Legislature(2005 - 2006)SENATE FINANCE 532

04/06/2006 09:00 AM Senate FINANCE


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09:05:53 AM Start
09:07:17 AM SB305
02:08:00 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to 1:00 pm --
+= SB 305 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                            MINUTES                                                                                           
                    SENATE FINANCE COMMITTEE                                                                                  
                         April 6, 2006                                                                                        
                           9:05 a.m.                                                                                          
                                                                                                                                
                                                                                                                              
CALL TO ORDER                                                                                                               
                                                                                                                                
Co-Chair  Lyda  Green  convened   the  meeting  at  approximately                                                               
9:05:53 AM.                                                                                                                   
                                                                                                                                
PRESENT                                                                                                                     
                                                                                                                                
Senator Lyda Green, Co-Chair                                                                                                    
Senator Gary Wilken, Co-Chair                                                                                                   
Senator Con Bunde, Vice Chair                                                                                                   
Senator Fred Dyson                                                                                                              
Senator Bert Stedman                                                                                                            
Senator Donny Olson                                                                                                             
Senator Lyman Hoffman                                                                                                           
                                                                                                                                
Also Attending:  JOHN P. ZAGER, General  Manager, Chevron Alaska;                                                             
JOHN A BARNES, Production Manager, Marathon Oil Company                                                                         
                                                                                                                                
Attending  via  Teleconference:  From  an  Offnet  Location:  KEN                                                             
THOMPSON, Managing Director, Alaska Venture Capital Group                                                                       
                                                                                                                                
SUMMARY INFORMATION                                                                                                         
                                                                                                                                
SB 305-OIL AND GAS PRODUCTION TAX                                                                                               
                                                                                                                                
The Committee heard testimony from  Chevron Alaska, Marathon Oil,                                                               
and  Alaska  Venture   Capital  Group.  The  bill   was  held  in                                                               
Committee.                                                                                                                      
                                                                                                                                
Co-Chair Wilken  announced that public  testimony on the  FY 2007                                                               
operating  budget  would  commence   that  evening  and  continue                                                               
through Saturday, April 8, 2006.                                                                                                
                                                                                                                                
                                                                                                                                
     CS FOR SENATE BILL NO. 305(RES)                                                                                            
     "An  Act providing  for a  production  tax on  oil and  gas;                                                               
     repealing  the  oil  and  gas  production  (severance)  tax;                                                               
     relating to the calculation of  the gross value at the point                                                               
     of production of oil or gas  and to the determination of the                                                               
     value of oil  and gas for purposes of the  production tax on                                                               
     oil and gas;  providing for tax credits against  the tax for                                                               
     certain   expenditures   and   losses;   relating   to   the                                                               
     relationship of the  production tax on oil and  gas to other                                                               
     taxes, to  the dates those  tax payments and  surcharges are                                                               
     due,  to interest  on overpayments  of the  tax, and  to the                                                               
     treatment of  the tax  in a  producer's settlement  with the                                                               
     royalty owners; relating  to flared gas, and to  oil and gas                                                               
     used  in the  operation of  a  lease or  property under  the                                                               
     production tax; relating  to the prevailing value  of oil or                                                               
     gas  under the  production  tax; relating  to surcharges  on                                                               
     oil; relating  to statements  or other  information required                                                               
     to be filed with or  furnished to the Department of Revenue,                                                               
     to the penalty  for failure to file certain  reports for the                                                               
     tax, to the powers of the  Department of Revenue, and to the                                                               
     disclosure of  certain information required to  be furnished                                                               
     to  the   Department  of  Revenue   as  applicable   to  the                                                               
     administration of  the tax;  relating to  criminal penalties                                                               
     for  violating conditions  governing  access to  and use  of                                                               
     confidential  information relating  to the  tax, and  to the                                                               
     deposit  of  tax  money  collected   by  the  Department  of                                                               
     Revenue;  amending  the  definitions of  'gas,'  'oil,'  and                                                               
     certain other terms for purposes  of the production tax, and                                                               
     as the  definition of the  term 'gas' applies in  the Alaska                                                               
     Stranded   Gas   Development   Act,   and   adding   further                                                               
     definitions;  making  conforming amendments;  and  providing                                                               
     for an effective date."                                                                                                    
                                                                                                                                
                                                                                                                                
This was  the sixth hearing for  this bill in the  Senate Finance                                                               
Committee.                                                                                                                      
                                                                                                                                
Co-Chair Green announced  that three oil and  gas companies would                                                               
be presenting  testimony regarding this petroleum  production tax                                                               
(PPT) legislation.                                                                                                              
                                                                                                                                
