Legislature(2011 - 2012)HOUSE FINANCE 519

04/23/2012 09:00 AM RESOURCES

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09:07:57 AM Start
09:08:56 AM HB3001
12:31:16 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
In Participation with House ENE
Heard & Held
-- Testimony <Invitation Only> --
Analysis of bill by PFC Energy
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                         April 23, 2012                                                                                         
                           9:07 a.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Eric Feige, Co-Chair                                                                                             
Representative Paul Seaton, Co-Chair                                                                                            
Representative Peggy Wilson, Vice Chair                                                                                         
Representative Alan Dick                                                                                                        
Representative Neal Foster                                                                                                      
Representative Bob Herron                                                                                                       
Representative Cathy Engstrom Munoz                                                                                             
Representative Berta Gardner                                                                                                    
Representative Scott Kawasaki                                                                                                   
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
OTHER LEGISLATORS PRESENT                                                                                                     
Representative Kurt Olson                                                                                                       
Representative Dan Saddler                                                                                                      
Representative Pete Petersen                                                                                                    
Representative Chris Tuck                                                                                                       
Representative Lance Pruitt                                                                                                     
Representative Mike Doogan                                                                                                      
Representative Steve Thompson                                                                                                   
Representative Bill Thomas                                                                                                      
Representative Mark Neuman                                                                                                      
Representative Tammy Wilson                                                                                                     
Representative Bob Miller                                                                                                       
Representative Bob Lynn                                                                                                         
Representative Alan Austerman                                                                                                   
Representative Anna Fairclough                                                                                                  
Senator Cathy Giessel                                                                                                           
COMMITTEE CALENDAR                                                                                                            
HOUSE BILL NO. 3001                                                                                                             
"An Act  relating to  adjustments to oil  and gas  production tax                                                               
values  based on  a percentage  of gross  value at  the point  of                                                               
production for  oil and  gas produced  from leases  or properties                                                               
north  of   68  degrees  North  latitude;   relating  to  monthly                                                               
installment payments of the oil  and gas production tax; relating                                                               
to  the determinations  of  oil and  gas  production tax  values;                                                               
relating  to  oil  and  gas   production  tax  credits  including                                                               
qualified  capital  credits   for  exploration,  development,  or                                                               
production; making  conforming amendments;  and providing  for an                                                               
effective date."                                                                                                                
     - HEARD & HELD                                                                                                             
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: HB3001                                                                                                                  
SHORT TITLE: OIL AND GAS PRODUCTION TAX                                                                                         
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
04/18/12       (H)       READ THE FIRST TIME - REFERRALS                                                                        
04/18/12       (H)       RES, FIN                                                                                               
04/20/12       (H)       RES AT 1:00 PM HOUSE FINANCE 519                                                                       
04/20/12       (H)       Heard & Held                                                                                           
04/20/12       (H)       MINUTE(RES)                                                                                            
04/21/12       (H)       RES AT 10:00 AM HOUSE FINANCE 519                                                                      
04/21/12       (H)       Heard & Held                                                                                           
04/21/12       (H)       MINUTE(RES)                                                                                            
04/21/12       (H)       RES AT 2:00 PM HOUSE FINANCE 519                                                                       
04/21/12       (H)       Heard & Held                                                                                           
04/21/12       (H)       MINUTE(RES)                                                                                            
04/23/12       (H)       RES AT 9:00 AM HOUSE FINANCE 519                                                                       
WITNESS REGISTER                                                                                                              
JANAK MAYER, Manager                                                                                                            
Upstream and Gas                                                                                                                
PFC Energy                                                                                                                      
Washington, D.C.                                                                                                                
POSITION  STATEMENT:   Speaking as  the project  manager who  has                                                             
been  hired  by  the  Legislative  Budget  and  Audit  Committee,                                                               
presented   a  PowerPoint,   "Discussion  Slides:   Alaska  House                                                               
Resources Committee" and answered  questions during discussion of                                                               
HB 3001.                                                                                                                        
ACTION NARRATIVE                                                                                                              
9:07:57 AM                                                                                                                    
CO-CHAIR  PAUL   SEATON  called  the  House   Resources  Standing                                                             
Committee meeting to order at  9:07 a.m.  Representatives Seaton,                                                               
Feige, Gardner, Dick,  Foster, Herron and P.  Wilson were present                                                               
at  the  call  to  order.   Representatives  Kawasaki  and  Munoz                                                               
arrived as the  meeting was in progress.  In  attendance from the                                                               
House  Special Committee  on Energy  were Representatives  Olson,                                                               
Pruitt, Saddler,  Lynn, Petersen, and  Tuck.  Also  in attendance                                                               
were  Representatives  Austerman,   Fairclough,  Neuman,  Thomas,                                                               
Thompson, T. Wilson, Doogan, and Miller and Senator Giessel.                                                                    
               HB 3001-OIL AND GAS PRODUCTION TAX                                                                           
9:08:56 AM                                                                                                                    
CO-CHAIR SEATON announced  that the only order  of business would                                                               
be HOUSE  BILL NO. 3001, "An  Act relating to adjustments  to oil                                                               
and  gas production  tax values  based on  a percentage  of gross                                                               
value at  the point of production  for oil and gas  produced from                                                               
leases  or  properties  north  of   68  degrees  North  latitude;                                                               
relating  to monthly  installment  payments of  the  oil and  gas                                                               
production tax;  relating to  the determinations  of oil  and gas                                                               
production tax  values; relating  to oil  and gas  production tax                                                               
credits  including  qualified  capital credits  for  exploration,                                                               
development,  or production;  making  conforming amendments;  and                                                               
providing for an effective date."                                                                                               
9:09:13 AM                                                                                                                    
JANAK MAYER, Manager,  Upstream and Gas, PFC  Energy, speaking as                                                               
the project  manager hired  by the  Legislative Budget  and Audit                                                               
Committee,  reported   that  PFC   Energy  is  a   global  energy                                                               
consultancy  which specializes  in oil  and gas  with a  focus on                                                               
above ground  risk, including fiscal terms,  commercial risk, and                                                               
geo-political risk.   He  explained that  upstream refers  to the                                                               
exploration  and   development  of  crude  oil,   as  opposed  to                                                               
downstream which refers to the refined product.                                                                                 
9:10:27 AM                                                                                                                    
CO-CHAIR  SEATON asked  the committee  to save  any philosophical                                                               
questions until after the presentation.                                                                                         
9:11:23 AM                                                                                                                    
MR.   MAYER  introduced   a   PowerPoint  presentation   entitled                                                               
"Discussion Slides: Alaska House  Resources Committee," which was                                                               
included in  members' packets.  He then said  he would  provide a                                                               
brief  background of  Alaska's oil  and gas  competitive context,                                                               
particularly  in  terms  of  the current  fiscal  system  in  the                                                               
context  of  other hydrocarbon  regimes.    Drawing attention  to                                                               
slide 3 entitled "Fixed royalty  Jurisdictions in US Lower 48 Are                                                               
A  Key  Competitor  to  Alaska  for  Investment  Dollars,"  which                                                               
compares  the  time periods,  2003-2005  and  2008-2010, for  the                                                               
areas  around the  world  where companies  were  taking cash  and                                                               
significantly investing  cash for a  base of new production.   He                                                               
stated that for much of  recent history, North America and Europe                                                               
have been  cash surplus regions  of established  production where                                                               
investments  have  been  made  in   the  past.    He  noted  that                                                               
essentially, companies  harvested cash from those  mature regions                                                               
and used  it to build  assets in new  regions.  During  the first                                                               
half of  this last decade,  a notable  cash deficit area  was Sub                                                               
Saharan  Africa where  companies made  significant investment  in                                                               
plays,  particularly  in  deep  water Sub  Saharan  Africa.    He                                                               
reported that  in the last  couple of  years high oil  prices and                                                               
the  unconventional oil  revolution in  North America,  the Lower                                                               
48, has created a remarkable  turnaround from an exporter of cash                                                               
within  companies'  portfolios to  a  destination  of cash.    He                                                               
declared that  there is now a  lot of investment in  the Lower 48                                                               
to take advantage of the Lower 48's onshore unconventional play.                                                                
MR. MAYER stated that the fiscal  regimes across the Lower 48 are                                                               
by and  large fixed-percentage royalty  regimes.  Five  years ago                                                               
major  competitor  jurisdictions   for  investment  dollars  were                                                               
likely to  be developing countries with  large production sharing                                                               
contracts  in  terms of  their  fiscal  systems, relatively  high                                                               
levels  of government  take, and  fiscal  systems that  negotiate                                                               
terms directly with companies.   The significant difference today                                                               
is that one  of the main competitive jurisdictions  for Alaska is                                                               
the Lower  48 as a destination  for cash and there,  in the Lower                                                               
48, is  significantly lower government take.   The aforementioned                                                               
makes it more  difficult for Alaska to  compete within companies'                                                               
portfolios for investment dollars.                                                                                              
9:15:37 AM                                                                                                                    
MR. MAYER  moved on to  slide 4  entitled "Alaska's Days  of Easy                                                               
Oil  Are  Gone:  High  Costs and  High  Government  Take  Present                                                               
Challenges" and  stated that there  are steadily rising  costs of                                                               
oil development  in Alaska.   He listed the development  cost for                                                               
New  Light   Oil,  Mid-High  Cost  Development,   and  High  Cost                                                               
Development in  Alaska.   He declared that  capital costs  of $17                                                               
per barrel and  operating costs of $15 per  barrel are reasonable                                                               
estimates for  the existing infrastructure.   However,  for those                                                               
developments  that  are  farther  from  existing  infrastructure,                                                               
target smaller reservoirs, require  horizontal wells or hydraulic                                                               
fracturing, or are reservoirs for  viscous oil, the capital costs                                                               
increase  to $25  per barrel.    In fact,  for developments  well                                                               
outside of existing infrastructure  toward the National Petroleum                                                               
Reserve-Alaska (NPR-A)  the capital costs  can be as high  as $34                                                               
per  barrel.   In  comparison,  the Lower  48  capital costs  for                                                               
conventional onshore  plays is $2-$5  per barrel, with  the total                                                               
operating and capital  cost being less than $10 per  barrel.  The                                                               
total [capital  and operating] cost for  unconventional oil plays                                                               
in the  Lower 48, such as  the Bakken or Eagle  Ford, could reach                                                               
$20-$25 per barrel.   Therefore, the cost for  new development in                                                               
Alaska  is  significantly  more  expensive  than  the  Lower  48,                                                               
regardless of the fiscal terms.                                                                                                 
9:18:23 AM                                                                                                                    
REPRESENTATIVE GARDNER expressed  her understanding that Alaska's                                                               
very high costs had  been a reason to move to  a net profits tax.                                                               
She asked if  Texas, North Dakota, and Louisiana were  based on a                                                               
net profits tax.                                                                                                                
MR.  MAYER replied  that  those  states are  on  a fixed  royalty                                                               
system with  some variations  in the royalty  such that  there is                                                               
greater predominance  of private  land.   He declared  that fixed                                                               
royalty  systems can  have high  levels of  government take  when                                                               
costs are high  and prices are low because from  any given barrel                                                               
a fixed percent is being taken.   However, when costs are low and                                                               
prices are high,  the fixed rate jurisdiction  is more attractive                                                               
than the net profit jurisdiction.                                                                                               
9:19:53 AM                                                                                                                    
REPRESENTATIVE  GARDNER  asked  if,  in  comparison,  net  profit                                                               
blunts the impact  of high cost.  She pointed  out that Alaska is                                                               
at risk when the  price of oil falls, which was  a trade off when                                                               
the tax  structure was initiated.   Therefore, Alaska  would take                                                               
more at the high end and share the risk at the low end.                                                                         
MR. MAYER  stated that the impact  of a net profit  system of the                                                               
sort that's  in Alaska is  to make the overall  system relatively                                                               
neutral with  regard to cost.   The  presence of a  fixed royalty                                                               
component makes  Alaska's system slightly regressive  in terms of                                                               
cost because as costs increase,  the government take may increase                                                               
slightly.  However, fixed royalty  systems are very regressive in                                                               
terms of  cost, and thus  the greater  the costs, the  higher the                                                               
government take.  Mr. Mayer agreed  then that a net profit system                                                               
blunts  some of  the  impact [of  high  cost], but  it  is not  a                                                               
progressive  system with  regard  to cost.    As costs  increase,                                                               
government take does  not decrease, and he stated  that the level                                                               
of  government take  in Alaska  is  high compared  to many  other                                                               
9:21:41 AM                                                                                                                    
REPRESENTATIVE SADDLER asked to  clarify that the referenced high                                                               
cost of  development is not for  viscous oil or future  high cost                                                               
of development.                                                                                                                 
MR. MAYER  expressed agreement,  adding that  in the  recent past                                                               
there have  been developments within  the range of the  new light                                                               
oil to the  mid to high cost.   Although he was not  aware of any                                                               
developments at the high cost  level, he suggested that there are                                                               
projects in the planning and  evaluation stages that could entail                                                               
the higher costs.   However, those projects  are very challenged,                                                               
he further suggested.                                                                                                           
