of                                                               
production of  oil or gas;  relating to the determination  of the                                                               
net value  of taxable oil  and gas  for purposes of  a production                                                               
tax on the net value of  oil and gas; relating to the definitions                                                               
of  'gas,' 'oil,'  and certain  other  terms for  purposes of  AS                                                               
43.55;  making  conforming  amendments;   and  providing  for  an                                                               
effective date."                                                                                                                
                                                                                                                                
     - HEARD AND HELD                                                                                                           
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB 488                                                                                                                  
SHORT TITLE: OIL AND GAS PRODUCTION TAX                                                                                         
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
02/21/06       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/21/06       (H)       RES, FIN                                                                                               
02/22/06       (H)       RES AT 12:30 AM HOUSE FINANCE 519                                                                      
02/22/06       (H)       Heard & Held                                                                                           
02/22/06       (H)       MINUTE(RES)                                                                                            
02/23/06       (H)       RES AT 12:30 AM HOUSE FINANCE 519                                                                      
02/23/06       (H)       Heard & Held                                                                                           
02/23/06       (H)       MINUTE(RES)                                                                                            
02/24/06       (H)       RES AT 12:30 AM HOUSE FINANCE 519                                                                      
02/24/06       (H)       Heard & Held                                                                                           
02/24/06       (H)       MINUTE(RES)                                                                                            
02/25/06       (H)       RES AT 10:00 AM SENATE FINANCE 532                                                                     
02/25/06       (H)       Joint with Senate Resources                                                                            
02/27/06       (H)       RES AT 12:30 AM CAPITOL 124                                                                            
02/27/06       (H)       Heard & Held                                                                                           
02/27/06       (H)       MINUTE(RES)                                                                                            
02/28/06       (H)       RES AT 12:30 AM CAPITOL 124                                                                            
02/28/06       (H)       Heard & Held                                                                                           
02/28/06       (H)       MINUTE(RES)                                                                                            
03/01/06       (H)       RES AT 12:30 AM CAPITOL 124                                                                            
03/01/06       (H)       Heard & Held                                                                                           
03/01/06       (H)       MINUTE(RES)                                                                                            
03/02/06       (H)       RES AT 12:00 AM CAPITOL 124                                                                            
03/02/06       (H)       Heard & Held                                                                                           
03/02/06       (H)       MINUTE(RES)                                                                                            
03/03/06       (H)       RES AT 12:30 AM CAPITOL 124                                                                            
03/03/06       (H)       Heard & Held                                                                                           
03/03/06       (H)       MINUTE(RES)                                                                                            
03/04/06       (H)       RES AT 2:00 PM HOUSE FINANCE 519                                                                       
03/04/06       (H)       Heard & Held                                                                                           
03/04/06       (H)       MINUTE(RES)                                                                                            
03/06/06       (H)       FIN AT 12:30 AM HOUSE FINANCE 519                                                                      
03/06/06       (H)       Presentation by Legislative Consultant                                                                 
03/06/06       (H)       RES AT 12:30 AM HOUSE FINANCE 519                                                                      
03/06/06       (H)       Testimony by legislative consultant                                                                    
03/07/06       (H)       RES AT 12:30 AM CAPITOL 124                                                                            
03/07/06       (H)       Heard & Held                                                                                           
03/07/06       (H)       MINUTE(RES)                                                                                            
03/08/06       (H)       RES AT 12:30 AM CAPITOL 106                                                                            
03/08/06       (H)       -- Meeting Canceled --                                                                                 
03/09/06       (H)       RES AT 12:30 AM CAPITOL 106                                                                            
03/09/06       (H)       -- Meeting Canceled --                                                                                 
03/10/06       (H)       RES AT 12:30 AM CAPITOL 106                                                                            
03/10/06       (H)       Heard & Held                                                                                           
03/10/06       (H)       MINUTE(RES)                                                                                            
03/11/06       (H)       RES AT 10:00 AM CAPITOL 106                                                                            
03/11/06       (H)       -- Meeting Canceled --                                                                                 
03/13/06       (H)       RES AT 10:00 AM CAPITOL 124                                                                            
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
BARRY PULLIAM, Senior Economist                                                                                                 
Econ One Research                                                                                                               
Los Angeles, California                                                                                                         
POSITION STATEMENT: Presented an analysis of HB 488.                                                                            
                                                                                                                                
TONY FINIZZA, Economist                                                                                                         
AJF Consulting                                                                                                                  
Dana Point, California                                                                                                          
POSITION STATEMENT: Presented an analysis of HB 488.                                                                            
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CO-CHAIR  RALPH  CO-CHAIR  SAMUELS  called  the  House  Resources                                                             
Standing   Committee   meeting   to   order   at   10:05:27   AM.                                                             
Representatives Gatto,  Co-Chair Samuels, Seaton,  Olson, LeDoux,                                                               
Ramras,  and  Crawford  were  present   at  the  call  to  order.                                                               
Representative Kapsner  arrived as  the meeting was  in progress.                                                               
Representatives  Berkowitz,  Kerttula,  Gara, Croft,  and  Wilson                                                               
were also present.                                                                                                              
                                                                                                                                
HB 488-OIL AND GAS PRODUCTION TAX                                                                                             
                                                                                                                                
CO-CHAIR SAMUELS announced that the  only order of business would                                                               
be HOUSE BILL  NO. 488, "An Act repealing the  oil production tax                                                               
and gas production tax and providing  for a production tax on the                                                               
net value  of oil and  gas; relating  to the relationship  of the                                                               
production  tax  to  other  taxes;  relating  to  the  dates  tax                                                               
payments  and surcharges  are  due under  AS  43.55; relating  to                                                               
interest  on  overpayments  under   AS  43.55;  relating  to  the                                                               
treatment  of  oil  and  gas   production  tax  in  a  producer's                                                               
settlement with  the royalty owner;  relating to flared  gas, and                                                               
to oil  and gas  used in  the operation of  a lease  or property,                                                               
under AS  43.55; relating to the  prevailing value of oil  or gas                                                               
under AS  43.55; providing  for tax credits  against the  tax due                                                               
under AS 43.55 for certain  expenditures, losses, and surcharges;                                                               
relating to statements or other  information required to be filed                                                               
with or furnished  to the Department of Revenue,  and relating to                                                               
the penalty for failure to  file certain reports, under AS 43.55;                                                               
relating to the  powers of the Department of Revenue,  and to the                                                               
disclosure  of certain  information required  to be  furnished to                                                               
the Department of  Revenue, under AS 43.55;  relating to criminal                                                               
penalties for  violating conditions  governing access to  and use                                                               
of  confidential   information  relating  to  the   oil  and  gas                                                               
production tax;  relating to  the deposit  of money  collected by                                                               
the  Department  of  Revenue  under AS  43.55;  relating  to  the                                                               
calculation of the gross value at  the point of production of oil                                                               
or  gas;  relating to  the  determination  of  the net  value  of                                                               
taxable oil and  gas for purposes of a production  tax on the net                                                               
value  of oil  and gas;  relating  to the  definitions of  'gas,'                                                               
'oil,' and certain  other terms for purposes of  AS 43.55; making                                                               
conforming amendments; and providing for an effective date."                                                                    
                                                                                                                                
10:06:10 AM                                                                                                                   
                                                                                                                                
BARRY PULLIAM, Senior  Consultant, Econ One Research,  said he is                                                               
present  to  help  the  legislature  grapple  with  the  proposed                                                               
profit-based petroleum production tax (PPT)  in HB 488.  His firm                                                               
provides economic  consulting services  to a variety  of clients,                                                               
and much  of it  involves the  petroleum industry.   He  said the                                                               
company has worked  for the State of Alaska since  the late 1980s                                                               
in   advising  the   Department  of   Natural  Resources   (DNR),                                                               
Department of Revenue (DOR), and Department  of Law.  He said his                                                               
firm  has   been  advising  the  Legislative   Budget  and  Audit                                                               
Committee  on gas  issues.   The  firm has  also  worked for  the                                                               
federal government, foreign countries,  and a number of petroleum                                                               
and  natural  gas companies,  including  BP.    He spoke  of  his                                                               
experience,  including  co-authoring  recent studies  related  to                                                               
the Alaska natural gas markets and royalty valuation issues.                                                                    
                                                                                                                                
10:11:59 AM                                                                                                                   
                                                                                                                                
MR. PULLIAM continued  with a description of  Dr. Anthony Finizza                                                               
who is retired  from ARCO and teaches modeling  at the University                                                               
of California, Irvine.                                                                                                          
                                                                                                                                