JOHN  P. ZAGER,  General  Manager, Chevron  Alaska, informed  the                                                               
Committee that his remarks would  be accompanied by a power point                                                               
presentation [copy on file] dated April 6, 2006.                                                                                
                                                                                                                                
[Note: Each page of Chevron's  power point presentation contained                                                               
two  diagrams; thus  each diagram  is referenced  by both  a page                                                               
number and its  location at either the upper or  lower portion of                                                               
the page.  For reference purposes,  the Senate  Finance Committee                                                               
Secretary  made a  notation  on each  page  of the  corresponding                                                               
timestamp  in which  that  page was  addressed  in this  hearing.                                                               
General descriptive information  of each page is  provided in the                                                               
body of  these minutes when feasible.  A copy of the  handout can                                                               
be  obtained by  contacting the  Legislative Research  Library at                                                               
(907)465-3808.]                                                                                                                 
                                                                                                                                
9:07:17 AM                                                                                                                    
                                                                                                                                
     Page 1(lower diagram)                                                                                                      
                                                                                                                                
     Chevron's Alaska Presence                                                                                                  
                                                                                                                                
        · Current Asset base is formed by combination of                                                                        
          heritage Chevron and Unocal assets.                                                                                   
         *Both companies have been active in Alaska for                                                                         
                many years.                                                                                                     
        · 4th largest producer in state                                                                                         
        · 3rd largest operator                                                                                                  
        · 382 employees or full time contractors                                                                                
               *272 on the Kenai Peninsula                                                                                      
               *Payroll of > $45 million                                                                                        
        · Key customers: Tesoro, Enstar, Chugach Electric,                                                                      
          Agrium, Aurora                                                                                                        
        · Chevron is the only producer in the state with a                                                                      
          relative balance of assets in Cook Inlet and on the                                                                   
          North Slope                                                                                                           
          *Both production streams are large enough to                                                                          
                trigger PPT                                                                                                     
        · Chevron's Cook Inlet offshore assets are uniquely                                                                     
          positioned to suffer from the proposed PPT                                                                            
                                                                                                                                
Mr. Zager overviewed Chevron's activities  in the State. He noted                                                               
that Chevron acquired Unocal's Alaska  operations in August 2005.                                                               
Both  companies  had  conducted "downstream"  activities  in  the                                                               
State   since  the   late  1800s.   Exploration  and   production                                                               
activities  in Cook  Inlet and  on the  North Slope  have existed                                                               
since  oil  and  gas  activities first  occurred  in  the  State.                                                               
Chevron's  employees were  based in  Anchorage and  on the  Kenai                                                               
Peninsula.                                                                                                                      
                                                                                                                                
Mr. Zager noted that Chevron  provided oil and gas commodities to                                                               
a variety of customers including  the Tesoro refinery in Nikiski,                                                               
the Enstar Natural Gas Company which supplies natural gas for                                                                   
home  heating, the  Agrium fertilizer  plant in  Nikiski, and  to                                                               
Chugach Electric and Aurora Power.                                                                                              
                                                                                                                                
Mr. Zager  specified that Chevron's Alaska  operations, which are                                                               
fairly split  between Cook  Inlet and the  North Slope,  would be                                                               
large enough  "to trigger" the  PPT. "Chevron's position  in Cook                                                               
Inlet,  and Cook  Inlet  in general,  is  uniquely positioned  to                                                               
suffer under the proposed tax regime."                                                                                          
                                                                                                                                
     Page 2 (upper diagram)                                                                                                     
                                                                                                                                
     Alaska North Slope Fields                                                                                                  
                                                                                                                                
     [This map depicts  the locations of the North  Slope oil and                                                               
     gas producing  fields that Chevron  is involved in.  Its Net                                                               
     Production  on the  North  Slope is  16,000  Barrels of  Oil                                                               
     Equivalent (BOE) per day.]                                                                                                 
                                                                                                                                
Mr.  Zager  characterized the  company's  holdings  on the  North                                                               
Slope "as  a mile wide  and an inch  deep" in  that it had  a one                                                               
percent interest in the Alpine  field, a five percent interest in                                                               
the  Greater Kuparuk  field, a  one percent  interest in  Prudhoe                                                               
Bay, an 11  percent interest in the Endicott field,  a 25 percent                                                               
interest in  Point Thomson, and  a "50 percent  owner/operator of                                                               
the leases  that are currently  held" within the  Arctic National                                                               
Wildlife  Refuge  (ANWR).  At  a recent  State  lease  sale,  the                                                               
company,  which  "was one  of  the  most active  bidders",  spent                                                               
approximately seven  million dollars to acquire,  for exploration                                                               
purposes,  a large  parcel of  acreage in  an area  south of  the                                                               
Greater Kuparuk region.                                                                                                         
                                                                                                                                