REPRESENTATIVE SADDLER  asked for an  example of an  Alaska field                                                               
that would fall  into the specified categories:   new light, mid-                                                               
high cost development, and high cost development.                                                                               
MR. MAYER  offered his guess  that Nakaitchuq and  Oooguruk would                                                               
fall  somewhere  between the  new  light  oil and  mid-high  cost                                                               
development,  but opined  that the  oil companies  would need  to                                                               
share the details.   He anticipated that some of  the viscous oil                                                               
projects planned within existing  fields by the current operators                                                               
would  also be  in  the  mid-high to  high  cost of  development.                                                               
Similarly,  projects  in  NPR-A  as well  as  serious  heavy  oil                                                               
projects could fall in the high cost of development.                                                                            
REPRESENTATIVE SADDLER  asked if there  are any examples  for new                                                               
light oil or mid cost projects.                                                                                                 
MR. MAYER  responded that he  did not have specific  examples for                                                               
new  development,  but characterized  the  estimated  costs as  a                                                               
reasonable benchmark based on other recent developments.                                                                        
9:24:09 AM                                                                                                                    
CO-CHAIR SEATON pointed out that  the unconventional oil projects                                                               
of  the Bakken  and  Eagle Ford  and new  light  oil projects  in                                                               
Alaska had  the same  capital cost  requirements as  specified on                                                               
the  chart.   He asked  if the  Eagle Ford  and Bakken  projects,                                                               
which  required  continuous  drilling   and  capital  costs,  had                                                               
capital costs related to the graph.                                                                                             
MR. MAYER  replied that the  figures on slide  4 were done  on an                                                               
annual operating cost per barrel  produced, but the capital costs                                                               
were  based on  per barrel  of reserves.   He  pointed out  that,                                                               
depending on the size of the  reserve, spending could come at the                                                               
front or be  stretched out, which could  significantly impact the                                                               
project   economics.      He  stated   that   even   though   the                                                               
unconventional  projects  have  much higher  capital  costs  than                                                               
previously  seen in  the Lower  48, these  costs were  lower than                                                               
many costs in  the planning stages in Alaska.   Other than having                                                               
lower capital  costs than in  Alaska, the Lower 48  projects have                                                               
the advantage  of the capital  costs being spread out  over time.                                                               
Therefore, with  comparable costs between  the new light  oil and                                                               
the unconventionals,  it may look better  for the unconventionals                                                               
because the capital spending is spread out over time.                                                                           
9:26:27 AM                                                                                                                    
MR.  MAYER moved  on  to slide  5  entitled "Relative  Government                                                               
Take," which defined relative government  take as government take                                                               
divided by divisible income.   He explained that divisible income                                                               
is gross  revenues less  all the  costs, including  operating and                                                               
capital costs and  transportation costs.  The  government take is                                                               
that portion of the divisible  income remaining after the private                                                               
company's take.   Dividing  the absolute  government take  by the                                                               
divisible  income results  in the  percentage of  the income  the                                                               
government receives on a project.                                                                                               
9:28:09 AM                                                                                                                    
CO-CHAIR SEATON  inquired as to  when private royalty  comes into                                                               
MR. MAYER  clarified that  the benchmark  slides he  will present                                                               
today treats  private royalties as though  the private landholder                                                               
were government.  From a  company's perspective, funds that go to                                                               
a private landholder or the  government are the same because they                                                               
are funds that the company does not receive.                                                                                    
REPRESENTATIVE P.  WILSON asked  how the  private royalty  can be                                                               
determined when, in fact, some of the contracts are private.                                                                    
MR.  MAYER said  that although  there are  significant variations                                                               
between leases with the private  contracts, there are fairly well                                                               
documented   reasonable  averages   available  for   estimations.                                                               
Therefore, Mr. Mayer used the  reasonable averages and when there                                                               
was a question, he erred on the high side.                                                                                      
9:30:00 AM                                                                                                                    
MR. MAYER,  addressing slide 6  entitled "Fixed Royalty  v Profit                                                               
Based   Fiscal   Systems,"  answered   Representative   Gardner's                                                               
question  regarding the  impact of  fixed royalty  systems versus                                                               
net profit-based  tax systems.   He  compared the  first example,                                                               
which depicted  five different  projects each  with a  30 percent                                                               
fixed royalty  to five  projects with  a 50  percent profit-based                                                               
tax.   He  pointed out  that these  were five  different projects                                                               
with  five different  cost levels.   He  noted that  each project                                                               
included  capital  cost,  operating  cost,  normal  return  to  a                                                               
private investor on capital, and  economic rent or income surplus                                                               
required  to achieve  a  normal  return on  the  capital that  is                                                               
sometimes known as super profits.                                                                                               
MR. MAYER declared that the  amount of economic rent generated by                                                               
a project would  vary enormously depending on  the cost structure                                                               
of that  project, and thus  project one  would generate a  lot of                                                               
economic  rent while  project five  would  generate a  relatively                                                               
small amount of economic rent.   Referring to the graph of the 30                                                               
percent fixed royalty in terms  of five different cost structures                                                               
with five different projects for  the same $100 per barrel price,                                                               
he  pointed out  that  the black  rectangles represent  divisible                                                               
income, that is all  of the cash and none of the  costs.  The bar                                                               
graph  depicts a  line straight  across the  graph at  30 percent                                                               
fixed  royalty, which  is  at the  $70 because  $30  of the  $100                                                               
barrel of oil goes to the 30  percent fixed royalty.  In the case                                                               
of project  one, then,  there is  a lot of  economic rent  and an                                                               
even larger  portion is going  to the  private investor.   In the                                                               
case of  project five, all  of the  economic rent is  being taken                                                               
through the 30  percent royalty as is all of  the ordinary return                                                               
on  capital.    Clearly,  that's a  project  that  wouldn't  move                                                               
forward under this  stylized regime because there  is no economic                                                               
rent or even a basic ordinary return on capital to be made.                                                                     
MR. MAYER  explained that  part of the  notion behind  a profits-                                                               
based tax is  that it eliminates the distorting  impact such that                                                               
there are  relatively lower  taxes on  the highest  cost projects                                                               
and relatively  higher taxes on  the lowest cost  projects, which                                                               
generate  the most  economic  rent.   He  noted  that  this is  a                                                               
stylized profits-based  system, not  like the Alaska  system that                                                               
is progressive in  regard to costs and may take  even more of the                                                               
rent in  certain cases.  "The  analogy being, in a  sense, to the                                                               
25  percent ...  base profits  tax in  Alaska.   If we  imagine a                                                               
system that was that at 50  percent with no other fiscal element,                                                               
that's sort of what we'd be looking at here," he said.                                                                          
9:34:15 AM                                                                                                                    
MR. MAYER explained  that the bar graph for the  30 percent fixed                                                               
royalty could  be viewed as a  percentage of a barrel  of oil for                                                               
any  given price  per  barrel,  with each  of  the five  projects                                                               
reflecting different oil  prices.  Therefore, the  graph could be                                                               
viewed as the  same project with the same cost  structure in five                                                               
different price  cases such that  price case one would  have very                                                               
high  oil prices  and price  case five  would have  very low  oil                                                               
prices.   He  reiterated that  in  a high  oil price  environment                                                               
fixed  royalty  is more  attractive  for  investors, whereas  the                                                               
profit-based  tax  is  more  attractive  in  a  lower  oil  price                                                               
environment because  the tax is  reduced as the  available profit                                                               
is  reduced.   In  that  sense, the  system  on  the [50  percent                                                               
profit-based tax] is more economically  efficient, as it does not                                                               
distort the investment  choices as much.  However,  that does not                                                               
necessarily mean that  it's competitive with what  one can obtain                                                               
as  a private  investor  in a  jurisdiction  with the  investment                                                               
profile of [projects] one, two, or  three.  Mr. Mayer opined that                                                               
that  the  aforementioned is  important  in  understanding how  a                                                               
profit-based  system, particularly  one  with  a relatively  high                                                               
government  take such  as Alaska,  looks as  compared to  a fixed                                                               
royalty  system   elsewhere.    A  profit-based   system  with  a                                                               
relatively high government  take is very attractive  at lower oil                                                               
prices, while less attractive, from  a competitive standpoint, at                                                               
high  oil  prices,  particularly when  those  jurisdictions  have                                                               
relatively lower costs.                                                                                                         
9:36:16 AM                                                                                                                    
REPRESENTATIVE GARDNER  inquired as to the  contextual definition                                                               
for  rent and  normal return  of capital.   She  asked if  normal                                                               
return of capital is part of the profit or the cost.                                                                            
MR. MAYER explained that normal  return on capital differentiates                                                               
the  perspective  of  accountants  versus  economists.    For  an                                                               
accountant,  profit   is  what   remains  after  the   costs  are                                                               
subtracted from the  income; however, for an  economist profit is                                                               
what  remains after  all  the capital  invested  in the  project,                                                               
including  the physical  structures and  the working  capital, is                                                               
subtracted [from the  income].  For an  economist, anything above                                                               
the normal return  on capital is economic profit.   Therefore, on                                                               
the  bar graphs  on slide  6 the  yellow and  red bars  represent                                                               
accounting profit,  but only  the red  bars are  economic profit,                                                               
which is the same as rent.                                                                                                      
REPRESENTATIVE  GARDNER  asked what  risk  was  calculated for  a                                                               
normal return on capital.                                                                                                       
MR.  MAYER  explained  that  the required  rates  of  return  for                                                               
capital  are connected  to the  levels of  risk, with  lower risk                                                               
investments requiring  lower rates  of returns.   He  pointed out                                                               
that the standard  benchmark is the U.S. Treasury  rate, which is                                                               
a completely  risk-free rate of return  on capital.  Any  rate of                                                               
return required above the guaranteed  return is considered a risk                                                               
premium.   The significantly higher  rate of return  required for                                                               
an oil and gas project located  in a stable jurisdiction versus a                                                               
project  that holds  a U.S.  Treasury bill  is reflective  of the                                                               
risk  one  is taking  in  undertaking  the project.    Therefore,                                                               
projects  in   jurisdictions  that  are  viewed   as  riskier  by                                                               
investors  require  significantly  higher   rates  of  return  to                                                               
compensate for the risk involved.                                                                                               
REPRESENTATIVE  GARDNER  asked  for  the benchmark  of  the  U.S.                                                               
Treasury rate.                                                                                                                  
MR.  MAYER  replied  that  the   rate  varied  depending  on  the                                                               
investment time  frame.  He  stated that, although 5  percent had                                                               
historically  been  financially  used  as a  risk  free  rate  of                                                               
return,  the  current  economic environment  is  a  substantially                                                               
lower rate.                                                                                                                     
MR. MAYER, in  response to Representative Tuck,  said that Alaska                                                               
is  "progressive  with  regard  to price,  but  not  particularly                                                               
progressive with  regard to  cost."   He then  turned to  the bar                                                               
graph  in  terms of  the  same  project  in five  different  cost                                                               
environments  and suggested  layering  in Alaska's  progressivity                                                               
would result in the diagonal bar  curving down and taking more of                                                               
the rent at the highest price environment.                                                                                      
9:41:33 AM                                                                                                                    
CO-CHAIR SEATON surmised that Mr.  Mayer would be going into more                                                               
detail on the Alaska price structure.                                                                                           
9:41:52 AM                                                                                                                    
MR. MAYER, in further response  to Representative Tuck, clarified                                                               
that he was  referring to the chart entitled "Incidence  of a 50%                                                               
Profit-Based Tax  on 5  Different Projects" on  slide 6  with the                                                               
angled line  being a fixed 50  percent of the profit  for a given                                                               
project.   A  system that  is  progressive with  regard to  price                                                               
would  result in  "1" being  the  highest price  case that  would                                                               
yield  the most  economic rent  such  that 60-70  percent of  the                                                               
[profit] is taken and perhaps less  than 50 percent in the lowest                                                               
price case,  "5".   Therefore, the  line would  steadily increase                                                               
from right  to left to reflect  more economic rent in  high price                                                               
environments, which  is what  makes it  progressive in  regard to                                                               
price.  Alaska's system is  deliberately crafted such that at oil                                                               
prices net of  cost above $30 per barrel, the  share going to the                                                               
state  through  the  petroleum profit-based  tax  (PPT)  steadily                                                               
increases.   He  stated that  although this  is progressive  with                                                               
regard to  oil price, it is  not progressive in the  same way for                                                               
cost.   Therefore, as costs  rise, the amount of  government take                                                               
stays  the  same  and may,  in  certain  circumstances,  slightly                                                               
increase as costs increase.                                                                                                     
9:43:20 AM                                                                                                                    
REPRESENTATIVE TUCK,  recalling earlier  testimony that  a normal                                                               
return of capital  is about 15 percent, surmised  that the yellow                                                               
block on  the bar graphs on  slide 6 is 15  percent of everything                                                               
below it.                                                                                                                       
MR.  MAYER  expressed  agreement  that the  yellow  block  is  15                                                               
percent of the  capital costs, shown in green,  with some portion                                                               
of the ongoing working capital required to maintain the project.                                                                
9:44:05 AM                                                                                                                    