10:14:04 AM                                                                                                                   
                                                                                                                                
TONY FINIZZA,  Economist, AJF  Consulting, said  his job  at Arco                                                               
was "giving  them new  insight" as  the chief  economist.   It is                                                               
important to  know the oil  price forecasts that the  industry is                                                               
using, which is  $40 per barrel WTI [West Texas  Index], with $30                                                               
as a  "stress price case."   He said  oil companies want  to know                                                               
that at $30 their business was still "a going concern."                                                                         
                                                                                                                                
10:17:37 AM                                                                                                                   
                                                                                                                                
CO-CHAIR RAMRAS asked about $50 per barrel WTI.                                                                                 
                                                                                                                                
10:17:55 AM                                                                                                                   
                                                                                                                                
DR. FINIZZA said  $50 per barrel is not being  used for planning,                                                               
but is  not out of  bounds.  It is  the best estimate  that other                                                               
forecasters are using.                                                                                                          
                                                                                                                                
CO-CHAIR RAMRAS  surmised that if $30  is a stress price  and $40                                                               
is the planning base case, then  $50 might be the other boundary,                                                               
whereby  between  $30  and  $50   "you're  capturing  almost  any                                                               
economic project."                                                                                                              
                                                                                                                                
DR. FINIZZA said one might use  a wider range, and an upside case                                                               
might be  higher than $50,  but such ranges are  not symmetrical.                                                               
There is most likely a higher upside than downside, he stated.                                                                  
                                                                                                                                
10:19:02 AM                                                                                                                   
                                                                                                                                
DR. FINIZZA  said the  Department of Energy  uses $54  per barrel                                                               
for its  Annual Energy Outlook,  but what matters are  the prices                                                               
the  industry uses.   Forecasts  will continue  to be  humbled as                                                               
they  have in  the  past, but  there are  reasons  to not  expect                                                               
either  $150 or  $20 per  barrel.   There are  factors predicting                                                               
high prices, including demand from  Asia, he noted.  This growing                                                               
demand and  lack of supply from  OPEC will impact prices.   There                                                               
has  to be  an increase  of oil  from OPEC,  which will  increase                                                               
prices.   There  are factors  predicting lower  prices, including                                                               
alternative sources  of energy, he  said, and he made  mention of                                                               
tar  sands  and   oil  shale.    He  said  the   use  of  oil  is                                                               
predominantly  for transportation,  and alternative  vehicles are                                                               
coming into  the market because  of high  oil prices.   For every                                                               
$10  increase in  oil  price, it  is  like adding  a  tax to  the                                                               
consumer of $73 billion, which will "start tanking the economy."                                                                
                                                                                                                                
10:22:09 AM                                                                                                                   
                                                                                                                                
DR. FINIZZA  said he likes  to poll  experts and take  the median                                                               
value, as  well as look  at the  market.  That  analysis supports                                                               
the $40-and-up  prediction.  The  EIA publishes an  Annual Energy                                                               
Outlook, and P-20 means there is  a 20 percent chance that prices                                                               
will be  below the line  and an 80  percent chance of  them being                                                               
above the line.  He said he created the graph himself.                                                                          
                                                                                                                                
10:23:39 AM                                                                                                                   
                                                                                                                                
DR. FINIZZA said  the base case is what EIA  says is the expected                                                               
price path, but there is a  range of uncertainty, so the red line                                                               
is the  P-20 line,  and there  is a  20 percent  probability that                                                               
prices will remain  below that line.  The yellow  line says there                                                               
is a 20 percent  chance that oil prices will be  above it.  There                                                               
will  be  a  60  percent   chance  oil  prices  will  be  between                                                               
$30/barrel  and  $80/barrel,  he  stated, and  the  P-50  is  the                                                               
median.                                                                                                                         
                                                                                                                                
REPRESENTATIVE  CRAWFORD said  if  the United  States gets  cold,                                                               
China  gets pneumonia.   There  is  a tendency  to bring  China's                                                               
economy way down.  He asked what happens with a recession.                                                                      
                                                                                                                                
10:25:39 AM                                                                                                                   
                                                                                                                                
DR.  FINIZZA said  none of  the  models expects  a recession;  it                                                               
assumes an average growth rate of  2.5 percent per year.  He said                                                               
a recession would have a devastating impact on oil prices.                                                                      
                                                                                                                                
REPRESENTATIVE  CRAWFORD   noted  that  there  is   a  nationwide                                                               
tightening of credit  and a slowing of the  housing market, which                                                               
has  powered the  economy for  the past  few years.   He  said if                                                               
[Americans]  are going  to stop  buying houses  at recent  rates,                                                               
"we're in for some rocky times."                                                                                                
                                                                                                                                
10:26:44 AM                                                                                                                   
                                                                                                                                
DR.  FINIZZA predicts  a recession  between now  and 2030,  which                                                               
will create a  series of deviations from his trend  lines, but no                                                               
one is expecting a permanent depression, he stated.                                                                             
                                                                                                                                
REPRESENTATIVE  LEDOUX said  the  forecasts extend  "quite a  few                                                               
years," and  she asked if  anyone anticipated "how lousy  the oil                                                               
prices would be just a few years ago?"                                                                                          
                                                                                                                                
DR. FINIZZA said no; but everyone  says they had a inkling of it.                                                               
He  said he  will  show how  far off  the  mark economists  were.                                                               
Looking far into the future is almost embarrassing, he admitted.                                                                
                                                                                                                                
10:28:02 AM                                                                                                                   
                                                                                                                                
DR. FINIZZA showed a poll of 18  oil analysts on the price of oil                                                               
in  2010.   The  median is  $40 per  barrel.   The  International                                                               
Energy Agency forecasts are about the same, he noted.                                                                           
                                                                                                                                
REPRESENTATIVE GARA asked about ANS [Alaska North Slope] price.                                                                 
                                                                                                                                
DR. FINIZZA said ANS is $2 less than WTI.                                                                                       
                                                                                                                                
CO-CHAIR SAMUELS asked if it is usually $2 and not a percentage.                                                                
                                                                                                                                
10:30:33 AM                                                                                                                   
                                                                                                                                
DR. FINIZZA  showed a  graph of  WTI prices taken  at the  end of                                                               
January.   He compared it with  what the market was  saying three                                                               
years prior.  It almost always  reverts to a lower price, "so the                                                               
market is always  looking to kind of revert to  a mean--head down                                                               
to the average it's been over  long periods of time.  The current                                                               
strip is  keeping us in the  $60 range, so that's  about the only                                                               
evidence that's higher than the  $40-plus numbers we see in other                                                               
sources."   The  industry will  test  their projects  in the  $40                                                               
range, and perhaps lower, he surmised.                                                                                          
                                                                                                                                
10:32:39 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE GATTO asked if the  blue line is what happened and                                                               
the other lines represent past forecasts.                                                                                       
                                                                                                                                
DR. FINIZZA  said, "Yes;  the blue  line of  the actual  WTI spot                                                               
prices in current  dollars, and those are the NYMEX  views of the                                                               
future...at that  point in  time."  The  prices are  derived from                                                               
contracts--oil futures--actually traded.                                                                                        
                                                                                                                                
CO-CHAIR RAMRAS  said Alaska Airlines  purchased a lot  of strips                                                               
at the  lower price.   "Using  the green  line, for  instance, if                                                               
Alaska Airlines  were to have  bought strips on that  green line,                                                               
then as  oil went up to  $60 a barrel, they  would have purchased                                                               
it out into the future years at that lower price."                                                                              
                                                                                                                                
10:34:05 AM                                                                                                                   
                                                                                                                                
DR. FINIZZA said oil can be  purchased into the future to protect                                                               
from an increase in prices.                                                                                                     
                                                                                                                                
DR. FINIZZA  suggested learning from  recent asset  transfers and                                                               
purchases of  the oil  industry [with regard  to what  oil prices                                                               
they are predicting].   The recent acquisition of  Gulf of Mexico                                                               
assets  would have  been sensible  at  $40/barrel.   He showed  a                                                               
graph  of  forecasts  from  1986  where  at  times  it  was  very                                                               
optimistic  and in  2005  it was  way under.    The EIA  forecast                                                               
suffers similarly  with others.   He showed  a graph  of outlooks                                                               
from an oil  company that had a  lot of optimism.   For 1985, the                                                               
long  range plan  showed a  decline in  price before  the decline                                                               
actually happened.   It was a good short-term  prediction, but it                                                               
was "way off the mark" in the future.                                                                                           
                                                                                                                                
10:37:35 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE OLSON noted  that the EIA is  not using production                                                               
in the Arctic National Wildlife Refuge in its forecast.                                                                         
                                                                                                                                