9:10:00 AM                                                                                                                    
                                                                                                                                
     Page 2 (lower diagram)                                                                                                     
                                                                                                                                
     Cook Inlet - CVX Asset Description                                                                                         
                                                                                                                                
     [This map depicts the location of the company's assets in                                                                  
     Cook Inlet.]                                                                                                               
                                                                                                                                
     Cook Inlet Offshore:                                                                                                       
        · 3 fields (all op.)                                                                                                    
        · 10 Platforms                                                                                                          
        · 145 wells                                                                                                             
        · 2 onshore plants                                                                                                      
        · 42 mile PL                                                                                                            
        · 10,900 BOEPD                                                                                                          
                                                                                                                                
     Cook Inlet Onshore:                                                                                                        
        · 8 fields (6 op.)                                                                                                      
        · 60 wells                                                                                                              
        · 2 gas storage fields                                                                                                  
        · WI% in 4 PLs                                                                                                          
        · 14,100 BOEPD                                                                                                          
                                                                                                                                
     Net Production                                                                                                             
                                                                                                                                
     Offshore Oil 6,300 BOPD                                                                                                    
     Gas 112 MMCFPD                                                                                                             
     25,000 BOEPD                                                                                                               
                                                                                                                                
Mr. Zager  informed the  Committee that  Chevron was  the largest                                                               
offshore operator in Cook Inlet. It  operated ten of the total 15                                                               
offshore  platforms in  Cook  Inlet.  Eight of  the  ten were  in                                                               
production,  including the  McCarthy  River field  which was  the                                                               
largest offshore field  in Cook Inlet. Chevron held  a 52 percent                                                               
interest in that  field. Overall, Chevron operated  72 percent of                                                               
the oil production in Cook Inlet.                                                                                               
                                                                                                                                
Mr.  Zager stated  that Chevron's  gas activities  in Cook  Inlet                                                               
included a 33  percent interest in the Beluga River  field, a 100                                                               
percent  interest  in  the  Swanson River  field  which  was  the                                                               
State's original  oil field, a  40 percent interest  in Ninilchik                                                               
which was  operated by Marathon  Oil, and a 100  percent interest                                                               
in Happy  Valley. The  Ninilchik and  Happy Valley  fields, which                                                               
began   producing  after   2001,   significantly  increased   gas                                                               
production in Cook Inlet.                                                                                                       
                                                                                                                                
     Page 3 (upper diagram)                                                                                                     
                                                                                                                                
     Trading Bay Unit                                                                                                           
                                                                                                                                
     [This was a collage of pictures depicting platforms and                                                                    
     production facilities in the Trading Bay unit of Cook                                                                      
     Inlet.]                                                                                                                    
                                                                                                                                
Mr.  Zager stated  the purpose  of this  pictorial was  to remind                                                               
people that  the operating  environment in  the Trading  Bay unit                                                               
could be  as harsh  as those  on the  North Slope.  Facilities in                                                               
Trading  Bay   were  approximately   40  years   old;  tremendous                                                               
maintenance  would be  required to  meet the  safe operation  and                                                               
environmental  protection levels  sought  by  Chevron. Ice  floes                                                               
were environmental obstacles of concern.                                                                                        
                                                                                                                                
     Page 3 (upper diagram)                                                                                                     
                                                                                                                                
     Cook Inlet Offshore                                                                                                        
                                                                                                                                
     [This "production graph … depicts a history of offshore                                                                    
     Cook Inlet production" from the early 1970s through 2006.]                                                                 
                                                                                                                                
Mr. Zager  stated that  the green line  on the  graph represented                                                               
Cook  Inlet  oil  production  in barrels  per  day.  The  graph's                                                               
vertical axis depicted  oil volume in logarithmic  scale units of                                                               
1,000, 10,000,  100,000 and 200,000.  During the  field's initial                                                               
years, daily  oil production  was approximately  200,000 barrels.                                                               
Production  has since  declined to  approximately 12,000  barrels                                                               
per  day,  and  consequently,  platforms  are  only  producing  a                                                               
fraction of the production they were designed for.                                                                              
                                                                                                                                