REPRESENTATIVE HERRON  asked how the  bar graphs would  change if                                                               
Alaska  became   an  investor,  instead  of   approving  the  tax                                                               
reduction in the proposed legislation.                                                                                          
MR. MAYER, directing  attention to the equation on  slide 5, said                                                               
that  government take  does not  include the  government earnings                                                               
directly from an equity stake.   However, he said that government                                                               
take would be impacted if the  government, as Alaska does to some                                                               
extent,  provides  tax  credits  as  cost  contributions  to  the                                                               
project with a correspondingly high tax rate afterward.                                                                         
9:45:27 AM                                                                                                                    
MR. MAYER  offered a brief  overview of  slides 7 and  8, "Regime                                                               
Competitiveness: Average Government  Take," which compared Alaska                                                               
to a  range of global fiscal  regimes at $100 per  barrel of oil,                                                               
slide  7, and  $140 per  barrel  of oil,  slide 8.   He  directed                                                               
attention  to the  two  red bars,  which  represented the  Alaska                                                               
take, under  Alaska's Clear and  Equitable Share (ACES),  for new                                                               
oil  developments and  for an  existing producer.   He  noted the                                                               
difference:    an existing  producer  could  claim capital  costs                                                               
against existing  costs for production,  while a  new development                                                               
producer could only claim upfront  incurred capital costs against                                                               
net operating  lost credit,  which results  in a  slightly higher                                                               
government  take.   He  stated  that  the  yellow bars  were  all                                                               
Organization  for  Economic  Cooperation and  Development  (OECD)                                                               
jurisdictions,  which are  developed, not  developing, countries.                                                               
He  explained  that the  benchmark  analysis  offers a  range  of                                                               
actual economic modeled projects as  opposed to how this exercise                                                               
is frequently performed  in which a single stylized  field is run                                                               
through a  range of different  regimes.  The idea,  he specified,                                                               
is that in  each regime there should be review  of something that                                                               
comes close  to approximating  the actual  levels of  cost, field                                                               
sizes, and  etcetera in order to  view representative development                                                               
for  each of  the  basins  in terms  of  field size,  production,                                                               
costs, and the resulting government take.                                                                                       
9:48:18 AM                                                                                                                    
MR.  MAYER reported  that oil  price  levels significantly  below                                                               
$100  per  barrel  would  reflect  an  impact  on  fixed  royalty                                                               
regimes.  He said when oil  price was compared at $100 per barrel                                                               
and above,  Alaska's fiscal regime was  significantly higher than                                                               
all  other  OECD jurisdictions,  with  the  exception of  Norway;                                                               
whereas,  below $100  per  barrel, ACES  was  comparable to  many                                                               
other  jurisdictions.   For an  existing producer,  [Alaska under                                                               
ACES]  has the  second highest  level of  government take  in the                                                               
OECD countries.   At a price  of $140 per barrel,  the government                                                               
take [in  Alaska] for an existing  producer is about the  same or                                                               
slightly  above  Norway and  is  slightly  higher still  for  new                                                               
development.   For  oil  prices higher  [than  $140 per  barrel],                                                               
Alaska finds  itself among the very  highest taxing jurisdictions                                                               
in  the world.   He  clarified that  he had  focused on  $100 per                                                               
barrel and  $140 per barrel as  these were the most  recent price                                                               
boundaries over  the last few years.   He stated that  the fiscal                                                               
regime in Alaska had been  designed for high levels of government                                                               
take  for   existing  production,  and  is   notably  higher  for                                                               
government take of new development in the Lower 48.                                                                             
9:50:32 AM                                                                                                                    
CO-CHAIR SEATON requested a copy of  this same graph using an oil                                                               
price of $80 per barrel.                                                                                                        
MR. MAYER agreed to do so.                                                                                                      
9:50:52 AM                                                                                                                    
REPRESENTATIVE GARDNER  inquired as to why  Saudi Arabia, Kuwait,                                                               
and  Iraq,  which she  opined  to  be  some  of the  largest  oil                                                               
producers in the world, are not included on the chart.                                                                          
MR. MAYER explained that Saudi  Arabia entirely owns and produces                                                               
its oil  resource, and  thus it  is not  relative to  these other                                                               
fiscal regimes.   The aforementioned is true, to  some extent, in                                                               
Iraq and Kuwait  as well.  Iraq  is a unique case  because it has                                                               
recently invited  service contracts  with overseas  oil companies                                                               
to invest  capital and introduce  new technology in an  effort to                                                               
increase the  oil production of  long existing mature  oil fields                                                               
that have  been produced  by the  state.   He offered  his belief                                                               
that  those  [existing   mature  oil  fields  in   Iraq]  have  a                                                               
relatively high  level of  government take,  but that  the fiscal                                                               
structure rewards  contractors for  increases in  production over                                                               
certain benchmark levels.  Companies  have been willing to invest                                                               
in  Iraq   because  it  is   viewed  as  a   long-term  strategic                                                               
REPRESENTATIVE  GARDNER asked  whether Norway  is a  hybrid model                                                               
similar to Alaska.                                                                                                              
MR.  MAYER concurred,  declaring that,  although Norway  has high                                                               
levels  of   government  take,  it  ensures   ongoing  investment                                                               
regardless of the  private sector appetite.  Norway  has a large,                                                               
sophisticated  national oil  company, Statoil,  which is  a major                                                               
participant  in Norwegian  oil development.   Norway  also has  a                                                               
state equity arm, Petoro, which  also holds directly on behalf of                                                               
the state in those projects.                                                                                                    
MR. MAYER, in  response to Co-Chair Seaton, said  that PFC Energy                                                               
has analysis of what HB 3001  looks like in comparison to ACES in                                                               
terms of government  take.  Although he did not  have it in terms                                                               
of the  benchmark chart [on  slides 7 and  8], but he  offered to                                                               
provide it.                                                                                                                     
REPRESENTATIVE SADDLER asked to also  see the countries ranked by                                                               
annual volume of oil produced and cost of production.                                                                           
MR.  MAYER replied  that it  could  be done,  but it  might be  a                                                               
significant  process.   He  noted  that  there is  a  correlation                                                               
between  desirability   of  hydrocarbon  basins  and   levels  of                                                               
government take.                                                                                                                
9:55:43 AM                                                                                                                    
MR.   MAYER,   referring  to   slide   9   entitled  "Effect   of                                                               
Progressivity on Price Upside," explained  that the two graphs on                                                               
slide  9 reflect  net present  value (NPV)  and internal  rate of                                                               
return  (IRR) over  a range  of various  price environments.   He                                                               
explained that  the cost profile  used is from the  average North                                                               
Slope capital  and operating costs  directly from  the Department                                                               
of Revenue (DOR)  Revenue Sources Handbook and  was graphed under                                                             
ACES versus with a flat  25 percent profits-based tax without any                                                               
progressivity.   The graphs  illustrate that  under progressivity                                                               
as the  price, economic  rent, increases,  the state  is steadily                                                               
able to  take more  and more.   The graphs  use a  relatively low                                                               
cost development and illustrate that  the system works quite well                                                               
such that  there is a 15  percent rate of return  around the $60-                                                               
$70 price.   As one reaches  higher and higher price  levels, the                                                               
idea  behind the  progressivity is  that  more and  more rent  is                                                               
taken for the state.  In the  low cost example, the impact of the                                                               
state taking [more] economic rent  should not impact the economic                                                               
viability of  the project.   However, if  one compares this  to a                                                               
more neutral or  regressive regime, a very  economic project does                                                               
not alone  make the project  economic for capital.   For example,                                                               
there are  projects in  the Lower 48  at high  price environments                                                               
that   look   much   better.     Therefore,   the   question   of                                                               
competitiveness remains.  He declared  the basic lesson from this                                                               
chart to  be:  ACES worked  very well, in a  harvest regime, when                                                               
there  were  low  development costs  while  maintaining  existing                                                               
production  from   existing  fields   with  no   significant  new                                                               
10:00:31 AM                                                                                                                   
REPRESENTATIVE  GARDNER  expressed  her  understanding  that  the                                                               
desired outcome  of the  progressivity tax  rate is  to encourage                                                               
the  industry to  re-invest its  profits in  Alaska, rather  than                                                               
elsewhere because their tax rates  in Alaska would drop with each                                                               
dollar  re-invested.    She  asked  for  clarification  regarding                                                               
whether   high   prices   were  instead   discouraging   industry                                                               
investment and that industry would  prefer a higher progressivity                                                               
rate in  a harvest  mode rather than  re-invest and  decrease the                                                               
rate on everything.                                                                                                             
10:01:20 AM                                                                                                                   
MR. MAYER, noting  that there were the two  approaches, said that                                                               
progressivity is  an approach to  encourage investment  such that                                                               
the  high  level  of  taxation   could  be  lowered  through  re-                                                               
investment.   The other approach  would be  for a lower  level of                                                               
government take  with an upside  for higher oil prices,  which is                                                               
more  desirable for  capital investment.   High  government take,                                                               
high costs,  and the  lack of  an upside  combine to  make Alaska                                                               
less competitive, he said.                                                                                                      
REPRESENTATIVE  GARDNER opined  that this  made sense  for a  new                                                               
investment, without a broad infrastructure.                                                                                     
CO-CHAIR  SEATON questioned  whether  progressivity would  really                                                               
make a difference  if companies had decided prior  to the current                                                               
tax  regime in  Alaska that  Alaska's  mature oil  basins were  a                                                               
harvest regime.                                                                                                                 
10:03:44 AM                                                                                                                   
MR. MAYER related that there  are various gradations to determine                                                               
that a jurisdiction  is a harvest region, even  if the investment                                                               
is limited  to a low cost,  easy investment.  The  decision would                                                               
be made  at the corporate  level, in  large part, because  of the                                                               
interplay of costs  and economics of a new  investment.  However,                                                               
the fiscal  system is but one  component.  There are  issues over                                                               
which the  state has no  control, including the  cost environment                                                               
and other competing uses of capital.   He stated that the harvest                                                               
designation is  not made in  the abstract,  but is a  function of                                                               
the  other possible  uses of  capital, returns  available on  the                                                               
uses  of  capital,  and  the returns  available  given  the  cost                                                               
structure and tax  environment in Alaska.  The  question would be                                                               
whether Alaska is  a place to invest and draw  the capital in the                                                               
future, or to invest and draw cash now.                                                                                         
10:06:06 AM                                                                                                                   
CO-CHAIR SEATON asked  if those decisions had been  made prior to                                                               
the current  tax system in Alaska  on a low tax  environment, and                                                               
whether lowering the  taxes would reverse the decision  made in a                                                               
lower tax environment.                                                                                                          
MR.  MAYER expressed  his agreement  that the  oil producers  had                                                               
taken cash  out of  Alaska long before  ACES was  implemented, as                                                               
Alaska was  a cash surplus region.   Therefore, he said  he would                                                               
not suggest  that the  implementation of  ACES created  a harvest                                                               
system where none existed before.   On the other hand, since [the                                                               
implementation  of ACES],  oil prices  have become  significantly                                                               
higher, technological advances  have been made, and  the Lower 48                                                               
is no  longer a harvest regime.   The question, then,  is whether                                                               
there  are projects  that  might  be viable  given  the high  oil                                                               
prices and technology  in Alaska that are less  viable because of                                                               
[Alaska's] fiscal system.                                                                                                       
10:08:01 AM                                                                                                                   
CO-CHAIR FEIGE questioned whether it  is the fiscal regime or the                                                               
actual field  mechanics driving [Alaska]  toward a  harvest mode,                                                               
when  it  could be  moving  in  a  different direction  with  the                                                               
current increase in oil prices.                                                                                                 
10:09:29 AM                                                                                                                   
MR. MAYER  moved on  to slide  10 entitled  "Low Cost  Light Oil:                                                               
Hypothetical 10  mb/d Project  Cashflows ($13/bbl  Capex, $10/bbl                                                               
Opex)," which  presents the stylized  impacts of cash flow  for a                                                               
brand new  development with  a cost structure  of $13  per barrel                                                               
capital expense and  $10 per barrel operating expense.   He noted                                                               
that the  horizontal axis  is at  zero and  anything above  it is                                                               
revenue, as  depicted in  the blue  bars, whereas  anything below                                                               
the  horizontal  axis is  capital  development  costs during  the                                                               
initial  years  and  then  ongoing operating  costs  of  $10  per                                                               
barrel.  He  specified that the black line is  the after tax cash                                                               
flow (ATCF).   The  graph relates  that in  the early  years, the                                                               
difference between  the negative capital expenditure  bar and the                                                               
slightly less negative ATCF line is  the impact of the 20 percent                                                               
capital credit  and the  net overriding  loss credit  under ACES.                                                               
He noted that this capital  credit reduces the negative cash flow                                                               
in  the  early  years,  thereby  improving  the  overall  project                                                               
economics.    However,  if  the costs  are  subtracted  from  the                                                               
revenue  [blue  bar], that  would  amount  to  all the  cash  the                                                               
project produces.   On the other  hand, the ATCF [black  line] to                                                               
the  producer  is "a  relatively  small  portion of  the  overall                                                               
revenues generated from the project."   The difference in that is                                                               
that the  operating and the capital  costs have to be  covered as                                                               
well as the almost 80 percent  of the revenue that goes to either                                                               