DR. FINIZZA said the EIA only uses policies in place.                                                                           
                                                                                                                                
REPRESENTATIVE OLSON said it uses future gas line production.                                                                   
                                                                                                                                
10:38:14 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  CROFT  suggested  that people  forecast  low  oil                                                               
prices when  prices are low,  and errors occur by  projecting the                                                               
most recent experience out into the future.                                                                                     
                                                                                                                                
DR.  FINIZZA said  yes; that  is called  anchoring.   Operating a                                                               
company with  unreasonable optimism risks bankruptcy;  they can't                                                               
stray too much away from the pack, he said.                                                                                     
                                                                                                                                
REPRESENTATIVE  CROFT   said  actual  prices  have   been  pretty                                                               
consistent in  spite of wild forecasts.   When oil gets  too high                                                               
other fuels are  used and so it stays around  nominal $15 and $25                                                               
prices.   The  price, in  nominal  dollars, has  stayed within  a                                                               
tight range, he noted.                                                                                                          
                                                                                                                                
10:40:47 AM                                                                                                                   
                                                                                                                                
DR.  FINIZZA   showed  105  years   of  oil  prices   with  sharp                                                               
deviations.   He said he  has made forecasting  mistakes himself.                                                               
He showed  the Society of  Petroleum Evaluation  Engineers annual                                                               
Delphi Poll, which severely understated  oil prices.  He said the                                                               
$40 range with a stress test of  $30 is likely the range that the                                                               
industry is using.                                                                                                              
                                                                                                                                
10:42:52 AM                                                                                                                   
                                                                                                                                
DR. FINIZZA explained how the  PPT will impact exploration in net                                                               
present value and internal rate  of return-where cash flows equal                                                               
zero.   He said  he is  "looking at something  in the  15 percent                                                               
range  with  a  look  down  to 12,  so  if  the  project  doesn't                                                               
substantially pass  a 15  percent, I  probably would  think about                                                               
passing  on  it."    Some  people  will  use  cash  flows  in  an                                                               
undiscounted way,  and economists don't  like to do  that because                                                               
the future  value of money is  not as much as  the current value,                                                               
"so I'm  going to use everything  in a discounted way."   He said                                                               
he will present the  economics of new fields based on  a PPT.  He                                                               
noted that Arco was proud  of having discovered Prudhoe Bay, "and                                                               
15 billion barrels later, we have a nice oil field."                                                                            
                                                                                                                                
REPRESENTATIVE   GARA  asked   him  to   include  Mr.   Johnson's                                                               
recommendation  of  25/20 and  higher  at  higher prices  in  his                                                               
analysis.                                                                                                                       
                                                                                                                                
DR. FINIZZA said Mr. Pulliam will do that.                                                                                      
                                                                                                                                
10:47:25 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GARA asked  about internal  rate of  return.   He                                                               
noted that  profit margins  are easy to  figure out-profits  as a                                                               
percentage of  gross revenues.   He asked  if that is  related to                                                               
internal rate  of return.   "We know  that profit margins  on the                                                               
North Slope, right now, are in the 40 percent range."                                                                           
                                                                                                                                
DR. FINIZZA said  if cash flow is discounted at  10 percent, "and                                                               
you had  a net  present value  that was in  excess of  that, that                                                               
means  you are  getting profits  beyond normal  profits.   So you                                                               
could think  of that net present  value in the sense  of a profit                                                               
margin."   The  internal  rate of  return is  one  at which  that                                                               
becomes zero-they  just have  normal profits.   At low  prices it                                                               
appears the 25/20  ratio helps the explorer more  than the 20/20.                                                               
"It seems  important that  [exploration] incentives  are required                                                               
at low prices."  Both the  20/20 and 25/20 are preferred over the                                                               
status quo,  he stated.   "It appears...that under either  of the                                                               
schemes  being   discussed,  the   remaining  reserves   will  be                                                               
economic...except  for  low  prices."   Around  $30  per  barrel,                                                               
"things get questionable."                                                                                                      
                                                                                                                                
10:49:22 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE LEDOUX asked why a  25 percent tax helps explorers                                                               
more at low prices.                                                                                                             
                                                                                                                                
DR. FINIZZA said some sheltering  at higher tax rates could help.                                                               
He gave  a stylized  lifecycle of a  new field  with exploration,                                                               
development,  production, and  economic limit  phases.   It might                                                               
take seven years before the first oil goes to market, he said.                                                                  
                                                                                                                                
CO-CHAIR SAMUELS  said he has been  told that is takes  longer in                                                               
Alaska because of the shorter operating season.                                                                                 
                                                                                                                                
DR.  FINIZZA said  Alaska  might  be longer.    He  spoke of  the                                                               
technical  capability  of  Alaska   and  showed  an  analysis  of                                                               
undiscovered  technically-recoverable  oil   reserves.    On  the                                                               
central North Slope,  the mean expectation is  4 billion barrels.                                                               
The Arctic  National Wildlife  Refuge will  have over  10 billion                                                               
barrels, he  said.  In the  refuge, 22 percent of  the fields are                                                               
expected  to have  more  than  a billion  barrels  of  oil.   The                                                               
central North Slope study predicts the  amount of oil to be found                                                               
in fields smaller than 64 million barrels to be 51 percent.                                                                     
                                                                                                                                
REPRESENTATIVE BERKOWITZ asked about legacy fields.                                                                             
                                                                                                                                
10:53:35 AM                                                                                                                   
                                                                                                                                
DR. FINIZZA said he is only talking about new fields.                                                                           
                                                                                                                                
REPRESENTATIVE  GARA said  there is  a discussion  of not  taxing                                                               
fields with  less than 5,000  barrels per  day, and he  asked for                                                               
the number of fields in that category.                                                                                          
                                                                                                                                
DR. FINIZZA  said he  thinks the  50 million-barrel  fields might                                                               
peak at 4 million per year, so  at some point all of these fields                                                               
would be more that 5,000 barrels per day.                                                                                       
                                                                                                                                
REPRESENTATIVE WILSON asked how many reserves are economic.                                                                     
                                                                                                                                
DR. FINIZZA said he will get to that.                                                                                           
                                                                                                                                
REPRESENTATIVE  SEATON  said  5,000  barrels  per  field  is  not                                                               
exempted in the PPT, it is per company not per field.                                                                           
                                                                                                                                
10:55:53 AM                                                                                                                   
                                                                                                                                
DR.  FINIZZA showed  the  central North  Slope  and likely  field                                                               
sizes.   "They're saying  that in the  central North  Slope, they                                                               
expect an  average of 21 fields  that will be 50  million barrels                                                               
... total."  There  is a 20 percent chance there  will be only 17                                                               
to 24 fields  of that size.  An Alpine-type  field of 500 million                                                               
has an  expected value of  one, and he  noted that he  is talking                                                               
about  technically-recoverable  oil.    In  the  Arctic  National                                                               
Wildlife   Refuge,  there   are  larger   potential  fields,   so                                                               
developing it  would change  the dynamics.   "What is  the likely                                                               
economic size  of these at various  prices?"  At $40  per barrel,                                                               
there will  be 1.9 billion barrels  of economically commercially-                                                               
recoverable reserves.   At $60 per barrel, it would  be 3 billion                                                               
barrels.    Modeling at  $40  and  assuming the  Arctic  National                                                               
Wildlife Refuge isn't drilled, "you  might expect 20 fields to be                                                               
discovered in  the North  Slope from  now on.   [So,]  60 percent                                                               
would  be  small--50  million  barrels; 5  percent  would  be  an                                                               
Alpine-type field;  [ten percent  would be] 150  million barrels;                                                               
and [25  percent would be] 100  million barrels."  Those  are his                                                               
assumptions of what is "out there"  and what an explorer would do                                                               
under alternative prices with a PPT or the current system.                                                                      
                                                                                                                                
11:00:17 AM                                                                                                                   
                                                                                                                                
DR.  FINIZZA  said he  assumes  that  there  is  one out  of  six                                                               
successful fields, which is based on past ratios.                                                                               
                                                                                                                                
REPRESENTATIVE  BERKOWITZ  suggested  that  new  technology  will                                                               
increase that ratio.                                                                                                            
                                                                                                                                
DR. FINIZZA said he would be willing to raise it a little.                                                                      
                                                                                                                                