Mr. Zager pointed out that the solid  blue line in the box at the                                                               
top of the  diagram reflected "the water cut  line" or percentage                                                               
of water in the oil.  Fluids produced during Cook Inlet's initial                                                               
years  were 100  percent  oil and  zero  percent water.  However,                                                               
overtime, the  ratio has  changed to being  90 percent  water and                                                               
only ten  percent oil even though  the same amount of  fluid were                                                               
being  produced.  Operating  costs incurred  by  the  separating,                                                               
treating,  and  disposing of  that  water  oil are  significantly                                                               
affecting costs in Cook Inlet.                                                                                                  
                                                                                                                                
     Page 4 (upper diagram)                                                                                                     
                                                                                                                                
     Trading Bay Unit                                                                                                           
                                                                                                                                
     [This diagram mirrors the information of the previous                                                                      
     diagram, however, it is specific to the production and                                                                     
     water cut line of the Trading Bay unit in Cook Inlet.]                                                                     
                                                                                                                                
Mr. Zager  pointed out  that at  its peak  the Trading  Bay unit,                                                               
which  produced approximately  120,000 barrels  per day,  was the                                                               
biggest producer  in Cook Inlet.  Its production has  declined to                                                               
approximately  8,000  barrels  per  day   with  a  water  cut  of                                                               
approximately  92 percent.  This  information would  substantiate                                                               
that Cook  Inlet is "very challenged"  in this phase of  its life                                                               
cycle. The North  Slope has been likened to being  in the teenage                                                               
or young  adult years  of its  life cycle;  while Cook  Inlet "is                                                               
already collecting social security".                                                                                            
                                                                                                                                
     Page 4 (lower diagram)                                                                                                     
                                                                                                                                
     Cook Inlet Oil Production History                                                                                          
                                                                                                                                
     [This chart depicts the production history of Cook Inlet.                                                                  
     Net production has declined from 12.7 million barrels in                                                                   
     1997 to 6.4 million in 2005.]                                                                                              
                                                                                                                                
Mr. Zager reviewed the information.                                                                                             
                                                                                                                                
9:14:33 AM                                                                                                                    
                                                                                                                                
     Page 5 (upper diagram)                                                                                                     
                                                                                                                                
     Cook Inlet Offshore Oil                                                                                                    
                                                                                                                                
        · Cook Inlet is very high cost                                                                                          
          * Direct lift cost $20 - $25 per BOE                                                                                  
          * Currently breakeven on Cash Flow @ ~ $30/BOE                                                                        
      * Currently breakeven on Earnings @ ~ $40 - $45/BOE                                                                       
       * Further production declines will raise breakeven                                                                       
           prices                                                                                                               
        · Significant operational risks                                                                                         
          * Two platforms are currently shut-in                                                                                 
          * Must maintain critical mass of operations                                                                           
        · Cook Inlet Offshore cannot afford an additional tax                                                                   
          burden                                                                                                                
                                                                                                                                
Mr.  Zager  summarized  Chevron's   Cook  Inlet  activities.  The                                                               
breakeven  on  cash  flow  point,   which  is  calculated  to  be                                                               
approximately   $30  barrel   of   oil   equivalent  (BOE),   was                                                               
significantly higher  than other  production areas in  the State.                                                               
Since the  goal of business  is to make  money, any tax,  such as                                                               
the  PPT,  that  would  affect   a  company's  cash  flow,  would                                                               
negatively impact  the financial  market's view of  the business,                                                               
as it would affect company earnings.                                                                                            
                                                                                                                                
9:15:08 AM                                                                                                                    
                                                                                                                                
Mr.  Zager noted  that the  affect  of the  PPT on  cash flow  on                                                               
Chevron's  offshore Cook  Inlet activities,  in conjunction  with                                                               
"the  depreciation that's  required  in  the earnings  contract",                                                               
would increase  the breakeven  amount on earnings  to $40  to $45                                                               
dollars. While the  company might choose not to  abandon its Cook                                                               
Inlet activities based on the  earnings calculations, it would be                                                               
a consideration in future investment decisions.                                                                                 
                                                                                                                                
9:15:57 AM                                                                                                                    
                                                                                                                                
Mr.  Zager disclosed  that activities  on two  of Chevron's  Cook                                                               
Inlet platforms  were halted  several years  ago when  oil prices                                                               
were too  low to  support them. Other  platforms might  also have                                                               
been "shut in"  since then had oil prices not  increased to their                                                               
current levels.                                                                                                                 
                                                                                                                                
Mr.  Zager  advised  that platforms  are  "co-dependent  on  each                                                               
other" because  the costs of  such things as  onshore facilities,                                                               
helicopters,  and boats  are  shared  between them.  Consequently                                                               
when  one is  shut down,  costs  are allocated  to the  remaining                                                               
platforms. This  could be  likened to a  "domino effect"  in that                                                               
closing one platform could lead to the closure of others.                                                                       
                                                                                                                                