the federal  or state government,  which is a  significant amount                                                               
at $100 per barrel.  The amount  left is the ATCF [black line] to                                                               
the producer that  is shown at $100 per barrel  in the graph, but                                                               
a small table  on slide 10 indicates  the NPV and IRR  for oil at                                                               
$40,  $60, and  $100 per  barrel.   A  hypothetical project,  new                                                               
development,  at  a cost  structure  equivalent  to some  of  the                                                               
current existing mature  assets would result in a  hurdle rate of                                                               
return at  about $60 per  barrel and  $100 per barrel  would look                                                               
quite attractive.                                                                                                               
10:13:20 AM                                                                                                                   
MR. MAYER declared that this  graph hypothetically reflects a new                                                               
development with the  cost structure of an existing  field and an                                                               
attractive  rate of  return at  $100 per  barrel.   However, this                                                               
analysis  for   IRR  would  be  different   for  actual  existing                                                               
production as there  is no longer an [upfront]  lump sum creating                                                               
a  return; the  NPV would  be higher,  as there  was no  lump sum                                                               
upfront investment  and only annual capital  and operating costs.                                                               
The  graph  shows  that  this cost  structure  under  ACES  looks                                                               
relatively attractive.                                                                                                          
10:13:56 AM                                                                                                                   
MR.  MAYER moved  to slide  11, "New  Light Oil:  Hypothetical 10                                                               
mb/d  Project Cashflows  ($17/bbl  Capex,  $15/bbl Opex),"  which                                                               
uses  the  same production  profile,  but  increases the  capital                                                               
expenses to $17 per barrel and  the operating expenses to $15 per                                                               
REPRESENTATIVE SADDLER requested clarification  that the blue bar                                                               
below  the ATCF  [black line]  represents the  producer's profit,                                                               
and above the black line represents the government take.                                                                        
MR. MAYER  replied that,  although government  take is  not shown                                                               
explicitly, divisible income  is the difference when  the red and                                                               
yellow  bars are  subtracted from  the blue  bar.   The divisible                                                               
income is all of the cash a project generates.                                                                                  
REPRESENTATIVE SADDLER  asked what the  blue bar above  the black                                                               
line represents.                                                                                                                
MR. MAYER replied that the  blue bars represent the total revenue                                                               
for the project.                                                                                                                
REPRESENTATIVE SADDLER  agreed that  he understood that  the blue                                                               
bar is the  total revenue, but he asked again  for an explanation                                                               
of the blue bar above the ATCF [black line].                                                                                    
MR. MAYER said that the black  line itself represents the ATCF to                                                               
the private investor.                                                                                                           
REPRESENTATIVE SADDLER  asked again  what was represented  by the                                                               
blue bar above the ATCF black line.                                                                                             
MR. MAYER  replied that the  portion of  the blue bars  above the                                                               
black  line  does  not  represent   anything  specifically.    He                                                               
explained  that  if the  operating  expenses  [red bar]  and  the                                                               
capital  expenses [yellow  bar] are  subtracted from  the revenue                                                               
[blue  bar], the  difference between  that result  and the  black                                                               
line, would be  the government take.  In  this hypothetical case,                                                               
the government  take would be a  bit less than 80  percent of the                                                               
10:16:31 AM                                                                                                                   
CO-CHAIR  SEATON  stressed the  need  to  better understand  this                                                               
graph before moving forward with testimony.                                                                                     
10:17:14 AM                                                                                                                   
MR.  MAYER said  that to  explicitly  plot government  take as  a                                                               
third  cost component,  along with  operating and  capital costs,                                                               
there  would   be  another  negative  bar   which  would  roughly                                                               
counterbalance the  blue revenue  bar.  He  pointed out  that, as                                                               
the result  would not be  as negative  as the blue  was positive,                                                               
the difference would  be the ATCF black line.   He clarified that                                                               
the difference  of the total  of the operating cost,  the capital                                                               
expense cost, and  the government take with the  revenue would be                                                               
the "cash that the producer themselves gets."                                                                                   
10:18:11 AM                                                                                                                   
CO-CHAIR SEATON surmised  then that the blue bar  is for revenue,                                                               
and the cash for the producer  is between the black ATCF line and                                                               
the axis.   He asked if the  area of the blue bar  above the ATCF                                                               
black line is equivalent to government take.                                                                                    
MR. MAYER replied  that it is equivalent to  government take plus                                                               
costs.   In response  to Representative  P. Wilson,  he confirmed                                                               
that government take is not included on the graph.                                                                              
REPRESENTATIVE  TUCK related  his  understanding  that the  graph                                                               
doesn't include  any tax structure or  government take structure;                                                               
the graph,  he surmised, is  not explicit to one  taxation system                                                               
versus another rather it is total costs and expenditures.                                                                       
MR. MAYER  specified that  the after tax  cash flow  (ATCF) line,                                                               
which is based on ACES, is specific to a given tax structure.                                                                   
10:20:20 AM                                                                                                                   
MR. MAYER directed attention to the  graphs on slides 11, 12, and                                                               
13 that reflect the same  production profile and revenue as slide                                                               
10,  but  each  slide  depicts increased  operating  and  capital                                                               
expenses.   Referring  to the  graph  on slide  11 entitled  "New                                                               
Light  Oil:  Hypothetical  10  mb/d  Project  Cashflows  ($17/bbl                                                               
Capex, $15/bbl Opex)"  that includes capital expenses  of $17 per                                                               
barrel and  operating expenses of  $15 per barrel,  he determined                                                               
that the acceptable rate of return  begins at the $100 per barrel                                                               
price, whereas  any lower price is  "actively destroying economic                                                               
values."   At $60  oil per  barrel, the NPV  is negative  and the                                                               
rate of  return is 9 percent,  which is less than  the 10 percent                                                               
discount rate that is  used in this case.  The  graph on slide 12                                                               
entitled  "Mid-High Cost  Project: Hypothetical  10 mb/d  Project                                                               
Cashflows   ($25/bbl  Capex,   $15/bbl  Opex)"   depicts  capital                                                               
expenses  of $25  per barrel  and operating  expenses of  $15 per                                                               
barrel,  and states  that  the rate  of return  at  the $100  per                                                               
barrel price is only 11 percent.   Finally, the graph on slide 13                                                               
entitled  "High  Cost  Project:   Hypothetical  10  mb/d  Project                                                               
Cashflows  ($34/bbl Capex,  $15/bbl  Opex),"  reflects a  capital                                                               
expense of  $34 per barrel  and an  operating expense of  $15 per                                                               
barrel, with a 7 percent rate of  return at $100 per barrel.  The                                                               
initial  yellow bars  depicting the  capital being  spent on  the                                                               
project become  more and more  negative and  to obtain a  rate of                                                               
return  on that  a  correspondingly relatively  higher amount  of                                                               
cash flow afterwards  is necessary.  However, the  cash flow only                                                               
changes  marginally after  the initial  investment, which  is why                                                               
the very  low rates of return  are experienced.  In  fact, at $34                                                               
in capex  per barrel,  there is  a negative NPV  at a  10 percent                                                               
discount rate, even at $100 per barrel of oil.                                                                                  
10:22:20 AM                                                                                                                   
CO-CHAIR  SEATON,  directing  attention  to  slide  11  with  the                                                               
$17/bbl capex, posed  a scenario in which there is  new light oil                                                               
new field  development with a  65 percent exploration  tax credit                                                               
and convertible  tax credit.   He then  asked if  the exploration                                                               
tax credits would affect the 2011 and 2012 bars on the graph.                                                                   
MR.  MAYER  responded  that  this  graph  depicts  a  development                                                               
forward basis  and does not  include exploration costs,  only the                                                               
capital  costs   required  for  development  and   the  resulting                                                               
revenue.  He declared that the  20 percent capital credit and the                                                               
25 percent net operating loss  credit should both be applied, but                                                               
he  noted   that,  they   may  be  applied   with  a   year  lag.                                                               
Furthermore,  under  ACES,  those  credits are  spread  over  two                                                               
years.   He reported that the  biggest impact should come  in the                                                               
third year,  2013, after  there have  been a  couple of  years of                                                               
capital spending.                                                                                                               
10:24:11 AM                                                                                                                   
CO-CHAIR  SEATON pointed  out that  one provision  of HB  3001 is                                                               
that the  credit would be  for one  year, instead of  spread over                                                               
two  years, which  he  surmised  would move  the  cash flow  line                                                               
(indisc.) negative for the first two years.                                                                                     
MR. MAYER  agreed that for  a new project  it would make  a small                                                               
difference in the first couple of years.                                                                                        
REPRESENTATIVE TUCK  related his understanding that  on the graph                                                               
development is  represented prior to  the blue bars and  the blue                                                               
bars are production.                                                                                                            
MR.  MAYER expressed  his agreement,  but reminded  the committee                                                               
that there are ongoing capital expenses for drilling.                                                                           
REPRESENTATIVE  TUCK surmised  then  that the  blue revenue  bars                                                               
reflect  the usual  peak and  then subsequent  decline as  an oil                                                               
field moves into production.                                                                                                    
MR.  MAYER replied  yes, noting  that the  decline would  be more                                                               
dramatic  if it  represented volume  rather than  revenues.   The                                                               
graph is an illustration based on  a nominal cash basis, and thus                                                               
there is  about 2.5 percent  inflation, which offsets  the actual                                                               
underlying  decline   of  the  production  by   the  2.5  percent                                                               
inflation and each  year the value of the dollar  is less and the                                                               
revenue from it is 2.5 percent  greater.  He pointed out that the                                                               
graph  is  a  stylized  hypothetical  profile  which  could  look                                                               
different   under  different   circumstances,   or  relative   to                                                               
unconventional production fields.   In certain places  one may be                                                               
able to  achieve a  production profile with  a faster  and higher                                                               
peak and  a faster  decline, which is  in many  ways economically                                                               
preferable.  Such  a situation would mean that  one could recover                                                               
cash  much   faster,  which  improves  one's   economic  metrics.                                                               
However, production  profiles for  Oooguruk, for example,  do not                                                               
look particularly like earlier "peakers"  with sharp declines but                                                               
rather steadier  producers with  a shallower  decline and  a less                                                               
significant initial peak, which  makes projects more economically                                                               
challenged than  those with  higher initial  production.   On the                                                               
other hand,  the unconventional  resource plays  in the  Lower 48                                                               
would  require  less  initial  capital for  any  given  level  of                                                               
spending but  more ongoing capital  spending throughout  the life                                                               
of  the  project  as  more   wells  are  drilled,  which  is  not                                                               
necessarily the case in conventional oil development.                                                                           
10:28:04 AM                                                                                                                   
MR. MAYER, referring  to slide 13, stated that as  the yellow bar                                                               
[capital   expenses]  increases   the  corresponding   cash  flow                                                               
[revenue]  needed to  offset  the initial  expenses  needs to  be                                                               
higher, but is not.   As is evidenced on the  slide, the rates of                                                               
return  and present  values  are steadily  lower.   Referring  to                                                               
slide 12,  Mr. Mayer said  that the  $25 per barrel  capital cost                                                               
was not attractive to oil producers,  even at a price of $100 per                                                               
barrel, and,  noting slide 13,  said that $34 per  barrel capital                                                               
cost is "actively destroying economic  value," even at a price of                                                               
$100 per barrel.                                                                                                                
10:29:05 AM                                                                                                                   
MR. MAYER,  moving on to  slide 14 entitled "Project  Value Under                                                               
ACES:  Cost  and  Price Sensitivity",  compared  project  present                                                               
value  over  time  under  a   number  of  different  cost  cases,                                                               
including  low  cost light  oil  and  capital  costs of  $17  per                                                               
barrel,  $25 per  barrel, and  $34 per  barrel.   He pointed  out                                                               
that,  as costs  increase, the  break even  points of  these high                                                               
cost developments increase, such that  the $25 per barrel capital                                                               
cost did not  break even until a price of  almost $90 per barrel.                                                               
In  terms of  the internal  rate  of return,  the graph  entitled                                                               
"IRR" on  slide 14 illustrates that  a 15 percent rate  of return                                                               
was  not  achieved until  the  price  per barrel  was  $130-$140,                                                               
whereas a  constant government  take would  achieve a  15 percent                                                               
rate  of  return at  a  price  less than  $100  per  barrel.   He                                                               
declared that  ACES works  well for  existing, mature,  low cost,                                                               
light  oil fields  that capture  the most  economic rent  for the                                                               
government  from the  production while  ensuring that  production                                                               
remains ongoing and  economic.  However, this  structure could be                                                               
a significant  inhibitor for developing new  projects with higher                                                               
10:31:27 AM                                                                                                                   
REPRESENTATIVE P.  WILSON asked how  much this would change  at a                                                               
price of $120 per barrel.                                                                                                       
MR. MAYER  explained that  the horizontal axis  of each  graph is                                                               
the oil  price.   The graphs illustrate  the sensitivity  of four                                                               
different  projects of  project value  measured by  two different                                                               
economic metrics,  NPV and IRR,  in different  price environments                                                               
and what the specified price  increase does to the project value.                                                               
The bending  of the curve, he  pointed out, is the  impact of the                                                               
progressivity such  that the marginal benefit  of each additional                                                               
dollar is less and less.                                                                                                        
10:33:00 AM                                                                                                                   
MR.  MAYER, in  response to  Representative P.  Wilson, explained                                                               
that when  oil is  priced at  $120 per  barrel, the  economics is                                                               
challenging for  all the heavier  [oil] projects, except  for low                                                               
cost light oil.   For example, in  the $34 capex case  it has yet                                                               