11:01:14 AM                                                                                                                   
                                                                                                                                
DR. FINIZZA said  there is an 83 percent chance  of getting a dry                                                               
hole, which  would create  a negative cash  flow.   The successes                                                               
are lessened  by taxes and  costs but mitigated by  tax shelters.                                                               
For exploration there is a negative  cash flow for the first four                                                               
years,  then  after   finding  something  expenditures  continue.                                                               
Drilling  one well  has  an  83 percent  chance  of  a bust,  but                                                               
partnering may lower  the chance of failure, he stated.   He said                                                               
an explorer would assume the  one successful field will be small.                                                               
No one will drill only one  well, but assuming someone did at $20                                                               
million  per well,  it  would be  a negative  cash  flow of  that                                                               
amount.   Under the  PPT, the explorer  would deduct  capital and                                                               
sell  the  credit.    "So  in actuality  the  explorer  has  less                                                               
negative  cash flow,  and by  this  calculation, [is]  marginally                                                               
better off with the 25/20 than with the 20/20."                                                                                 
                                                                                                                                
11:05:09 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE   BERKOWITZ  asked   if   he  analyzed   different                                                               
tax/credit ratios, like 30/20.                                                                                                  
                                                                                                                                
DR.  FINIZZA said  he  didn't;  these are  the  most likely  PPTs                                                               
contemplated.   He said in  the pattern of capital  the crescendo                                                               
comes near  the end of  the 4-year period.   Capital expenditures                                                               
can  be deducted,  and  then  there is  a  tax  credit for  those                                                               
expenditures, which all alter the cash flow.                                                                                    
                                                                                                                                
REPRESENTATIVE GARA asked if one  could assume a better cash flow                                                               
at a 30 percent tax rate.                                                                                                       
                                                                                                                                
11:07:05 AM                                                                                                                   
                                                                                                                                
DR. FINIZZA  said the  state is allowing  capital expenses  to be                                                               
deductible, so  higher tax rates  allow more sheltering  of those                                                               
expenditures.   He said  this pattern might  not persist  for the                                                               
total program.                                                                                                                  
                                                                                                                                
CO-CHAIR RAMRAS said  he is struggling with more  basic math from                                                               
the DOR  staff who stated  that exploration plus  development per                                                               
year has been about $1 billion  over the last five years, "and we                                                               
saw that exploration  represented between about 7  and 10 percent                                                               
of  that $1  billion, which  would  be $70-$100  million a  year.                                                               
That doesn't  even get us to  a six-well program per  year, which                                                               
seems precisely why  we're all sitting here, which is  to try and                                                               
jumpstart our  whole exploration program.   Because if  we're not                                                               
even  spending $100  million  a  year, which  means  our odds  of                                                               
finding a 50-million-barrel field or  [larger] are reduced by the                                                               
fact that there isn't a satisfactory amount of exploration."                                                                    
                                                                                                                                
DR.  FINIZZA  said "This  program  would  bring you  roughly  100                                                               
million barrels a  year, which is roughly the  average for Alaska                                                               
over  the  10  years.    I  didn't  choose  this  as  the  entire                                                               
exploration program,  I just said  let's assume that this  is the                                                               
number.   I'm really at  a loss to  say how much,  really, people                                                               
will spend  on exploration.   I have a  feeling it's more,  but I                                                               
have no  way of judging whether  it's going to be  more than $100                                                               
million, $120 million a year."                                                                                                  
                                                                                                                                
11:09:46 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE LEDOUX said she is  confused that a 25 percent tax                                                               
rate is better for industry than a 20 percent rate.                                                                             
                                                                                                                                
11:10:26 AM                                                                                                                   
                                                                                                                                
DR. FINIZZA said, "Let's suppose you  like to go to los Vegas and                                                               
you had a  1 in 6 chance  of [winning]; you role one  die, and if                                                               
number six comes up,  you win.  You don't really  like to do that                                                               
because you don't  think that's a good deal, but  what if someone                                                               
in your neighborhood said, 'I  will allow you to-whatever you do,                                                               
I'm going  to give you  25 percent of  your losses back  to you.'                                                               
Would you be more encouraged to go on that bender in Los Vegas?"                                                                
                                                                                                                                
11:11:30 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  SEATON suggested  that  the  explanation is  that                                                               
exploration is always a negative loss,  and no one makes money on                                                               
exploration.    So   to  stimulate  it,  the   more  subsidy  for                                                               
exploration,  "the more  positive benefit  there is."   He  noted                                                               
that taxes aren't going to be paid until the development stage.                                                                 
                                                                                                                                
DR. FINIZZA said that is pretty accurate.                                                                                       
                                                                                                                                
REPRESENTATIVE BERKOWITZ asked at  what point are the diminishing                                                               
returns.                                                                                                                        
                                                                                                                                
DR. FINIZZA said that is the  question.  "We don't think that any                                                               
of these ... programs  would be onerous."  But he  said to err on                                                               
the side  of not  being onerous.   It will  be clearer,  he said,                                                               
when  he  puts  the  whole program  together,  rather  than  only                                                               
looking at the complete loss phase.                                                                                             
                                                                                                                                
11:13:17 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  BERKOWITZ  said  one  needs  to  know  where  the                                                               
diminishing return is before knowing if it is onerous.                                                                          
                                                                                                                                
DR. FINIZZA said it is the question, and no one can answer it.                                                                  
                                                                                                                                
REPRESENTATIVE  BERKOWITZ  suggested  running a  variety  of  tax                                                               
rates based on this hypothetical.                                                                                               
                                                                                                                                
DR. FINIZZA said if the  state subsidizes too much exploration it                                                               
might lose money.  His gut feel is 25/20 is the right one.                                                                      
                                                                                                                                
11:14:57 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE CRAWFORD  asked about the  efficacy of going  to a                                                               
profits-based  tax,  a  system   that  is  open  to  manipulating                                                               
profits.  He asked if the state should be adopting the profit-                                                                  
based tax rather than a severance tax based on production.                                                                      
                                                                                                                                
DR. FINIZZA  said the ELF system  is broken, and a  fairer system                                                               
might be one that allows the industry to cover their costs.                                                                     
                                                                                                                                
REPRESENTATIVE CRAWFORD said  the ELF is broken, but  there are a                                                               
lot of  production severance tax  programs around the  world that                                                               
are working.   So he  asked him not to  compare the PPT  with the                                                               
ELF, but to recommend the best system.                                                                                          
                                                                                                                                
11:16:36 AM                                                                                                                   
                                                                                                                                
DR. FINIZZA said that is  stretching his expertise.  He suggested                                                               
something that  allows for cost  recovery.  "The fact  that there                                                               
might  be 150  different fiscal  regimes in  the world,  some are                                                               
good and some are bad.   I think this is, generally, a reasonable                                                               
approach."                                                                                                                      
                                                                                                                                
REPRESENTATIVE CRAWFORD asked about gaming the system.                                                                          
                                                                                                                                
11:17:25 AM                                                                                                                   
                                                                                                                                
DR.  FINIZZA said  there are  safeguards, and  that is  a problem                                                               
that can be avoided or mitigated.                                                                                               
                                                                                                                                
REPRESENTATIVE  KERTTULA asked  about  a ratio  of  35/30 and  of                                                               
giving even  more deductions  and credits,  which would  make the                                                               
higher tax rate acceptable.                                                                                                     
                                                                                                                                
DR. FINIZZA asked  if the state would be willing  to run the risk                                                               
of taking a big loss in a failed exploration program.                                                                           
                                                                                                                                
11:18:56 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GARA  asked if  Dr.  Finizza  suggested that  the                                                               
25/20 ratio is the point of maximizing revenues.                                                                                
                                                                                                                                
DR. FINIZZA said  he had a gut  reaction at that level.   He said                                                               
he didn't think  the state would need to go  further than that to                                                               
encourage [development] and take a greater risk.                                                                                
                                                                                                                                
11:19:53 AM                                                                                                                   
                                                                                                                                
DR. FINIZZA showed  a graph of oil production profiles.   He gave                                                               
an example  of the  economics of  a six-well  exploration program                                                               
with success for  finding a 15 million-barrel field.   Looking at                                                               
total  cash flow  that an  explorer would  get, discounted  by 10                                                               
percent without  the $73  million allowance,  at $30  per barrel,                                                               
there would  be a negative cash  flow of $80 million  for a small                                                               
field.   "With the  PPT it  would be somewhere  in the  mid 30s--                                                               
negative."  At  $40 per barrel they would start  to make a profit                                                               
and "do better under the 25/20."   There is a crossover point, he                                                               
noted.   He  said adding  the allowance  would make  the negative                                                               
smaller at $30 per barrel, but  if putting it with larger fields,                                                               
there might be a different story.                                                                                               
                                                                                                                                