9:16:46 AM                                                                                                                    
                                                                                                                                
Mr. Zager contended "the Cook  Inlet offshore could not afford an                                                               
additional tax."                                                                                                                
                                                                                                                                
9:17:01 AM                                                                                                                    
                                                                                                                                
     Page 5 (lower diagram)                                                                                                     
                                                                                                                                
     Chevron Cook Inlet Strategic Study                                                                                         
                                                                                                                                
        · August 10, 2005 Chevron acquires Unocal                                                                               
          * Much speculation about Cook Inlet asset fit in                                                                      
           Chevron Portfolio                                                                                                    
        · October 2005 - January 2006 - Strategy work completed                                                                 
       * Determined that there are incremental investment                                                                       
          opportunities in the Cook Inlet although they are in                                                                  
          the lowest quartile of Chevron's investment portfolio,                                                                
          many projects did not make the cut                                                                                    
        · February 2006 - Great news - announce decision that                                                                   
          Chevron will retain all Cook Inlet assets with the                                                                    
         intent to begin a multiyear investment program                                                                         
       * Chevron will retain the current office locations                                                                       
                                                                                                                                
Mr.  Zager stated  that when  Chevron acquired  Unocal in  August                                                               
2005 there was wide speculation  that it would sell Unocal's Cook                                                               
Inlet  assets.  After  conducting   an  internal  study,  Chevron                                                               
concluded  35 to  50 projects  were infeasible  and would  not be                                                               
undertaken;  however, there  were  approximately 35  to 50  other                                                               
"incremental investment  opportunities in the Cook  Inlet". Thus,                                                               
Chevron  and its  partners planned  to  spend approximately  $200                                                               
million during the next four years on off-shore oil projects.                                                                   
                                                                                                                                
9:18:18 AM                                                                                                                    
                                                                                                                                
Mr. Zager continued that Chevron's  announcement in February 2006                                                               
that it  would retain all  of its Cook  Inlet assets was  a shift                                                               
from its  initial business  plan. The decision  was also  made to                                                               
continue to  conduct technical and  other work in its  offices in                                                               
Kenai  and Anchorage  rather  than to  consolidate  that work  in                                                               
Houston Texas  and other oil  centers. These decisions  were good                                                               
not only for company employees but also for the State.                                                                          
                                                                                                                                
9:19:02 AM                                                                                                                    
                                                                                                                                
     Page 6 (upper diagram)                                                                                                     
                                                                                                                                
     Great news, so what's the problem?                                                                                         
                                                                                                                                
        · The Cook Inlet reinvestment program was evaluated                                                                     
          using the current severance tax assumptions (zero                                                                     
          severance tax)                                                                                                        
        · When modeled under the proposed 20/20 PPT the                                                                         
          economics on some projects are degraded, some projects                                                                
          are improved, overall poorer economics for the program                                                                
          * Oil production taxes will go up dramatically                                                                        
      * Will cause investment decision to be reconsidered                                                                       
       * Higher taxes will cause less capital to be spent                                                                       
          * Enhanced PPT terms could significantly expand the                                                                   
          list of economic projects in the investment program                                                                   
          and significantly extend the life of offshore oil                                                                     
          production                                                                                                            
                                                                                                                                
Mr. Zager  pointed out that  these decisions were based  upon the                                                               
State's  current tax  regime, the  Economic  Limit Factor  (ELF),                                                               
which had basically  lowered the severance tax  on oil production                                                               
in Cook  Inlet to  zero. When  re-factoring Cook  Inlet economics                                                               
under the  20 tax rate  and 20 percent credit  (20/20) provisions                                                               
in the original  PPT bill (SB 305) proposed by  the Governor, the                                                               
determination  was that  under its  tax and  incentive increases,                                                               
the  economics of  the  best  of the  35  to  50 projects  deemed                                                               
feasible  under  ELF, "got  poorer",  as  the  tax on  the  those                                                               
projects would increase. "Conversely,  the projects that were the                                                               
poorest in  the portfolio  actually got  a little  better because                                                               
they  weren't  generating  as much  profit,  but  the  investment                                                               
incentives  were helping  them."  Therefore, the  PPT "tended  to                                                               
level the  portfolio. But  overall, the  economics of  the entire                                                               
program went down".                                                                                                             
                                                                                                                                