to break  even on a  10 percent  discount rate, and  therefore it                                                               
has negative NPV at the $120 price per barrel.                                                                                  
REPRESENTATIVE  P.  WILSON opined  that  it  would be  easier  to                                                               
understand this if the current prices were used.                                                                                
MR. MAYER reminded the committee that  the aim of the chart is to                                                               
show a  broad range  of prices  and how,  as prices  changes, the                                                               
value of  the project  is impacted.   The  curvature is  from the                                                               
progressivity, which  takes away the  upside of high  oil prices.                                                               
The chart  reflects that the  higher cost cases impact  the basic                                                               
breakeven economics  of the project,  which makes  it challenging                                                               
for  a project  to  meet the  basic hurdle  rate  for returns  on                                                               
capital, not  to mention being cost  competitive with investments                                                               
in other  jurisdictions.  In  further response  to Representative                                                               
P.  Wilson, Mr.  Mayer explained  that the  IRR chart  reflects a                                                               
healthy rate of return, approaching  25 percent, for the low cost                                                               
light oil  project at  a price  of $120  per barrel,  whereas the                                                               
most expensive development, $34  per barrel for capital expenses,                                                               
results in less than a 10 percent rate of return on the project.                                                                
10:36:06 AM                                                                                                                   
CO-CHAIR  SEATON   related  his  understanding  that   the  chart                                                               
represents  a   stand-alone  project.     He  also   related  his                                                               
understanding that under  ACES, a high cost  environment would be                                                               
written off  against existing production,  which would  lower the                                                               
tax rate on the oil.  He  then asked how [ACES] changes the chart                                                               
for incremental production  at the higher tax rate  when there is                                                               
no  higher cost  investment  to  lower the  overall  tax rate  by                                                               
lowering the marginal tax rate on progressivity.                                                                                
MR. MAYER  returned attention  to slide  13 and  said that  it is                                                               
related to  the impact  of the  capital credits,  particularly in                                                               
the early  years when there  is very  little oil production.   He                                                               
said that on a stand-alone basis,  for a company with no existing                                                               
production, the  most credit that  could be claimed would  be the                                                               
20 percent capital credit and  the 25 percent net overriding loss                                                               
credit.   He stated that this  would be the same  for an existing                                                               
producer in  a price environment without  progressivity; however,                                                               
once  the  existing  producer has  triggered  progressivity,  the                                                               
capital could  be written down at  a higher rate, because  of the                                                               
higher rate that  comes with progressivity.  He  declared that in                                                               
the first few  years an ATCF line would appear  less negative for                                                               
an existing  producer if this  was viewed as a  stand-alone, with                                                               
the ability to write it off against the existing portfolio.                                                                     
10:38:52 AM                                                                                                                   
MR. MAYER, in further response  to Co-Chair Seaton, said that the                                                               
curves might shift  up a teeny bit if the  existing production is                                                               
considered with higher costs and  the marginal tax rate, but that                                                               
overall there would be no change in the deduction.                                                                              
10:39:04 AM                                                                                                                   
REPRESENTATIVE  GARDNER  asked  if  the  model  for  capital  and                                                               
operating  expenses  used by  Mr.  Mayer  is in  anticipation  of                                                               
realistic expenses.                                                                                                             
MR. MAYER  explained that the  figures were similar, as  they are                                                               
an  average of  all capital  expenses divided  by all  production                                                               
across the  North Slope in any  given year.  He  allowed that the                                                               
average did  hide a lot  of variation, as projects  would differ.                                                               
He explained  that, for  an aggregate  analysis to  the generated                                                               
revenue of a  taxation system, "plugging in that  sort of average                                                               
number  is  a  good  way   of  getting  an  approximate  answer."                                                               
However, just looking  at the aggregate did  conceal the enormous                                                               
disparity between the capital expenses  required for existing and                                                               
new developments.                                                                                                               
10:41:41 AM                                                                                                                   
REPRESENTATIVE GARDNER  asked to  verify that the  evaluation and                                                               
calculation of NPV and IRR  for a prospective investment does not                                                               
include  the state  participation  in capital  costs.   She  also                                                               
asked  why that  should  be the  case when  the  decision is  not                                                               
impacted by it.                                                                                                                 
MR. MAYER opined  that project economics are  determined by after                                                               
tax  cash  flow (ATCF),  which  credits  definitely impact.    He                                                               
pointed out  that Alaska is  unusual as  its credits are  paid at                                                               
the outset, as opposed to  being deducted from future production,                                                               
which has  a significant impact  on project economics.   Although                                                               
Alaska is  a high government-take  regime, these  upfront credits                                                               
work for low cost production.                                                                                                   
REPRESENTATIVE  GARDNER, confirming  that the  prompt payment  of                                                               
credits  is  "a  plus  in  an  evaluation,"  asked  whether  [the                                                               
credits] are included in NPV or IRR.                                                                                            
10:43:06 AM                                                                                                                   
MR. MAYER  established that the  credits are included in  the NPV                                                               
and the IRR and are implied by  the ATCF black line on the chart.                                                               
Directing  attention to  slide 13,  he  pointed out  that to  the                                                               
extent in the early years that  the black line is not as negative                                                               
as the capital  expenses is the positive impact  generated by the                                                               
credits and improves the economic metrics of the project.                                                                       
CO-CHAIR SEATON  suggested that  this same  question be  asked to                                                               
the upcoming oil industry witnesses for verification.                                                                           
10:44:17 AM                                                                                                                   
REPRESENTATIVE  TUCK, directing  attention to  slide 14,  related                                                               
his understanding  that the low  cost light oil is  equivalent to                                                               
the $13 per barrel  costs.  He then asked if all  of the lines on                                                               
the graph are for newly developed fields or wells.                                                                              
MR. MAYER replied  that they represent newly  developed fields at                                                               
different cost structures.                                                                                                      
REPRESENTATIVE  TUCK surmised  then  that  these aren't  existing                                                               
fields but  rather are fields in  which the find is  known and it                                                               
is set to be developed and come online.                                                                                         
MR. MAYER  agreed, and explained  that the  red line for  the low                                                               
cost light  oil is used  to compare the  hypothetical development                                                               
of a new  project at that cost  structure in order to  be able to                                                               
compare it to the other cost structures.                                                                                        
10:45:23 AM                                                                                                                   
MR. MAYER summarized that slide  14 reflects ACES in various cost                                                               
environments.  Moving  on to slide 15 entitled  "ACES - Effective                                                               
as a  Harvest Area  Fiscal Regime," he  declared that  ACES works                                                               
well as  a harvest regime,  particularly when the policy  goal is                                                               
for maximum extraction and economic  rent and the belief is there                                                               
is no significant additional oil  production, regardless of price                                                               
or  technological  advancements.    However,  ACES  inhibits  the                                                               
development of new projects and  resources that have higher costs                                                               
than the  existing production base for  a number of reasons.   As                                                               
has been mentioned, ACES is  not progressive with regard to costs                                                               
and  it  is  a  high  government take  system  that  has  a  high                                                               
government  take,  even   for  very  high  cost   projects.    He                                                               
acknowledged that ACES has capital  credits that go far in making                                                               
a  lot of  existing capital  work and  takes projects  from a  15                                                               
percent  natural  decline  of  fields   to  a  6  percent  level.                                                               
Although  that combined  with the  high government  may encourage                                                               
some of  the renewal capital  expenditures, it is not  enough for                                                               
new  high cost  development to  be economic  or competitive  in a                                                               
broader   global  company   portfolio.     Furthermore,  although                                                               
progressivity  can be  effective in  capturing maximum  rent with                                                               
low cost projects, it can  have a "significant detrimental impact                                                               
on break  even prices  and hurdle  rates of  return, and  all the                                                               
rest for high cost projects at current oil prices."                                                                             
10:47:58 AM                                                                                                                   
MR. MAYER,  moving on to slide  16 entitled "Options to  Spur New                                                               
Developments,"   suggested   there  are   different   approaches,                                                               
including    uniform   lowering    of    government   take    and                                                               
differentiation  between old  and new  production.   In order  to                                                               
lower the  uniform government take one  can bracket progressivity                                                               
as  was  the  case  with  HB 110,  increase  the  thresholds  for                                                               
progressivity,  reduce  the  coefficients on  progressivity,  cap                                                               
progressivity at  different rates,  or lower  the base  rate tax.                                                               
He offered that  there are some advantages to  a lower government                                                               
take; as ACES  is already a complex system,  thereby lowering the                                                               
government  take  would  not  add  any  increased  complexity  or                                                               
ambiguity with  regard to  which projects  apply for  the various                                                               
tax  regimes.     He  declared  that  this   could  even  present                                                               
opportunities for simplification.                                                                                               
10:49:50 AM                                                                                                                   
MR. MAYER  then pointed out  that a big disadvantage  of proposed                                                               
HB 3001  is that  incentivizing new  high cost  resources through                                                               
lowering government take alone  would require lowering government                                                               
take quite  a lot, and  thus give back substantial  economic rent                                                               
on  the  already  producing low-cost  assets  that  were  clearly                                                               
10:50:16 AM                                                                                                                   
MR. MAYER  reflected that the  simplest approach, with  the least                                                               
ambiguity  and  possibility  for misalignment  for  unintentional                                                               
consequences,  requires   returning  the   most  cash   back  for                                                               
activities that  are currently economic.   An alternative  to the                                                               
aforementioned  is to  find ways  of differentiating  between old                                                               
and new production.   He acknowledged that it  is relatively easy                                                               
to differentiate  completely new  production from areas  that are                                                               
not  currently  in production,  which  is  included in  HB  3001.                                                               
Although  it   is  more   difficult  to   differentiate  existing                                                               
production that  is the result  of existing levels  of investment                                                               
in legacy  fields versus production from  increased investment in                                                               
the  legacy fields,  it could  be achieved  by defining  the base                                                               
decline  rate  and  applying  a   significantly  lower  level  of                                                               
taxation.  The  regulatory process could also be used  to apply a                                                               
lower  rate  of tax,  but  not  to the  base  production.     The                                                               
advantage of the  regulatory process is that it  does not require                                                               
returning  a  lot  of  cash  for  existing  activities  that  are                                                               
currently   economic.       However,    it   is    more   complex                                                               
administratively  and increases  the opportunities  for "perverse                                                               
incentives,  whether  that  be   ...  alignment  of  partners  on                                                               
different projects ...."                                                                                                        
10:53:49 AM                                                                                                                   
MR.  MAYER provided  that  there  is a  third  option to  further                                                               
enhance some  of the  cost progressivity  of ACES,  although this                                                               
would also  increase the already  high complexity and  opacity of                                                               
the  system.    He  declared   that  almost  any  solution  would                                                               
exacerbate existing  problems of  relatively poor  incentives for                                                               
cost control that currently exist.   He emphasized that there are                                                               
no  perfect answers,  as it  is  a policy  trade-off between  the                                                               
degree  to which  one is  willing  to return  cash for  currently                                                               
economic  activities versus  the  degree to  which  one tries  to                                                               
avoid  that   and  reaches   greater  complexities   and  greater                                                               
likelihood of "perverse incentives" by  trying to create a system                                                               
that preserves as much cash  as possible for the government while                                                               
providing significant new incentives for development.                                                                           
10:55:43 AM                                                                                                                   
The committee took an at-ease from 10:55 a.m. to 11:21 a.m.                                                                     
11:21:11 AM                                                                                                                   
CO-CHAIR  SEATON brought  the committee  back to  order at  11:21                                                               
11:21:20 AM                                                                                                                   
MR. MAYER  moved on to  the section of the  presentation entitled                                                               
"Analysis  of  HB 3001."    He  directed  attention to  slide  18                                                               
entitled "Options  to Spur New  Developments," which  he declared                                                               
to  be a  range of  imperfect options  to spur  new developments,                                                               
with  specific attention  to the  uniform lowering  of government                                                               
take versus  the differentiation between old  and new production.                                                               
He  stated  that  proposed  HB   3001  overwhelmingly  takes  the                                                               
approach of  uniform lowering of  government take, but  with more                                                               
complexity by  putting in  place a  gross revenue  exclusion that                                                               
applies in calculating  the progressive tax.   The overall effect                                                               
is to  reduce the progressive tax  on the existing base  of North                                                               
Slope  production.   The legislation  also includes  an allowance                                                               
for new oil production areas  outside the legacy fields, which is                                                               
from the Senate's  initiative at the end of  the regular session.                                                               
The allowance  for new  oil production  areas outside  the legacy                                                               
fields  uses a  gross revenue  exclusion at  a lower  rate, while                                                               
applying  both to  the 25  percent base  tax and  the progressive                                                               
tax, all of  which results in the uniform  lowering of government                                                               
take.   He then  turned to  the approach of  HB 3001  that offers                                                               
enhancements  to  the cost  progressivity  of  ACES and  said  it                                                               
increases the  capital credit from  20 percent to 40  percent for                                                               