11:23:01 AM                                                                                                                   
                                                                                                                                
DR. FINIZZA said  under the status quo, it is  already risky, and                                                               
it  doesn't  pass muster  at  $30  barrel  with that  field  size                                                               
distribution.  With the PPT,  at $40, "it looks fairly decent-I'm                                                               
getting above 15  percent IRR."  At $30 per  barrel there is some                                                               
profit.  An explorer would feel  more comfortable but still be on                                                               
the  edge.   With the  $73 million  allowance, an  explorer would                                                               
achieve the  kind of financial  return desired.   The IRR  at $30                                                               
per  barrel "is  at the  fringe of  a hurdle."   The  $73 million                                                               
incentive or  another formula  is helpful  and important  in this                                                               
price range.   He said  he spent his time  looking at the  $30 to                                                               
$40  range, "because  I think  that's  what people  are going  to                                                               
making the go-no-go  decisions.  We've got to get  them over that                                                               
hump."   The  yellow line  on his  graph is  the revenues  to the                                                               
state,  discounted, with  the allowance,  and "under  that system                                                               
you would  have collected more in  the old severance and  less in                                                               
the future.  Now  if you go to a PPT of 20/20,  you are giving up                                                               
some of  that at the  low end, but  making up for  it...at higher                                                               
prices."  The crossover point is "as you see it there."                                                                         
                                                                                                                                
11:26:27 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE BERKOWITZ  asked if  the current system  is better                                                               
for the state at prices under $50 per barrel.                                                                                   
                                                                                                                                
DR. FINIZZA  said that is true  for the example he  used, but "no                                                               
one in  their right  mind would go  into exploration  under those                                                               
conditions, so there might not be exploration taking place."                                                                    
                                                                                                                                
11:27:25 AM                                                                                                                   
                                                                                                                                
DR. FINIZZA said it is a notional  line, but it would be a losing                                                               
proposition for the explorer.                                                                                                   
                                                                                                                                
REPRESENTATIVE  WILSON  said that  explains  the  recent lack  of                                                               
exploration.                                                                                                                    
                                                                                                                                
DR. FINIZZA said that is true in  a low oil price world.  Without                                                               
drilling the Arctic National Wildlife  Refuge, the expectation of                                                               
large oil discoveries is unlikely,  and incentives are necessary.                                                               
"I expect this  program is going to get you  more exploration.  I                                                               
don't  know how  much more."   At  low prices,  either system  is                                                               
preferred over the status quo, he stated.                                                                                       
                                                                                                                                
11:29:32 AM                                                                                                                   
                                                                                                                                
MR. PULLIAM  said he will discuss  reserves in place.   He showed                                                               
DOR projections  for the ELF  and historical averages,  which are                                                               
driving the change in taxation.                                                                                                 
                                                                                                                                
CO-CHAIR RAMRAS asked if there is  an actual severance rate of 15                                                               
percent after  credits, will taxes  be several times  higher than                                                               
historic levels.                                                                                                                
                                                                                                                                
11:31:35 AM                                                                                                                   
                                                                                                                                
MR. PULLIAM said  that is true, and he will  put taxes in context                                                               
with  different oil  prices.   The PPT  changes the  tax rate  as                                                               
prices change.                                                                                                                  
                                                                                                                                
REPRESENTATIVE BERKOWITZ asked him to define effective tax rate.                                                                
                                                                                                                                
MR. PULLIAM  said, "They  way I  use it...is to  look at  the tax                                                               
rate as if  it is on the  wellhead value of the oil.   What's the                                                               
effective rate that you get if  you are calculating taxes as they                                                               
currently are  now, just on  the wellhead value."   So it  is the                                                               
nominal tax  times the  ELF weighted by  the volumes,  he stated.                                                               
Under that  approach, the PPT  allows additional  deductions from                                                               
the  wellhead  value  of  operating and  capital  costs,  and  it                                                               
provides  credits as  well.    "Take the  ultimate  tax that  you                                                               
receive at  whatever price  you receive it,  and figure  out what                                                               
that  tax is  as  a percent  of  wellhead value-to  put  it on  a                                                               
apples/apples."    He  showed  a  graph  of  effective  tax  rate                                                               
relative to wellhead values.   On average, the wellhead value has                                                               
been about  $15 per barrel  in nominal  terms, or $24  per barrel                                                               
adjusted for  inflation.  There has  been an average tax  rate of                                                               
12 percent.   "At $24 per barrel wellhead,  today would translate                                                               
into a WTI  equivalent of about $32, so in  today's prices, first                                                               
half of 2006, we're looking at probably $62 WTI."                                                                               
                                                                                                                                
11:35:28 AM                                                                                                                   
                                                                                                                                
MR. PULLIAM  presented the  Kuparuk and Alpine  fields.   The ELF                                                               
will pull  the line down over  time, he said.   He showed volumes                                                               
from  known fields  that are  under development  or likely  to be                                                               
developed.  He said there will  be new forecasts on volumes.  The                                                               
30,000-barrel-per-day  reduction "is  really  a  pushing back  of                                                               
production,  it's not  that they're  predicting there's  less oil                                                               
there, it's just that it's not going to come on as quickly."                                                                    
                                                                                                                                
11:38:08 AM                                                                                                                   
                                                                                                                                
MR. PULLIAM  said Prudhoe Bay and  Kuparuk will be 50  percent of                                                               
production over the  next 24 years, and by adding  Alpine and its                                                               
satellites, it  will constitute 70  percent of production.   That                                                               
will  total 5.6  billion barrels,  and at  $40 per  barrel, those                                                               
volumes will be produced, as  well as another 1.3 billion barrels                                                               
from  new exploration.    "The existing  stuff-what  we think  is                                                               
going to be  produced from known reservoirs, is  about 80 percent                                                               
of what we're going to  get, unless something unexpected happens-                                                               
which it will."  He said  opening up the Arctic National Wildlife                                                               
Refuge would  change the  equation "quite a  bit."   The existing                                                               
volumes may be only half "of what you could get" in that case.                                                                  
                                                                                                                                
MR. PULLIAM said he reviewed the  work of Pedro van Meurs and the                                                               
DOR, and  the projections  are great  but depend  on assumptions.                                                               
No two  people will have  the same  assumptions.  He  has created                                                               
other analyses.  The numbers of  DOR are reasonable but are based                                                               
on a  $20-per-barrel price, he said,  but $40 per barrel  is more                                                               
likely, and  Prudhoe Bay will be  economic for much longer.   But                                                               
he stressed  that the length of  time forecasted is too  long [to                                                               
be accurate.]   He showed the potential life of  the oil pipeline                                                               
without the  gas line.   Forecasting ten  years is  more accurate                                                               
than 30 years, so he puts more emphasis in that.                                                                                
                                                                                                                                
11:44:05 AM                                                                                                                   
                                                                                                                                
MR. PULLIAM said the chart  projects the severance taxes under HB
488  as  proposed in  real  terms,  with 2.5  percent  inflation,                                                               
versus the  status quo.   It is  not total state  revenues, which                                                               
would be different  because of state income taxes.   The increase                                                               
in severance  taxes will be  reduced because they  are deductible                                                               
against income  taxes, so  Alaska's total  revenue will  be about                                                               
3.8  percent lower.   His  forecast doesn't  include 300  million                                                               
barrels  from Pt.  Thompson because  it  might not  come on  line                                                               
without the  gas line.  He  put in the Oooguruk  development with                                                               
70 million barrels, so his  presentation includes 70 million more                                                               
barrels than the DOR presentation.                                                                                              
                                                                                                                                
11:47:13 AM                                                                                                                   
                                                                                                                                
MR. PULLIAM said  he is focusing on known volumes.   For the next                                                               
ten years, if  prices do as forecasted--average  about $54.70 per                                                               
barrel--the state  could expect  $15.27 billion in  severance tax                                                               
revenues with  a 20/20 PPT, which  would be an increase  of $7.47                                                               
billion.  The effective tax rate  would be 12.4 percent under the                                                               
PPT, and it would  be about 6.3 percent under the  ELF.  He noted                                                               
that the PPT effective tax rate  of 12.4 percent is just slightly                                                               
above  the historical  average of  about 12  percent.   The first                                                               
half of 2006 would have  $476 million in additional severance tax                                                               
at the  projected EIA price.   The graph  dips and comes  back up                                                               
because the  EIA is  forecasting a fall  in prices  before coming                                                               
back up, but the transition credit makes the line dip more.                                                                     
                                                                                                                                
The committee took an at-ease from 11:51:43 AM to 12:18:09 PM.                                                              
                                                                                                                                