Mr. Zager  noted that the  25 percent  tax and 20  percent credit                                                               
(25/20)  provisions proposed  in the  Senate resources  committee                                                               
substitute,  CSSB 305(RES)  [NOTE: this  bill is  referred to  as                                                               
CSSB  305  in these  minutes]  would  incur "a  more  significant                                                               
impact  on  degrading  the  value   of  that  overall  investment                                                               
package".  This   increased  tax   would  result   in  investment                                                               
decisions  being  reconsidered.  "Higher taxes  would  ultimately                                                               
cause less investment to occur."                                                                                                
                                                                                                                                
9:20:39 AM                                                                                                                    
                                                                                                                                
Mr. Zager noted however that  were the PPT terms "enhanced", some                                                               
of the  economics of the  35 to  50 projects which  had initially                                                               
not  made  the economic  cutoff  might  improve. Numerous  things                                                               
could be affected by "the ratio of the tax to the credits".                                                                     
                                                                                                                                
9:21:10 AM                                                                                                                    
                                                                                                                                
Co-Chair Green asked whether the  term "enhanced PPT terms" would                                                               
be further defined.                                                                                                             
                                                                                                                                
Mr.  Zager  replied  in  the  affirmative.  This  term  would  be                                                               
addressed later in the presentation.                                                                                            
                                                                                                                                
9:21:22 AM                                                                                                                    
                                                                                                                                
     Page 6 (lower diagram)                                                                                                     
                                                                                                                                
     Cook Inlet Production Forecast with Four-Year Capital Plan                                                                 
                                                                                                                                
     [This  graph  depicts  projected  Cook  Inlet  oil  and  gas                                                               
     offshore  production  absent  further  investment.  In  this                                                               
     case, production  would decline "fairly dramatically  and by                                                               
     2009, numerous  offshore platforms might be  shut down. This                                                               
     information had also been presented to Chevron's senior                                                                    
     management.]                                                                                                               
                                                                                                                                
Mr. Zager communicated that the  goal of the four year investment                                                               
program  would be  to stabilize  production above  10,000 barrels                                                               
per day for  four years. The hope was that  during this four-year                                                               
timeframe,   additional   projects   would  be   identified   and                                                               
investments in the field would continue for several more years.                                                                 
                                                                                                                                
9:22:25 AM                                                                                                                    
                                                                                                                                
     Page 7 (upper diagram)                                                                                                     
                                                                                                                                
     Alaska Oil Production                                                                                                      
     January 2006                                                                                                               
     BOPD                                                                                                                       
                                                                                                                                
     [This bar  graph compares  oil production  of Cook  Inlet to                                                               
     that  of  the North  Slope.  January  2006 North  Slope  oil                                                               
     production exceeded  810,000 barrels  of oil per  day (BOPD)                                                               
     compared to approximately 18,000 BOPD in Cook Inlet.                                                                       
                                                                                                                                
Mr.  Zager communicated  that the  purpose of  this graph  was to                                                               
depict  Cook Inlet  "in  perspective" to  the  North Slope.  Cook                                                               
Inlet's  January 2006  oil production  amounted to  approximately                                                               
two percent of  the total oil production in the  State. Thus, the                                                               
impact of  the PPT on the  oil production of Cook  Inlet would be                                                               
minimal.  Were  the  PPT  a  net profits  tax,  the  North  Slope                                                               
production would  be significantly  more profitable than  that of                                                               
Cook Inlet.                                                                                                                     
                                                                                                                                
     Page 7 (lower diagram)                                                                                                     
                                                                                                                                
     Alaska Oil Production                                                                                                      
     January 2006                                                                                                               
     BOEPD                                                                                                                      
                                                                                                                                
     [This chart compares the January 2006 barrels of oil                                                                       
     equivalent per day (BOEPD) production for oil on the North                                                                 
     Slope to that for both gas and oil in Cook Inlet.]                                                                         
                                                                                                                                
Mr. Zager stated  that the annual average gas  production in Cook                                                               
Inlet would be  slightly less than that depicted in  the chart as                                                               
January was one  of its peak gas production  months. Cook Inlets'                                                               
combined oil and gas 112,000  BOEPD would equate to approximately                                                               
12 percent of the State's total production "on a BOE basis".                                                                    
                                                                                                                                
Mr. Zager noted  that gas produced in Cook Inlet  was utilized to                                                               
heat homes in Anchorage, to  power area electrical utilities, and                                                               
to  support  "commercial  activities   in  South  Central  Alaska                                                               
"including  commercial users  such as  the liquefied  natural gas                                                               
(LNG) plant  and the Agrium  nitrogen fertilizer plant.  In other                                                               
words, there was a large  "economic multiplier on this gas". "The                                                               
economy of  Alaska in its  current form" was dependent  on having                                                               
gas support the economy of South Central.                                                                                       
                                                                                                                                