well capital expenses.                                                                                                          
11:23:28 AM                                                                                                                   
MR. MAYER then  directed attention to slide 19  entitled "HB 3001                                                               
-  Main Aspects,"  which specifies  that the  main aspects  of HB                                                               
3001,  as follows:   a  30  percent gross  revenue exclusion  for                                                               
production from new North Slope  fields, which would apply to the                                                               
calculation of both  the 25 percent base tax  and the progressive                                                               
tax  amounts,  but would  not  apply  to the  progressivity  rate                                                               
calculation and  would apply for  10 years;   a 40  percent gross                                                               
revenue  exclusion for  all other  North Slope  production, which                                                               
would  only  apply to  the  calculation  of the  progressive  tax                                                               
amount,  not   to  the  base   tax  or  the   progressivity  rate                                                               
calculation and  would apply  indefinitely.   Additional features                                                               
of HB 3001, are as follows:   the maximum progressive tax rate is                                                               
capped  at 60  percent  instead  of 75  percent;  the well  lease                                                               
expenditure  credit of  40 percent  would now  be applied  to the                                                               
North  Slope; and  the capital  credits  could be  redeemed in  a                                                               
single year rather than spread over two years.                                                                                  
11:24:44 AM                                                                                                                   
MR.  MAYER reviewed  slide 20  entitled "Understanding  the Gross                                                               
Revenue  Exclusions."   He said  that the  framework used  by the                                                               
Department  of  Revenue (DOR)  in  the  Revenue Sources  Handbook                                                             
considers the  total annual production and  subtracts the royalty                                                               
barrels to reach the taxable  barrels.  He compared the resulting                                                               
calculations under  ACES versus  proposed HB  3001.   The results                                                               
are  the same  for the  gross value  at the  point of  production                                                               
(GVPP), which  was the  gross revenue  from production  minus the                                                               
transportation  costs.    He  explained   that  the  capital  and                                                               
operating   expenses  were   also  deducted   to  determine   the                                                               
production  tax value  (PTV), which  is the  same under  ACES and                                                               
HB 3001 for both existing and new fields.                                                                                       
11:26:29 AM                                                                                                                   
MR. MAYER pointed  out that he had included  the calculations for                                                               
both new  fields and  existing fields under  proposed HB  3001 to                                                               
show how  they would  work and  how they  would differ  from each                                                               
other and  ACES.   He pointed  out that the  bottom line  [of the                                                               
chart]  represents the  likely  revenue from  the  state in  2013                                                               
under ACES and HB 3001 for  existing fields.  However, the bottom                                                               
line  of  the  [column  entitled  "HB  3001  New  Fields"]  is  a                                                               
hypothetical bottom line  that would apply if the  regime for new                                                               
fields  was applied  to all  production.   He clarified  that the                                                               
[column entitled "HB 3001 New  Fields"] is included to illustrate                                                               
how the calculation works.  With  a PTV of $12,385 million, under                                                               
ACES that is the PTV used  in calculating the 25 percent base tax                                                               
amount and  it's the amount  used in calculating  the progressive                                                               
tax.   He  then  explained  that 25  percent  of $12,385  billion                                                               
amounts to about $3 billion under  ACES and if the 16.72 percent,                                                               
which is the progressivity that  would apply at the 2013 forecast                                                               
number, is  multiplied by  the PTV, it  amounts to  a progressive                                                               
tax  just over  $2  billion  and a  total  production tax  before                                                               
credits of about $5.167 billion.                                                                                                
11:28:08 AM                                                                                                                   
MR. MAYER said, in comparison to  HB 3001, the calculation of the                                                               
25 percent  base production  tax is  the same  for both  ACES and                                                               
HB 3001 for existing fields such  that the $12,385 billion PTV is                                                               
multiplied  by 25  percent, which  amounts to  $3,096 billion  in                                                               
base  tax.    The  difference,  however,  is  the  amount  that's                                                               
calculated for the progressive portion  of the profits based tax,                                                               
which amounts  to $12,285 billion  under ACES and  $5,423 billion                                                               
under HB  3001 [existing fields].   Under HB 3001, 40  percent of                                                               
the GVPP  is taken from  the PTV to reach  $5,423 billion.   As a                                                               
result,  the progressive  production tax  under HB  3001 is  much                                                               
less  than  under  ACES,  and   thus  the  total  production  tax                                                               
liability before credits decreases from  about $5.1 billion to $4                                                               
billion.   Under  [HB  3001] there  is also  an  increase in  the                                                               
credits, which he  partly attributed to the  question of claiming                                                               
credits for one  year versus two years but mostly  because of the                                                               
40 percent  well credit.   Therefore, the  overall impact  to the                                                               
state  amounts to  an estimated  $4.7  billion of  income to  the                                                               
state  in 2013  through the  production tax  in 2013  versus $3.2                                                               
billion  under HB  3001 for  existing  production.   In terms  of                                                               
calculating  the   exclusion  for   completely  new   areas,  the                                                               
difference is  that gross revenue  adjustment is calculated  at a                                                               
lower level of  30 percent rather than 40 percent  but it applies                                                               
to both the  production tax value as it is  used to calculate the                                                               
base and  the progressive  tax.  Therefore,  the 25  percent base                                                               
production tax  for existing fields  is significantly  lower than                                                               
it is in  the aforementioned two cases because of  the 30 percent                                                               
gross revenue exclusion.  The  progressive tax [under HB 3001 for                                                               
new  fields] is  higher than  it is  under HB  3001 for  existing                                                               
fields but  lower than it  is under  ACES because the  30 percent                                                               
exclusion but  not the  40 percent exclusion  applies.   The fact                                                               
that it applies to the base  as well as the progressive tax means                                                               
that overall  the tax  liability is  lower than  is the  case for                                                               
HB 3001  for   existing  fields.     Therefore,  in   the  purely                                                               
hypothetical  case [HB  3001 for  new fields]  applying a  regime                                                               
that would  apply to  all production  would result  in production                                                               
taxes of  oil credits decreasing  from $5.1 billion  [under ACES]                                                               
to  $4  billion   [under  HB  3001  for   existing  fields],  and                                                               
ultimately to $2.9 billion [under HB 3001 for new fields].                                                                      
11:31:30 AM                                                                                                                   
CO-CHAIR   SEATON,   referring   to   slide   19,   related   his                                                               
understanding that  the 30 percent  gross revenue  exclusion does                                                               
not apply to the progressivity rate calculation.                                                                                
MR.  MAYER  concurred,   and  stated  that  it   applies  to  the                                                               
progressive tax but not to  the rate calculation.  He highlighted                                                               
the importance  of the fact  that the  16.72 percent tax  rate is                                                               
the same  for all three scenarios  and that the price  per barrel                                                               
is  calculated by  dividing  a  PTV by  the  number of  available                                                               
barrels, which  amounts to  PTV per  barrel of  $71.80.   He said                                                               
that this  calculation is done  before the GVPP  allowance, which                                                               
is the reason it does not  affect the progressive rate.  However,                                                               
in the new  fields case [the 30 percent  gross revenue exclusion]                                                               
does impact  the progressive tax  because although the  rate does                                                               
not change, the taxable base does by the 30 percent.                                                                            
REPRESENTATIVE SADDLER inquired as to  whether saying that the 30                                                               
percent   gross  revenue   exclusion  does   not  apply   to  the                                                               
progressivity rate  calculation means  it does  not apply  to the                                                               
gross revenue  as reduced by  progressivity.  In response  to Mr.                                                               
Mayer, Representative  Saddler clarified that he  is referring to                                                               
new fields.                                                                                                                     
MR.  MAYER replied  that it  applies  to the  calculation of  the                                                               
progressive tax  base, but it  does not  change the rate  that is                                                               
calculated through progressivity.                                                                                               
REPRESENTATIVE SADDLER surmised then  that the 30 percent applies                                                               
to  the  gross  revenue,  exclusive  of  the  progressivity  rate                                                               
MR. MAYER  clarified that the  amount of progressive tax  paid is                                                               
lower  because  the  taxable  base   is  less,  even  though  the                                                               
percentage is the same.                                                                                                         
11:33:57 AM                                                                                                                   
CO-CHAIR SEATON surmised  that 30 percent of the  barrels are not                                                               
taxable and the rate calculation based on price does not change.                                                                
MR. MAYER  expressed his  agreement, but  noted that  although 30                                                               
percent of  the revenue is  not taxable, the cost  deduction that                                                               
came from those barrels remains.                                                                                                
11:34:22 AM                                                                                                                   
REPRESENTATIVE  SADDLER, referring  to slide  20, inquired  as to                                                               
the  basic assumptions  of the  hypothetical  case presented  for                                                               
HB 3001 new fields.                                                                                                             
MR. MAYER replied  that the column entitled "HB  3001 New Fields"                                                               
is hypothetical in so far as  there are no known fields producing                                                               
in 2013 that meet the criteria  for new production under HB 3001.                                                               
Therefore, the  figures merely reflect how  the calculations work                                                               
as there is no production that is new.                                                                                          
11:35:14 AM                                                                                                                   
CO-CHAIR  SEATON  inquired as  to  whether  the exclusion  of  30                                                               
percent of  the oil from  taxation allows  the cost to  be offset                                                               
against the  other 70 percent  and essentially becomes  an uplift                                                               
or escalation  of costs by 30  percent.  In other  words, instead                                                               
of making  that calculation on  the production tax value,  the 30                                                               
percent is  taken prior to  the costs  and basically allows  a 30                                                               
percent increase in the cost per barrel that will be taxed.                                                                     
MR. MAYER  offered his belief  that the "basic intuition  of what                                                               
you said  rings true to  me," although  he expressed the  need to                                                               
run a few numbers before providing a conclusive answer.                                                                         
11:36:29 AM                                                                                                                   
REPRESENTATIVE TUCK  returned attention to  slides 16 and  18 and                                                               
the  statement   that  ACES  inhibits  the   development  of  new                                                               
projects.  He also recalled that  it is possible for the State of                                                               
Alaska to go  "upside down" on these tax credits.   He questioned                                                               
how that's not an incentive to go into these new oil fields.                                                                    
MR.  MAYER agreed  that there  could be  cases in  which the  tax                                                               
credits,  on a  discounted basis,  could outweigh  the production                                                               
tax from  those credits in  the future.  However,  the government                                                               
take across  the entire  system still does  not change  very much                                                               
whether it  is a low  cost or a high  cost project.   He declared                                                               
that the initial investment by  the state through the tax credits                                                               
pays off through taxes and  royalties on future production and in                                                               
almost  all  cases  the  cash  flows/income  from  those  revenue                                                               
streams is usually greater than  the investment from the credits.                                                               
For example, if the initial  tax credits are considered a roughly                                                               
35 percent tax  credit investment in the project,  the cash flows                                                               
from those are  usually significantly greater than  35 percent of                                                               
other project cash  flows, though the production tax  itself in a                                                               
very high  cost project may  not be.   That said, Mr.  Mayer said                                                               
that he has  not observed many cases of  consistently high enough                                                               
costs  that overall  the  value  from the  project,  just in  the                                                               
production tax,  would not be  greater than the  initial credits.                                                               
He reminded the  committee that high costs mean  that there isn't                                                               
very much  divisible income because  much of the barrel  is taken                                                               
out in costs.  There is a cost  and price case for which the 12.5                                                               
percent  royalty  alone  would  take all  the  divisible  income.                                                               
Therefore, some high  cost projects need a  lower government take                                                               
than the system  offers in order to be economic,  but the problem                                                               
is   providing  incentives   without   sacrificing  the   overall                                                               
government take structure.                                                                                                      
REPRESENTATIVE TUCK surmised then that  it is a greater advantage                                                               
to an  existing producer than  to a new developer  for investment                                                               
in heavy oil.                                                                                                                   
MR. MAYER expressed  agreement, as there is a  bigger benefit for                                                               
writing  off those  costs against  an existing  progressivity tax                                                               
base as opposed to the tax credits.                                                                                             
11:41:04 AM                                                                                                                   
REPRESENTATIVE  TUCK asked  whether  reserve taxes  are a  viable                                                               
option for increasing production.                                                                                               
MR. MAYER  answered that he  is aware  of reserve taxation  as an                                                               
idea in  principle, but not  aware of many regimes  that practice                                                               
it.   It is more common  for jurisdictions to include  into lease                                                               
agreements more  powerful relinquishment clauses  for development                                                               
within  a given  time  period  or the  rights  to  the asset  are                                                               
relinquished.    He said  he  has  not  seen enough  modeling  on                                                               
reserve  taxation to  offer any  insight to  the efficacy  of it.                                                               
However, he  offered his belief  that it  is more likely  to have                                                               
adverse impacts.                                                                                                                
11:43:31 AM                                                                                                                   
REPRESENTATIVE SADDLER,  addressing slide  20, asked if  there is                                                               
any  significance to  the red  and blue  colors assigned  various                                                               
MR.  MAYER explained  that the  idea  is to  illustrate in  color                                                               
where  there had  been a  change due  to the  application of  the                                                               
allowance.   The three numbers  in red are  the result of  the 30                                                               
percent gross  revenue exclusion applied to  the base calculation                                                               
and the  blue numbers represent  the resulting  tax calculations,                                                               
whereas the black numbers are "common across all regimes."                                                                      
11:46:21 AM                                                                                                                   
MR. MAYER,  returning to his presentation,  directed attention to                                                               
slide 21  entitled "Purpose of Gross  Revenue Exclusion Concept."                                                               