MR.  PULLIAM  said  the  analysis began  with  the  DOR  analysis                                                               
without the gas  line or enhanced volumes--no  exploration.  That                                                               
analysis assumed "that you'd spend  $100 million a year and under                                                               
one scenario, the no-enhanced volumes,  you wouldn't get anything                                                               
for it.  So  it's sort of a worst-case world."   He believes that                                                               
if  $100  million  were  spent   without  finding  anything,  the                                                               
expenditures would halt,  so the DOR view  is overly pessimistic.                                                               
Looking at  known fields means  there are no  exploration dollars                                                               
and a  lot of development dollars,  he stated, so he  changed the                                                               
DOR assumptions.   "We  have a little  bit different  number than                                                               
they do...We show  the effect of the PPT being  a little bit less                                                               
over the next ten years but then greater in the outer years."                                                                   
                                                                                                                                
12:20:15 PM                                                                                                                   
                                                                                                                                
MR. PULLIAM showed  a comparison at different  price levels: base                                                               
(from  prior charts),  low  (P20),  high (P80),  and  at $40  per                                                               
barrel.   He looked at  the break-even price  for HB 488  and the                                                               
status quo, which would be $28.50 ANS, West Coast.                                                                              
                                                                                                                                
REPRESENTATIVE  SEATON noted  that the  break even  price is  the                                                               
crossover point for the ELF versus HB 488.                                                                                      
                                                                                                                                
MR. PULLIAM  said yes; it is  the point at which  the state would                                                               
get the same revenue in 2006 real numbers.                                                                                      
                                                                                                                                
12:22:30 PM                                                                                                                   
                                                                                                                                
MR. PULLIAM said,  "If you look down that column,  you'll see, as                                                               
you get to the fourth row  there, it's entitled PPT effective tax                                                               
rate, and  you'll see that at  6.3 percent, and then  right below                                                               
it  you  see status  quo  effective  tax  rate.   It's  also  6.3                                                               
percent.  So that's what I'm trying  to match."  The  next column                                                               
projects  through  2030  where  the  break-even  price  is  lower                                                               
because status quo taxes are lower  over time.  The effective tax                                                               
rate under the PPT over the  next ten years is about 10.3 percent                                                               
at $35-$40  real WTI, he  said.  Historically, the  effective tax                                                               
rate was 12  percent at $32 WTI.   "So at that  same price level,                                                               
the PPT,  as proposed,  would have a  little bit  lower effective                                                               
tax rate  than what we've  had historically."  At  higher prices,                                                               
the tax rate would be a little bit higher, he stated.                                                                           
                                                                                                                                
REPRESENTATIVE SEATON  asked if he  is analyzing HB 488  with all                                                               
its provisions.                                                                                                                 
                                                                                                                                
MR. PULLIAM said yes.                                                                                                           
                                                                                                                                
12:24:52 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GARA asked  about  the break-even  point for  the                                                               
20/20 tax/credit proposal just for this year.                                                                                   
                                                                                                                                
MR. PULLIAM  said he  will find out.   He said  he looked  at the                                                               
forecast  with  regard  to  costs  of  developing  and  operating                                                               
fields.   He  looked  at a  downside  sensitivity-"What if  we're                                                               
wrong on  costs and they are  much higher.  I've  used 20 percent                                                               
here, which  seemed to be  a reasonable bound  on how far  off we                                                               
might be."  If  his costs forecast is off by  20 percent, the PPT                                                               
will  collect less,  and the  break-even  prices rise  by $4  per                                                               
barrel, relative to the status quo.                                                                                             
                                                                                                                                
12:27:10 PM                                                                                                                   
                                                                                                                                
MR. PULLIAM  said Pedro  van Meurs  suggested a  25/20 tax/credit                                                               
ratio.   With  the  same  EIA forecast,  the  effective tax  rate                                                               
becomes 16  percent versus the  status quo  of 6.3 percent.   The                                                               
first half of 2006  will bring in $782 million, he  said.  At low                                                               
prices, the  effective tax  rate is about  13.6 percent  with the                                                               
25/20.   At  low prices,  the 25/20  ratio will  be a  little bit                                                               
above the historical average.  The breakeven price comes down.                                                                  
                                                                                                                                
REPRESENTATIVE SEATON  asked why the  break even price  goes down                                                               
under the 25/20 scenario.                                                                                                       
                                                                                                                                
MR. PULLIAM  said taxes will be  higher, so Alaska will  get more                                                               
revenues sooner  as prices start  to rise.  The  break-even point                                                               
is about  $1.50 a barrel  lower under  the 25/20 than  the 20/20.                                                               
He showed the  difference in projected taxes.   The effective tax                                                               
rate at  25/20 will  be about  16 percent at  $54 per  barrel and                                                               
will add $450 million per year to  the state.  For the first half                                                               
of 2006, revenues will be $305 million higher.                                                                                  
                                                                                                                                
12:31:49 PM                                                                                                                   
                                                                                                                                
MR.  PULLIAM said  with  taxes at  25/20  "you're straddling  the                                                               
historical average  at about the same  kind of price level."   He                                                               
showed a chart of the  government-take for the status quo, 20/20,                                                               
and 25/20  at different price levels.   Under the ELF  the tax is                                                               
regressive  and with  a PPT  "the regressivity  pretty much  goes                                                               
away."   Under the PPT, the  Alaska-take will go up  as prices go                                                               
up, "but it's going up just  enough to sort of offset the overall                                                               
regressivity  of  the system,  which  comes  in, really,  through                                                               
royalties and through  property taxes."  He  showed different tax                                                               
rates at different price levels over the years.                                                                                 
                                                                                                                                
CO-CHAIR RAMRAS said the chart suggests  that as the rate goes up                                                               
"you're  not  participating in  a  decline  in production  that's                                                               
driven by tax rate increases."                                                                                                  
                                                                                                                                
MR. PULLIAM said it is holding the production constant.                                                                         
                                                                                                                                
12:35:13 PM                                                                                                                   
                                                                                                                                
CO-CHAIR   RAMRAS  suggested   that  the   tax-rate  impacts   on                                                               
production would be "anybody's guess."                                                                                          
                                                                                                                                
MR. PULLIAM said these tax  rates are not onerous or discouraging                                                               
at most price levels, "maybe a  little around the edges with some                                                               
marginal  stuff," but  not  a big  drop off.    The increment  is                                                               
fixed, so at $40 the increment is $58 million per year, he said.                                                                
                                                                                                                                
CO-CHAIR RAMRAS said his question referred to percentage points.                                                                
                                                                                                                                
MR. PULLIAM said, "Per percentage  point increase, that's right."                                                               
He said  it is stated  in millions of  dollars per year,  "so the                                                               
difference between  a 20/20 and a  21/20, if the price  stayed at                                                               
$40 and  the production  stayed the  same, I  would get,  for one                                                               
year, $58 million more."  He  said that amount will stay constant                                                               
as  the tax  rate changes.   If  price changes,  the amount  will                                                               
change.  He said he used WTI price levels.                                                                                      
                                                                                                                                
12:37:12 PM                                                                                                                   
                                                                                                                                
CO-CHAIR RAMRAS reported  that Anadarko said that a  $10 swing in                                                               
price of  oil was much  more significant  than any taxation.   He                                                               
noted that Mr. Pulliam's chart shows that.                                                                                      
                                                                                                                                
MR.  PULLIAM said  that  is  correct.   Column  9 represents  the                                                               
change in the  credit rate, and every percent  increase in credit                                                               
would reduce  revenues, on average,  by $13.6 million  at assumed                                                               
investments levels.  If investments  are higher, that number goes                                                               
up.  A  change per dollar increase in oil  prices increases taxes                                                               
by $52.1 million  at a 20 percent  tax rate.  He  referred to the                                                               
graph of historical and projected  tax rates from the status quo.                                                               
He said he drew the historical  rate as a function of prices, and                                                               
under the  current system  the rate  doesn't change  with prices,                                                               
creating a line going straight across  at 12 percent.  That won't                                                               
happen under the  PPT, he stated.  Under the  20/20 PPT, there is                                                               
progressivity built  in.  There  is a  crossover over the  ELF at                                                               
about $30.50  WTI per barrel.   The  kink in the  graph-where the                                                               
tax rate  drops--is the transition  credit, which is  100 percent                                                               
for  five years.   If  that  credit is  lower, the  line will  be                                                               
flatter.   "To  recover that  in the  four-year period,  it takes                                                               
about a $4.00 increase in price."                                                                                               
                                                                                                                                