9:24:29 AM                                                                                                                    
                                                                                                                                
     Page 8 (upper diagram)                                                                                                     
                                                                                                                                
     Chevron Cook Inlet Government Take Allocation                                                                              
     Combined Oil and Gas Production                                                                                            
                                                                                                                                
     [This  pie chart  indicates the  percentage breakout  of the                                                               
     total  government take  on oil  and gas  production in  Cook                                                               
     Inlet: federal  tax seven percent; property  tax 11 percent;                                                               
     production  tax  eight  percent;   and  State  royalties  74                                                               
     percent.]                                                                                                                  
                                                                                                                                
Mr. Zager cautioned that in  the endeavor to increase the State's                                                               
portion  of  the  revenue,  the  "pie"  size  could  shrink  were                                                               
decisions  made to  lower  investments made  in  the State.  This                                                               
would be  true not only  for Cook  Inlet, but possibly  for every                                                               
area of the State.                                                                                                              
                                                                                                                                
9:25:18 AM                                                                                                                    
                                                                                                                                
     Page 8 (lower diagram)                                                                                                     
                                                                                                                                
     Reasons to Lower Taxes and Provide Incentives for                                                                          
     Additional Cook Inlet Investment                                                                                           
                                                                                                                                
        · Gas is running out                                                                                                    
       * Home heating, electrical generation, industrial                                                                        
            consumption                                                                                                         
          * Additional gas supply is critical to state's economy                                                                
       * Other options are much more expensive than Cook                                                                        
            Inlet gas                                                                                                           
                                                                                                                                
        · Production tax is a pass through on most utility                                                                      
          contracts                                                                                                             
       * Tax increase represents increase in gas price to                                                                       
            consumers                                                                                                           
                                                                                                                                
        · Oil redevelopment will maintain and add new jobs and                                                                  
          will extend field life                                                                                                
                                                                                                                                
        · Cook Inlet competes for capital with other areas in                                                                   
          North America, does not compete for global capital                                                                    
          * Under PPT Alaska will have the worst fiscal terms in                                                                
            U.S.                                                                                                                
                                                                                                                                
Mr. Zager  communicated that these  reasons support  the position                                                               
that  a lower  tax should  be  applicable to  operations in  Cook                                                               
Inlet as its  operations differed from those on  the North Slope.                                                               
A  lower tax  would  encourage additional  investment there.  Gas                                                               
supplies  in Cook  Inlet were  dwindling. This  past winter,  gas                                                               
production could  not meet the  demand and the  Agruim fertilizer                                                               
plant was forced  to close for ten days. The  option of importing                                                               
LNG would not  only be expensive, but it would  ship money out of                                                               
the  State rather  than spending  it in-state.  Another expensive                                                               
option  would  be  to  construct   a  spur  line.  He  would  not                                                               
anticipate such  lines being commercial projects.  In other words                                                               
the State  would be required to  build them as there  would be no                                                               
other alternative to get gas to Anchorage.                                                                                      
                                                                                                                                
9:26:54 AM                                                                                                                    
                                                                                                                                
Senator  Bunde  noted  that companies  typically  do  not  absorb                                                               
taxes; they  instead pass that  expense on to customers.  To that                                                               
point, he questioned why an  increase in the tax would discourage                                                               
a company from investing in the State.                                                                                          
                                                                                                                                
Mr.  Zager  replied that  the  tax  would  be  passed on  to  the                                                               
consumer  in  the case  of  gas  being  sold  to a  gas  utility.                                                               
However, the  majority of  gas being produced  in Cook  Inlet was                                                               
sold  to  commercial businesses.  The  production  tax should  be                                                               
considered in the "broad" sense."                                                                                               
                                                                                                                                
9:28:14 AM                                                                                                                    
                                                                                                                                
Senator Stedman asked the reason  that State corporate income tax                                                               
had  not reflected  on the  "Chevron Cook  Inlet Government  Take                                                               
Allocation"  pie  chart. He  concluded  that  the pie  chart  was                                                               
incomplete as  two pieces  were not  reflected, those  being "the                                                               
net to  the producer and the  cost". While it was  helpful to see                                                               
"the breakdown  of the  government take numbers,  it is  not that                                                               
meaningful" unless the whole pie was accounted for.                                                                             
                                                                                                                                
9:29:18 AM                                                                                                                    
                                                                                                                                
Mr. Zager understood  that corporate income tax  was reflected in                                                               
the federal tax percentage.                                                                                                     
                                                                                                                                