He  began by  highlighting  that  the ACES  production  tax is  a                                                               
profit-based  tax as  it  taxes wellhead  revenue  net of  costs.                                                               
Under the  ACES structure,  varying the base  amount of  tax, the                                                               
progressive rates, or anything to  do with the production tax for                                                               
different streams of production  is extremely difficult and would                                                               
require "ring  fencing" to allocate different  costs to different                                                               
streams  of production.   The  aforementioned adds  complexity to                                                               
ACES.   He reported that the  basic concept of the  Gross Revenue                                                               
Exclusion  would allow  a reduction  in government  take on  some                                                               
streams of  production, but not  others, without  the requirement                                                               
for  "ring fencing."    He  explained that  it  could reduce  the                                                               
progressive  tax without  having to  account for  the costs  that                                                               
accompany a  particular asset, by  subtracting the  gross revenue                                                               
as  an  allowance  in  calculating  the  overall  production  tax                                                               
liability for a producer.  The  aforementioned would be used as a                                                               
way to  reduce the base  in the  progressive tax on  a particular                                                               
stream of  production that  is desired to  be incentivized.   Mr.                                                               
Mayer  reminded   the  committee  that  the   Senate  worked  the                                                               
aforementioned into  its legislation  at the  end of  the regular                                                               
session as  a way  in which  to address  incentivizing completely                                                               
new  areas  without ring  fencing.    However,  if one  wants  to                                                               
utilize  ring  fencing,  then progressivity  can  be  reduced  or                                                               
eliminated altogether for specific  assets while maintaining a 25                                                               
percent base.   If  one wants  to avoid  ring fencing,  the Gross                                                               
Revenue  Exclusion   is  a  useful  concept   to  obtain  similar                                                               
economics over  the life  cycle by taking  out the  gross revenue                                                               
that  comes  from a  particular  stream  of production  from  the                                                               
producer's  overall  tax liability.    He  said that  this  would                                                               
provide a simple  manner in which to calculate the  impact of new                                                               
assets   without  needing   to  know   what  costs   went  where.                                                               
Interestingly,  HB  3001  applies  the  gross  revenue  exclusion                                                               
across all North Slope fields.   He noted that [the gross revenue                                                               
exclusion] was only  applied to the progressive tax  not the base                                                               
tax, which basically results in  lowering progressivity.  Drawing                                                               
from   his   initial   analysis,   he   related   that   reducing                                                               
progressivity from .4 to .15  [percent] would result in about the                                                               
same  impact  as  the  40  percent  gross  revenue  allowance  in                                                               
HB 3001,  and would  do so  in a  simpler, more  transparent way.                                                               
The benefit of  a gross revenue exclusion is the  ability to only                                                               
apply the  benefit to a specific  stream of production and  it is                                                               
easy to  implement within the  structure of  ACES.  "It  seems to                                                               
me,  an odder  way of  achieving the  aim of  lowering government                                                               
take  overall  when  one  could  achieve the  same  aim  just  by                                                               
reducing the progressivity coefficient," he opined.                                                                             
11:51:08 AM                                                                                                                   
CO-CHAIR  SEATON,  referring  to  modeling, inquired  as  to  how                                                               
viewing  a 30  percent  exclusion  as being  equivalent  to a  30                                                               
percent increase in costs is  different than having a higher cost                                                               
MR.  MAYER  answered that  [viewing  a  30 percent  exclusion  as                                                               
equivalent to  a 30 percent  increase] increases benefits  to the                                                               
producer  from the  higher  costs, particularly  early  on.   For                                                               
instance, the  overall economics  of a  30 percent  gross revenue                                                               
allowance  for new  production under  HB 3001  versus eliminating                                                               
progressivity  under  ACES  for  the  early  years  looks  fairly                                                               
similar  to the  producer,  in  terms of  net  present value  and                                                               
internal rate  of return.   However, the overall  government take                                                               
on a  discount basis is  probably higher under the  gross revenue                                                               
exclusion because  the impact of  the exclusion is that  the cash                                                               
flow  looks better  in the  early  years.   Capital expenses  are                                                               
higher in  the early  years of production,  while there  are more                                                               
operating costs  in the  later years.   He  pointed out  that the                                                               
high capital  expenses combined with the  gross revenue exclusion                                                               
results in  low tax payments in  the early years.   However, when                                                               
all that is left is the operating  cost, the level of tax paid is                                                               
probably   more  than   would  be   paid  under   ACES  with   no                                                               
progressivity.  The fact that the  benefit is front loaded to the                                                               
early  years makes  the project  economics look  relatively good,                                                               
while  the  overall  undiscounted  government  take  is  probably                                                               
higher than  it would be, for  instance, under a flat  25 percent                                                               
base tax.                                                                                                                       
11:53:36 AM                                                                                                                   
MR.  MAYER then  turned to  slide  22 entitled  "FY 2013  Revenue                                                               
Comparison," which charts  the overall impacts on  revenue to the                                                               
State of Alaska from HB 3001  with oil prices ranging from $40 to                                                               
$200 per  barrel.   He listed the  various categories  to include                                                               
Production Tax, Total State Take,  Total Government Take, Cash to                                                               
Companies, and  FY 2013 %  Government Take.   He then  pointed to                                                               
the  example in  the  chart  of the  revenue  generated from  the                                                               
production  tax at  $110 per  barrel, which  relates the  revenue                                                               
generated:   Under ACES  $4.782 billion;  under HB  3001, without                                                               
the 40 percent  well credit, $3.597 billion; under  HB 3001, with                                                               
the 40  percent well  credit, $3.302 billion;  and under  HB 110,                                                               
$3.210 billion.                                                                                                                 
11:55:42 AM                                                                                                                   
REPRESENTATIVE TUCK  asked whether the examples  are for existing                                                               
production or for new fields.                                                                                                   
MR. MAYER replied  that this is the same  high level calculations                                                               
the Department of  Revenue presents in its  Revenue Sources Book,                                                             
in particular  in the appendix pages.   "If one assumes  away all                                                               
of the  data, all  of the complexity  of different  producers and                                                               
different fields and  different costs, and just says  'We can get                                                               
pretty close  to the  overall tax  liability here,  from assuming                                                               
all of  this production  comes from one  enormous field  with one                                                               
owner, with  ... a cost that's  equal to the average  cost of the                                                               
Slope.'"  In  that case it's going  to be around $13  a barrel in                                                               
capex and ... under  $10 a barrel in opex, if you do  it on a per                                                               
barrel rather than a per taxable barrel basis."                                                                                 
11:56:50 AM                                                                                                                   
REPRESENTATIVE SADDLER inquired as to the amount of production.                                                                 
MR. MAYER  replied that  the total  production amount  equals the                                                               
2013  DOR  forecast   of  555,000  barrels  per   day  or  annual                                                               
production of just over 200 million barrels.                                                                                    
REPRESENTATIVE SADDLER surmised then that  slide 22 is a stylized                                                               
chart  based  on 555,000  barrels  of  daily production,  with  a                                                               
capital expense  of $13 per  barrel, and an operating  expense of                                                               
$10 per barrel.                                                                                                                 
MR. MAYER expressed  his agreement, and noted  that these figures                                                               
were all  based on  Department of Revenue  fiscal year  (FY) 2013                                                               
11:57:51 AM                                                                                                                   
MR. MAYER,  continuing his  review of slide  22, pointed  out the                                                               
similarity  in the  revenue generated  by both  ACES and  HB 3001                                                               
without the  40 percent well credit  when oil prices are  $60 per                                                               
barrel and  below, as progressivity  has not yet  been triggered.                                                               
The  difference  illustrated  is  the  result  of  the  increased                                                               
capital credit.   He noted  that the  impact is magnified  as the                                                               
price per barrel  increases, with a revenue  difference of almost                                                               
$4 billion  between ACES  and HB  3001 when the  price of  oil is                                                               
$200 per barrel.   The impact is greatest  when the progressivity                                                               
is greatest.   He then directed attention to the  FY 2013 percent                                                               
of Government Take columns, and  explained the difference between                                                               
the take for the  life cycle of a project and  for a fiscal year.                                                               
He explained  that the  life cycle  of a  project is  impacted by                                                               
inflation, but  since the thresholds at  which progressivity kick                                                               
in for ACES are not linked  to inflation the impact under ACES is                                                               
such  that government  take steadily  increases over  time as  in                                                               
real  terms the  threshold through  which progressivity  kicks in                                                               
comes down.   Therefore,  the life  cycle analysis  of government                                                               
take for  ACES is more  likely to  be 82-83 percent,  whereas for                                                               
only FY  2013 the  high reaches  about 78 percent  for ACES.   He                                                               
reiterated that  the government take  at the $60 barrel  price is                                                               
the  same,  about 66-67  percent,  for  HB  3001 without  the  40                                                               
percent oil well credit.  The  40 percent oil well credit in both                                                               
HB  110 and  HB 3001  is  what makes  the difference  at the  $60                                                               
level.   Still, HB  110 and  HB 3001  look relatively  similar in                                                               
terms of overall government take,  and therefore progressing at a                                                               
much lower slope from a level in  the mid 60 percent to a maximum                                                               
of about 70 percent versus ACES,  which reaches 78 percent in the                                                               
highest price cases.                                                                                                            
12:00:51 PM                                                                                                                   
MR.  MAYER, in  response to  Representative P.  Wilson, explained                                                               
that the  columns entitled Total  State Take represent  the total                                                               
take to the State of Alaska that  is all of the components of the                                                               
fiscal regime,  including production tax, royalty,  property tax,                                                               
state income  tax, and  federal income tax.   The  federal income                                                               
tax  in Alaska  is calculated  assuming  the nominal  rate of  35                                                               
12:01:21 PM                                                                                                                   
MR. MAYER  addressed slide 23  entitled "FY 2013  Government Take                                                               
Comparison."   Comparing the government  take in more  detail for                                                               
FY  2013, he  pointed to  the steeper  upward slope  of the  ACES                                                               
graph  until the  percentage of  take reached  75 percent  and it                                                               
began to flatten.   He then pointed out that  the government take                                                               
for HB 110  and HB 3001 for existing production  is very similar,                                                               
especially for  $100 per  barrel and above  although HB  3001 has                                                               
slightly lower government take for  existing projects in the $50-                                                               
$80  per  barrel price  range,  which  he  attributed to  the  40                                                               
percent  well credit.   With  regard to  new production,  HB 3001                                                               
looks  better than  HB 110  at low  price levels,  but at  higher                                                               
price  levels of  $120  per barrel  there is  a  higher level  of                                                               
government take than occurs for HB 110 for new production.                                                                      
12:03:11 PM                                                                                                                   
MR. MAYER moved  on to slide 24 entitled  "$17/bbl Field: Project                                                               
Value Under  Different Fiscal Options,"  and compared  the graphs                                                               
for NPV and  IRR at $17 per barrel under  various fiscal regimes.                                                               
He  noted that  a  flat  tax would  create  a  straight line,  as                                                               
opposed to  the curved line  from progressivity.  He  pointed out                                                               
that   all   of   the  proposed   changes   effectively   reduces                                                               
progressivity and  gets closer  to the  straight line.   Although                                                               
the  $17 price  per barrel  does not  make a  huge difference  in                                                               
terms of breakeven  economics, the IRR is affected  such that the                                                               
level at  which the 15 percent  rate of return is  achieved moves                                                               
from about the $90 range to the  $80 range, if the field is taxed                                                               
under the existing production level and  down to the $70 range if                                                               
it  is  taxed  under  the  rate  for  new  production.      Those                                                               
differences become further magnified  for the higher cost fields,                                                               
as  shown on  slide  25 entitled  "$25/bbl  Field: Project  Value                                                               
Under  Different  Fiscal  Options."   If  the  same  exercise  is                                                               
performed for the $25 per  barrel field, the NPV10 breakeven when                                                               
the economic value  starts moves from $90 to $80  and then to the                                                               
high $70s,  depending upon which  tax regime is applied.   Again,                                                               
there is a large difference at  the level at which the 15 percent                                                               
rate of  return is achieved,  such that the $130-$140  per barrel                                                               
can  decrease to  $100  or $90  per barrel.    Similarly, in  the                                                               
highest case, a $34 per barrel  field [as illustrated on slide 26                                                               
entitled  "$34/bbl Field:  Project Value  Under Different  Fiscal                                                               
Options,"] the  NPV10 breakeven was  not achieved until  $130 per                                                               
barrel.  That price  can be brought down to $100  or below in the                                                               
difference  that is  made through  progressivity.   He attributed                                                               
that to the divergence such that  the ACES line bends away due to                                                               
the high  progressivity and the breakeven  point is significantly                                                               
reduced as is the point at  which the 15 percent IRR is achieved.                                                               
For  a project  this  challenged, particularly  on a  stand-alone                                                               
basis  without the  benefit of  some of  the other  benefits, the                                                               
economics   remain  challenged   at  the   various  cost   levels                                                               
presented, even under  HB 110 or HB 3001 for  new production.  He                                                               
declared that  this is the  impact on improving the  economics on                                                               
new higher cost development.                                                                                                    
12:06:24 PM                                                                                                                   
MR.  MAYER, referring  to  slide 27  entitled  "40% Well  Credits                                                               
Create High Levels  of Government Support," said  the question of                                                               
how much revenue one is willing  to forgo to have that impact and                                                               
whether  that  impact  should  be  targeted  at  new  incremental                                                               
production as opposed  to all production remains.   He then spoke                                                               
about  the  high levels  of  effective  government support  which                                                               
occur  under  the 40  percent  exploration  credit combined  with                                                               
progressivity  under ACES,  or the  40  percent well  expenditure                                                               
credit.   He  reported that  the tax  benefit of  writing off  an                                                               