12:41:43 PM                                                                                                                   
                                                                                                                                
MR. PULLIAM showed  a chart for 25/20 with a  greater dip because                                                               
the tax credit  would be greater, and where $35  is the crossover                                                               
point from  historic rates.  He  asked if the PPT  is progressive                                                               
enough, and  presented a hybrid rate  that has the base  of 20/20                                                               
PPT with a sliding scale  additional severance tax.  He presented                                                               
an  option  of a  percentage  increase  per  dollar over  a  base                                                               
threshold  level.   "Assume we  had  a tax  that was  equal to  a                                                               
quarter percent  per dollar...anytime the  price of WTI  was over                                                               
$45.  Let's also assume that the  price of WTI is $55 at whatever                                                               
month we're looking  at.  Based on current costs,  that would net                                                               
back to the  wellhead at about $47.  And  let's also assume we've                                                               
got a base tax  of PPT of 20/20.  With the  sliding scale tax, it                                                               
would  be  in  addition  to  the  PPT,  but  since  it  would  be                                                               
consistent  with the  way  the  PPT is  structured,  it would  be                                                               
deductible against  the PPT.   It  would be like  a royalty  or a                                                               
property tax...  If WTI is less  than or equal to  that threshold                                                               
price, there would be no additional  tax, so it would just be the                                                               
curve that  you just saw.   If WTI is greater  than the threshold                                                               
price, the additional  tax would be 0.25 percent  per dollar over                                                               
the threshold, times  the gross wellhead value."   At that price,                                                               
there would be $0.94 more per barrel in taxes, he said.                                                                         
                                                                                                                                
12:45:56 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GARA noted  that  ANS  is $2  less  than WTI  per                                                               
barrel, but the graph showed $55 WTI as being $47 ANS.                                                                          
                                                                                                                                
MR. PULLIAM explained that WTI  is sold at Cushing, Oklahoma, but                                                               
at the West Coast it is $8 higher.                                                                                              
                                                                                                                                
REPRESENTATIVE  GARA asked,  "You're doing  a projection  on: the                                                               
additional tax kicks in at $45 per barrel ANS wellhead?"                                                                        
                                                                                                                                
MR. PULLIAM said it would kick in  anytime WTI is over $45 in his                                                               
example, but one could structure it based on ANS wellhead.                                                                      
                                                                                                                                
12:47:07 PM                                                                                                                   
                                                                                                                                
MR. PULLIAM said the additional tax  will change the slope of the                                                               
line at  higher prices.   At $55  per barrel, for  example, under                                                               
the 20/20,  the effective tax  would be  12.5 percent.   With the                                                               
sliding scale  feature, the tax would  go up to 14.5  percent, so                                                               
it would be 80  percent of the 2.5 percent increase.   It is only                                                               
80 percent  because that tax  is deductible  under the PPT.   The                                                               
25/20  line would  cross  under $65  WTI, "so  as  prices are  up                                                               
there...near their historical highs that  we have today, you'd be                                                               
crossing the 25/20  line."  There could be a  different slope for                                                               
a different tax rate, for  example, like 0.35 percent per dollar.                                                               
The  additional tax  could  kick in  at $40  per  barrel, and  he                                                               
showed that example rising to a higher tax at higher prices.                                                                    
                                                                                                                                
REPRESENTATIVE  CRAWFORD said  he would  like to  correlate these                                                               
ideas to total government take.                                                                                                 
                                                                                                                                
12:50:19 PM                                                                                                                   
                                                                                                                                
MR. PULLIAM  showed a  table of different  WTI price  levels from                                                               
$30 to $80 per  barrel in 2006 prices using a  sliding scale.  He                                                               
told the committee to look at  each example and where the numbers                                                               
cross and how they relate to the 20/20 and 25/20 tax schemes.                                                                   
                                                                                                                                
12:52:23 PM                                                                                                                   
                                                                                                                                
MR. PULLIAM compared  the progressive option against  a 25/20 tax                                                               
system and the proposed 20/20.   The higher increment levels will                                                               
increase  the slope,  and he  said  a 0.2  percent increment  per                                                               
dollar is a 2 percent increment per ten dollars.                                                                                
                                                                                                                                
12:55:28 PM                                                                                                                   
                                                                                                                                
CO-CHAIR RAMRAS said Mr. Pulliam  is saying that between 20/20 or                                                               
25/20 the  state will  not discourage  oil investment  in Alaska.                                                               
But once  the decision  to invest  in Alaska  has been  made, the                                                               
progressivity lets the state share in the windfall profits.                                                                     
                                                                                                                                
MR. PULLIAM  said any tax system  will be evaluated with  that in                                                               
mind.   The example he is  showing is a system  that the industry                                                               
would know that at lower levels the rate would not increase.                                                                    
                                                                                                                                
12:57:18 PM                                                                                                                   
                                                                                                                                
CO-CHAIR  RAMRAS compared  the system  to an  IRA, whereby  young                                                               
people can invest with higher risk.   "The whole point of the PPT                                                               
is to incentivize exploration and  more investment dollars coming                                                               
to Alaska  to keep the pipe  full; where along that  spectrum are                                                               
we safe?  $30 is  a stress price.  $40 is a base  price.  Some of                                                               
your models  went as high as  $45.  What's the  safe number where                                                               
we're behaving like a 60-year-old, protecting the nest egg?"                                                                    
                                                                                                                                
MR. PULLIAM said he sat down  with Pedro van Meurs and considered                                                               
those  questions.   "In our  view, certainly  the 20/20  was very                                                               
safe-very safe; the 25/20 we even thought was safe."                                                                            
                                                                                                                                
12:58:47 PM                                                                                                                   
                                                                                                                                
CO-CHAIR  RAMRAS said  he was  talking  about the  price of  oil,                                                               
"where we're inside of all the board room projections."                                                                         
                                                                                                                                
MR. PULLIAM  said that would be  $35 to $40 per  barrel, but that                                                               
is a long-term average with  variation.  The sliding scale allows                                                               
sharing when the  prices are high or  low.  He said  that as part                                                               
of that analysis, industry expects  the upside.  One must balance                                                               
the desires  for the upside  between the state and  the industry.                                                               
"If you  make it too steep,  investors will plug that  into their                                                               
formulas."   If  the state  takes  everything when  the tax  rate                                                               
increases, it will not look good  to investors, but it will be OK                                                               
to take a  little more when prices rise, he  said.  "We certainly                                                               
thought that the 25/20 would  not result in rates...that would be                                                               
discouraging at  price levels that you  might see."  He  said the                                                               
state is  not taking  too much  at the upside.   Having  a higher                                                               
increment is  not going to  be discouraging at very  high prices.                                                               
He warned that he's an economist, not a fiscal system planner.                                                                  
                                                                                                                                
1:02:23 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM said  the  goal  is to  maximize  the  value of  the                                                               
resource to the state, and that  rate needs to be high enough but                                                               
not so high that the industry  loses interest.  He said losing "a                                                               
little interest" might not be bad.   As an economist, he said the                                                               
state doesn't  want to be  in the  position of taking  every last                                                               
penny of what's available.  The  state needs to be attractive for                                                               
investors, and the 25/20 doesn't go  beyond that at all, and with                                                               
a  sliding  scale  increment,  "we  think  it  still  stays  real                                                               
attractive."  A sliding scale would  have a lower increment if it                                                               
kicks in  at a lower price,  and a higher increment  if is begins                                                               
at a higher price, he stated.                                                                                                   
                                                                                                                                
1:04:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GATTO asked  if his chart stops  the increments at                                                               
$80 per barrel.                                                                                                                 
                                                                                                                                
MR.  PULLIAM said  the charts  stop but  the calculations  can go                                                               
beyond that.  There could be a cap  at some point.  He noted that                                                               
some forecasts are for over $100 per barrel.                                                                                    
                                                                                                                                
1:05:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  asked  if  any  of  these  scenarios  are                                                               
detrimental for investment in Alaska.                                                                                           
                                                                                                                                
MR. PULLIAM said  there are none presented.  He  said he tried to                                                               
put everything  into a  historical context.   At $40  prices, the                                                               
tax rate  is only 11.4  percent, and  that is a  lower percentage                                                               
than the historical  average.  There might be  some things around                                                               
the margin that might lose interest,  but not for the majority of                                                               
projects.  "You might have a more cautious approach."                                                                           
                                                                                                                                
1:07:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE CRAWFORD  said he  may be  a pessimist  because he                                                               
thinks oil will  be $20-$30 per barrel, but all  scenarios are at                                                               
much higher prices.  What would the tax rate do at that range?                                                                  
                                                                                                                                
MR. PULLIAM  said at  ANS West  Coast the  state would  lose when                                                               
prices are  $20 per  barrel, and  he doesn't know  how much.   It                                                               
will  be a  loss  relative  to the  current  ELF  system.   "This                                                               
system, at  $20 per barrel,  is more beneficial to  the producers                                                               
than the  status quo  system is."   He  said historically,  for a                                                               
real $30 West Coast price, the state has had a 12 percent tax.                                                                  
                                                                                                                                
REPRESENTATIVE CRAWFORD said that is a scary scenario.                                                                          
                                                                                                                                
1:08:56 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  RAMRAS  said  this  is  about  the  future  of  660,000                                                               
Alaskans.  "As you throw out  these numbers and you play with the                                                               
future  of  a sales  tax  [and]  the  most valuable  resource  we                                                               
have...how sure are you?"                                                                                                       
                                                                                                                                
DR.  FINIZZA said  at $20  per  barrel of  oil, you  have a  high                                                               
chance of losing,  and that is a credible price,  but he believes                                                               
it is a low probability, but he isn't certain.                                                                                  
                                                                                                                                
1:10:07 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM  suggested anticipating the future  and tailoring the                                                               
system accordingly, and  it can be--and should  be--altered it if                                                               
it  is not  working.   If the  tax rate  cannot be  changed, that                                                               
should enter  the calculation.  If  taxes can't be raised,  it is                                                               
better to be more aggressive knowing  they can be lowered.  It is                                                               
harder to raise taxes than lower them, he said.                                                                                 
                                                                                                                                
1:11:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ  said oil  economists conclude  that oil                                                               
production is  quite inelastic with  respect to changes  in state                                                               
severance taxes.   He said he doesn't  expect absolute certainty,                                                               
but he  asked if severance taxes  and oil don't really  have much                                                               
impact on one another.                                                                                                          
                                                                                                                                
MR. PULLIAM said, in general, a  state severance tax is a smaller                                                               
bite and  not a big  impact.  "Movements  in that tax  rate don't                                                               
have a  big impact."   Activities  are relatively  insensitive to                                                               
taxes,  but  "as you  get  to  a point,  you  may  get into  more                                                               
sensitivities, but  yes, in  general, a  change within  a certain                                                               
range, I  think would be  just as [you]  described."  He  said to                                                               
look at  [total] government take for  any scenario.  He  spoke of                                                               
column six  on his slide  "with the lowest threshold  and highest                                                               
increment that we've  put on there, you'll see as  you get to $50                                                               
a barrel you've  got a government take of just  under 60 percent;                                                               
at $80 per  barrel you've got a government take  of 64.5 percent.                                                               
As I've  heard and understand Dr.  van Meurs and Mr.  Johnson, in                                                               
their  view those  kinds of  takes are  not something  that would                                                               
make you less competitive than opportunities elsewhere."                                                                        
                                                                                                                                
1:14:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GATTO  said so much  depends on the price  of oil,                                                               
and the  presenters know the  20-year projected  world population                                                               
growth  and  the  increase  in  cars in  China,  which  won't  be                                                               
hybrids.  He  mentioned oil production in other  countries.  "You                                                               
take all  this data,  and you  can pretty  much take  an educated                                                               
guess of what a barrel of oil is  going to be worth in 10 years."                                                               
He asked  if they brought  enough variables into the  equation to                                                               
conclude that  a $20  per barrel  oil price is  a pipedream.   He                                                               
said  he  can't think  of  a  potential circumstance  that  would                                                               
provide  more   oil  "compared  to  a   devastating  accident  or                                                               
terrorist  incident  that  would  literally  demolish  the  world                                                               
supply of oil."                                                                                                                 
                                                                                                                                
DR. FINIZZA  said he does  not forecast crude oil  prices because                                                               
of the fear  of being wrong and embarrassed, but  there is a wide                                                               
range  of uncertainty.    The  best guess  from  others  is a  60                                                               
percent chance  that oil prices will  be between $30 and  $80 per                                                               
barrel, but  he said he  thinks the range is  wider.  He  said he                                                               
would not personally bet that oil will  be $20 or less for a long                                                               
period, but  there is a high  chance that price will  exist for a                                                               
short  while.   He said  he wouldn't  bet his  money on  $100 per                                                               
barrel oil.  [Industry] is not  making decisions based on $60 per                                                               
barrel, nor $50 per barrel.  "You shouldn't bet on $50 either."                                                                 
                                                                                                                                
1:18:25 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM  said a  [tax] system  that is  flexible over  a wide                                                               
price range  and doesn't  cause inordinate  pain to  either side,                                                               
will be a  fair system and more  likely to last.   He said Alaska                                                               
is taking on more risk by the  PPT, but that is not necessarily a                                                               
bad thing.                                                                                                                      
                                                                                                                                
REPRESENTATIVE GARA  asked them to  recommend a tax  structure to                                                               
maximize  revenue for  Alaska  in the  long  term, including  the                                                               
tax/credit ratio and a sliding scale.                                                                                           
                                                                                                                                
1:20:16 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM said,   "We  don't have  a single  rate; we  are not                                                               
designers of  fiscal systems."   He  said he  can look  at fiscal                                                               
systems and  try to anticipate  the outcome.  He  suggested being                                                               
conservative and see how it is  working, as long as the structure                                                               
can be  revisited, but  if it  is hard to  raise taxes,  "I think                                                               
that  pushes you  a little  bit the  other way--to  start on  the                                                               
higher  end knowing  that you  can't [raise  taxes easily]."   He                                                               
said a producer will  always say any tax is a  bad tax, but taxes                                                               
are a  fact of life.   He added that  the industry will  tell the                                                               
legislature that oil taxes "are  causing pain" no matter what, so                                                               
the state should  look at industry behavior.   He recommended not                                                               
using "that lowest  threshold" [for the sliding scale].   He said                                                               
he  would start  at $40-$45  "with a  mid-level increment  rate."                                                               
But, he said, that decision is a "personal feeling."                                                                            
                                                                                                                                
MR. PULLIAM  said that  it is likely  that such  a recommendation                                                               
will take Alaska to the end  of the last century, "and it doesn't                                                               
put [Alaska] where  everyone is today."  The change  is good, but                                                               
there will be  some challenges, he noted.  Cost  issues will need                                                               
to be monitored by  good people in DOR and DNR.   He said Section                                                               
20 is a challenge.  It is wise to be able to revisit the tax.                                                                   
                                                                                                                                
1:24:25 PM                                                                                                                    
                                                                                                                                
DR. FINIZZA recommended starting  "with the lower combination and                                                               
then have  some kind of  this sliding  scale because you  can, in                                                               
fact, simulate  at high prices the  higher rate."  It  may be the                                                               
best  of both  worlds  at  higher prices,  and  the  pain on  the                                                               
industry won't  be too great.   That  would help the  industry at                                                               
lower  prices and  protect  the state  "in  a busted  lower-price                                                               
scenario" from giving away too many tax credits.                                                                                
                                                                                                                                
REPRESENTATIVE CRAWFORD said Mr.  Johnson told the committee that                                                               
for Alaska oil,  discounted for transportation and  quality, a 65                                                               
percent total  government take  would keep  Alaska in  the world-                                                               
wide  average.    He  surmised  that  the  state  would  want  to                                                               
construct a  tax that starts  at 65 percent government  take "and                                                               
take it  backwards from there...to reach  that."  He said  the 56                                                               
to 59 percent government take leaves  a lot of money on the table                                                               
compared to the worldwide average.                                                                                              
                                                                                                                                
1:26:25 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM  said, "If  your  objective  is  to  get to  be  the                                                               
worldwide average  on government  take, then  you would  go about                                                               
this in a different way."   He said the average is interesting to                                                               
look at  to see if  Alaska will  potentially drive folks  away if                                                               
taxes are too  high, but there is nothing magical  about being at                                                               
the average,  and the state might  want to be below  or above the                                                               
average.  He noted that the  average has some extremes.  The Gulf                                                               
of Mexico  is very low  and there are  places that are  very high                                                               
and have "a lot of oil to go  after."  He said there is a limited                                                               
amount of places  to find oil any more, and  many of those places                                                               
have very  high takes, "and  a lot of  them are much  higher than                                                               
anything you're talking about here."                                                                                            
                                                                                                                                
1:27:51 PM                                                                                                                    
                                                                                                                                
[HB 488 was held over]                                                                                                          
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no further business before the committee, the House                                                                 
Resources Standing Committee meeting was adjourned at 1:28 PM.                                                                

Document Name Date/Time Subjects