expense against  the existing taxable production  base, including                                                               
the ability  to reduce the  payable tax under  progressivity, and                                                               
then include  the 40  percent credit, would  result in  very high                                                               
levels of  government support.   For example, when the  oil price                                                               
is  $120  per barrel,  under  progressivity  an approximately  50                                                               
percent  production tax  is being  paid.   Further, if  a company                                                               
spends $100  million on  work that qualifies  for the  credit and                                                               
can, in addition, obtain a 40  percent credit, the after tax cash                                                               
flow would  only be worse  off by 10 percent  of the cost  of the                                                               
well work,  with the remaining  90 percent of expense  covered by                                                               
the 40 percent credit or  the 50 percent effective production tax                                                               
that the company is not paying on  that amount.  A 60 percent cap                                                               
rather  than  the 75  percent  cap  on progressivity  results  in                                                               
exceeding 100  percent when  the price  of oil  reaches $210-$220                                                               
per barrel.   Overall,  the 40 percent  well credit  creates very                                                               
high levels of effective government support.                                                                                    
12:09:29 PM                                                                                                                   
CO-CHAIR  SEATON asked  whether  the state  corporate income  tax                                                               
reduction would be added to this as well.                                                                                       
MR. MAYER replied that he was  unsure, as it would depend on what                                                               
portion of  the spending is  capitalized and  hence, depreciated,                                                               
and  what  portion  is  expensed.   To  the  extent  that  it  is                                                               
capitalized and  depreciated, it  would be  spread over  a longer                                                               
time and have a lesser impact.                                                                                                  
CO-CHAIR  SEATON surmised  that  government  support referred  to                                                               
state dollars  used in  the project, whether  they are  offset by                                                               
reductions in property tax and credits.                                                                                         
MR. MAYER answered, "That's certainly  one way of looking at it."                                                               
However, it  is a view  that the companies would  not necessarily                                                               
agree with because they are  spending the actual dollars.  Still,                                                               
at the  end of the  year, when all  the tax implications  come to                                                               
bear, the after tax cash flow is  only worse off by 10 percent of                                                               
the total cost at the $120 price per barrel.                                                                                    
12:11:20 PM                                                                                                                   
CO-CHAIR SEATON replied "if they're  looking at it in those terms                                                               
when they are calculating the  competitiveness of the project, do                                                               
all  those terms  get  added  in on  the  competitiveness of  the                                                               
project ...?"                                                                                                                   
MR. MAYER  replied that the economic  metrics of IRR and  NPV are                                                               
impacted  when the  after tax  cash flow  is minimized.   To  the                                                               
extent that this minimizes the  impact on ACTF of significant new                                                               
spending, of which  only a small amount appears as  a negative to                                                               
the company,  then it has  a significant  impact on the  ACTF for                                                               
the IRR  and NPV of  that spending.   He offered his  belief that                                                               
there are  other important economic metrics,  including return on                                                               
capital  employed,  are not  affected.    The return  on  capital                                                               
employed   is  important   to  large   oil  and   gas  companies,                                                               
particularly  of  the  sort  that operate  the  major  assets  in                                                               
Alaska, that  tend not to  be "high growth companies"  but rather                                                               
rely on  the efficiency  of their  operations.   One of  the most                                                               
important measures  of efficiency,  from the perspective  of uses                                                               
of capital,  which is frequently  used in judging  oil companies,                                                               
is  the return  on capital  employed.   The question  of implicit                                                               
government  support does  not impact  that metric  because it  is                                                               
about what  was spent, that  is actual dollars the  company spent                                                               
by  the  company  without  taking  into  account  the  after  tax                                                               
benefits, and what return was gained from it.                                                                                   
12:13:33 PM                                                                                                                   
CO-CHAIR SEATON  surmised that the effect  on the competitiveness                                                               
of  a  project  would  be  influenced by  the  structure  of  the                                                               
modifications to the entire fiscal regime.                                                                                      
MR. MAYER replied yes, but  added that some economic metrics will                                                               
be more impacted than others.                                                                                                   
12:14:17 PM                                                                                                                   
MR.  MAYER,  concluding  with slide  28  entitled  "Key  Issues,"                                                               
summarized  that the  largest question  with  regard to  proposed                                                               
HB 3001 is the merit of  across-the-board reduction in government                                                               
take versus  trying to  limit a  benefit from  reduced government                                                               
take and  possibly even greater  reduced government take  that is                                                               
limited to  a more  targeted production  stream.   An across-the-                                                               
board reduction in  government take is the  simplest approach and                                                               
avoids  the  potential  for   complexity,  adverse  outcomes,  or                                                               
perverse incentives;  however, it requires  foregoing significant                                                               
revenue  on   activities  that  are  currently   economic.    The                                                               
alternative  is  a  more  targeted  approach  that  forgoes  less                                                               
revenue on activities  that are currently economic,  but also has                                                               
a  greater  risk of  creating  a  less significant  incentive  or                                                               
creating particular perverse incentives  or adverse outcomes.  He                                                               
noted  that,  although   the  current  proposed  across-the-board                                                               
reduction in government take would  be about $1.2-$1.5 billion at                                                               
$110 per  barrel, if the  decline on  the legacy fields  could be                                                               
reduced from 6  percent to 2 percent by [proposed  HB 3001], then                                                               
the revenue from FY 2020 onward  could be higher than the current                                                               
projected scenario.   Even with  such a reduction in  the decline                                                               
of the legacy  fields, revenue until 2020  would be significantly                                                               
lower than under maintaining the  current tax structure; however,                                                               
there would be  a cross-over point at which  the possible reduced                                                               
decline could result in increased revenue.                                                                                      
12:17:09 PM                                                                                                                   
MR.  MAYER  declared  that  this   critical  question,  which  is                                                               
difficult to answer  without the details that  only the operators                                                               
have, is with  regard to how viable  it is to the  decline from 6                                                               
percent to 2 percent.  He  opined that although it is "not beyond                                                               
the  scope  of imagining,  but  also  far  from certainty."    He                                                               
offered  that  the only  alternative  would  be to  differentiate                                                               
between  existing  and  incremental   production  in  the  legacy                                                               
fields,    and   there    are   significant    complexities   and                                                               
administrative  difficulties to  doing this  effectively so  that                                                               
when  the benefit  is  provided  companies are  able  to run  the                                                               
economics on their project applying  the economics that come from                                                               
that benefit  rather than the  economics of the  base production.                                                               
Mr. Mayer opined that the key  issue with proposed HB 3001 is the                                                               
approach  to take  to  reduce government  take  to stimulate  new                                                               
investments, while keeping in mind  that in the future with heavy                                                               
oil there may be even  higher [production] costs and even greater                                                               
reductions  in  government  take   necessary  to  stimulate  some                                                               
things.  There comes  a point at which it is  clear that one does                                                               
not want to apply a  regime, for example, that incentivizes heavy                                                               
oil to the  light, highly economic, existing  production from the                                                               
base fields.   He further  opined that  HB 3001 does  not address                                                               
other key  issues that have  been raised  with ACES, such  as oil                                                               
and  gas decoupling.   If  there is  large scale  gas production,                                                               
because under ACES  progressivity is assessed on a  per Btu basis                                                               
based on the price of an  average barrel or Btu equivalent barrel                                                               
of  production, at  significantly lower  prices, then  gas prices                                                               
vary  far below  oil parity.    The aforementioned  can reduce  a                                                               
taxpayer's  production  tax  value   per  barrel,  and  therefore                                                               
substantially reduce  the amount of  progressivity they pay.   In                                                               
effect, there would  be a cross-subsidy between gas  and oil such                                                               
that  the simple  fact  of  gas production  reduces  the tax  the                                                               
taxpayer  pays on  oil.   This legislation  does not  address the                                                               
aforementioned  issue  nor does  it  address  the issue  of  high                                                               
levels of spending support for  particular activities through the                                                               
interaction  of  high  credits   with  progressivity,  which  has                                                               
principally been the case with  the 40 percent exploration credit                                                               
in  the past.   The  legislation only  addresses [the  40 percent                                                               
exploration credit] in  so far as it reduces the  maximum rate of                                                               
progressivity  from 75  percent  to 60  percent.   Although  that                                                               
reduction in the  rate of progressivity takes "the  very worst of                                                               
it  out ...  there's a  lot  that still  remains."   Furthermore,                                                               
taking  the  40  percent  credit  probably  contributes  to  that                                                               
problem further.                                                                                                                
12:20:48 PM                                                                                                                   
CO-CHAIR  FEIGE, referring  to the  incremental and  existing oil                                                               
production,  asked  whether the  application  of  a credit  or  a                                                               
reduction  in  the  gross  value  would have  more  impact  on  a                                                               
company's  decision at  the  point of  production  or some  other                                                               
point.   He acknowledged that  there is an  increasing complexity                                                               
for the various proposed points of application.                                                                                 
MR. MAYER stated  that there are a number of  issues to consider.                                                               
He  explained that  to some  extent the  gross revenue  allowance                                                               
avoids  the  complexity  of determining  the  costs  to  specific                                                               
fields  and assets.    He  suggested that  one  way  to target  a                                                               
substantially reduced  government take  to a  specific production                                                               
stream  and then  differentiate between  existing production  and                                                               
new  production would  be to  draw the  decline curve  using past                                                               
production  data,  calculating  the  decline,  and  extending  it                                                               
forward.    He pointed  out,  "The  more  granular the  level  of                                                               
calculation  is  done  at,  the   better  the  forecast  one  can                                                               
produce."    He  clarified  that   a  decline  curve  using  past                                                               
production  data for  specific wells  is far  more accurate  than                                                               
using  the data  for an  entire unit  or an  entire company.   He                                                               
considered that this analysis, although  complex, would only have                                                               
to  be performed  once.   He  allowed that  the complexity  would                                                               
arise for an investment decision  today knowing that there is the                                                               
potential  for  substantially  reduced government  take  above  a                                                               
target rate set by a decline  curve, the question is where is the                                                               
[company]  in relation  to the  target today.   If  a company  is                                                               
already substantially over the target  with a comfortable buffer,                                                               
then any new  investment made can run on the  lower rates for the                                                               
production  over the  decline curve.   However,  if a  company is                                                               
substantially  underneath [the  target of  the decline  curve] or                                                               
even close to  it and uncertain about the performance  of some of                                                               
the company's  base assets, the  company could think  the decline                                                               
would  be worse  than  the  forecast predicts.    There are  many                                                               
circumstances under which a company,  driven by caution, would be                                                               
more likely to  run its base case economics  using the government                                                               
take that applies below the line than above it.                                                                                 
12:27:14 PM                                                                                                                   
REPRESENTATIVE HERRON asked  where Alaska would be  ranked on the                                                               
bar graph on slide 7 should proposed HB 3001 pass.                                                                              
MR. MAYER responded  that although he would have  to perform some                                                               
analysis and  get back  to the committee,  he offered  his belief                                                               
that Alaska would be ranked  close to the average government take                                                               
of "US - LA (Haynesville)."                                                                                                     
12:27:55 PM                                                                                                                   
REPRESENTATIVE HERRON, referring to  slide 23, recalled that last                                                               
year there was a proposed amendment  to HB 110 that would flatten                                                               
out  ACES at  a certain  price  per barrel.   He  asked if  other                                                               
regimes do the aforementioned.                                                                                                  
MR.  MAYER replied  that many  financial regimes  are neutral  at                                                               
specified  price levels,  and many  also have  a steady  downward                                                               
slope.   He declared that  it was  easy to structure  a financial                                                               
system  with  the cost  parameters  to  achieve neutrality  at  a                                                               
specified level of government take.                                                                                             
12:29:46 PM                                                                                                                   
REPRESENTATIVE  PETERSEN, referring  to  slide  28, recalled  the                                                               
comments  regarding the  high  amount of  credits  that would  be                                                               
involved with  the development  of heavy  oil, which  should also                                                               
apply to shale oil development  because of the significant amount                                                               
of drilling required to maintain  production levels of shale oil.                                                               
He  then  asked whether  Mr.  Mayer  was suggesting  that  Alaska                                                               
should  propose a  separate tax  regime  for those  types of  oil                                                               
MR. MAYER,  drawing from  his limited  work reviewing  the likely                                                               
cost  of  [heavy oil  and  shale  oil development],  offered  his                                                               
belief  that the  development of  heavy oil  and shale  oil would                                                               
require a level  of government take lower than  what is currently                                                               
proposed in HB  3001.  Therefore, he surmised that  one would not                                                               
want a  structure that  applies one level  of government  take to                                                               
everything because that  would result in applying a  low level of                                                               
government take to existing profitable production.                                                                              
12:31:09 PM                                                                                                                   
CO-CHAIR SEATON held over HB 3001.                                                                                              
12:31:16 PM                                                                                                                   
There being no  further business before the  committee, the House                                                               
Resources Standing Committee meeting was adjourned at 12:31 p.m.                                                                

Document Name Date/Time Subjects
Alaska House Resources - April 23.pptx HRES 4/23/2012 9:00:00 AM