Senator  Stedman  advised that  the  State  corporate income  tax                                                               
should also be reflected.                                                                                                       
                                                                                                                                
Mr. Zager agreed.                                                                                                               
                                                                                                                                
Senator Stedman  understood pie chart reflected  fiscal year 2005                                                               
numbers.                                                                                                                        
                                                                                                                                
Mr. Zager affirmed.                                                                                                             
                                                                                                                                
9:30:02 AM                                                                                                                    
                                                                                                                                
Senator Stedman  communicated that industry numbers,  as a whole,                                                               
were  available. It  was understandable  that  Chevron would  not                                                               
desire to depict their individual percentage take.                                                                              
                                                                                                                                
Senator  Stedman referred  back to  the Cook  Inlet Offshore  Oil                                                               
information depicted on  page 5 of the presentation.  It could be                                                               
interpreted from the current break  even on earnings price of $40                                                               
and $45  BOE depicted  on that  page that  any price  "above that                                                               
would create shareholder wealth".                                                                                               
                                                                                                                                
Mr.  Zager   responded  that  could  be   the  interpretation  if                                                               
shareholder wealth was defined "in  the terms that you would have                                                               
positive earnings per share".                                                                                                   
                                                                                                                                
Senator Stedman communicated that  his question pertained to CSSB
305's Progressivity provision's "trigger  point" which was set at                                                               
a  price of  $40  per  barrel. Two  issues  have  been raised  in                                                               
regards  to Progressivity.  The industry's  "fundamental" concern                                                               
was to the  impact the Progressivity element would  have on their                                                               
earnings as  the desire would be  to not "retard their  growth of                                                               
shareholder wealth". The  second concern was to  what price would                                                               
be the appropriate trigger point.  The current $40 barrel trigger                                                               
point seemed to  be "a reasonable arena". A trigger  point of $40                                                               
to $45  would be more  appropriate than a  $30 or $35  per barrel                                                               
price.                                                                                                                          
                                                                                                                                
9:31:52 AM                                                                                                                    
                                                                                                                                
Senator Dyson  voiced appreciation  for a separate  discussion he                                                               
had  with Mr.  Zager. To  that point,  he hoped  Mr. Zager  would                                                               
address the  effect of a  recent Regulatory Commission  of Alaska                                                               
(RCA) "decision  to let new gas  float to the Henry  Hub prices";                                                               
specifically   how   that   decision   might   impact   Chevron's                                                               
exploration activities  in Cook  Inlet in  light of  the "present                                                               
limited market" conditions that exist  due to long term contracts                                                               
that have been in play there.                                                                                                   
                                                                                                                                
9:32:40 AM                                                                                                                    
                                                                                                                                
Mr.  Zager first  addressed "the  impact of  Henry Hub  pricing".                                                               
Some  of  the  remarks  made  by  the  Governor  Frank  Murkowski                                                               
Administration could be interpreted to  imply that Cook Inlet gas                                                               
was sold  at Henry  Hub prices;  however, "that  is categorically                                                               
not true". Henry Hub prices  today range upwards of seven dollars                                                               
per 1,000 Cubic  Feet of Natural Gas  (MCF). Chevrons' contracted                                                               
gas prices with Enstar Natural Gas  Company of $6.19 MCF could be                                                               
some  of  the  highest  priced   gas  in  Cook  Inlet.  In  2005,                                                               
approximately 20 percent  of Chevron's gas was sold  to Enstar at                                                               
that price  and the remaining 80  percent was sold to  the Agruim                                                               
fertilizer plant.                                                                                                               
                                                                                                                                
Mr.  Zager disclosed  that this  year, Chevron  would be  selling                                                               
approximately  50 percent  of its  Cook Inlet  gas production  to                                                               
Enstar with the balance going  to other markets including Agruim.                                                               
Even  though   certain  price  information  was   privileged  for                                                               
competitive reasons, "it  would be fair to say that  the price to                                                               
Agruim  is far  below  seven dollars."  The  public record  would                                                               
reflect that in an Agruim  recent request for proposals (RFP) for                                                               
gas, they  requested bids  be in  the range  of three  dollars an                                                               
MCF. The price of longer  term gas contracts with other utilities                                                               
and the  LNG plant vary.  "This gas  is certainly not  being sold                                                               
for seven dollars; it's far below that on an average basis."                                                                    
                                                                                                                                
9:34:49 AM                                                                                                                    
                                                                                                                                
Mr. Zager stated that increased  prices in the past several years                                                               
could explain  the increase in  exploration that has  occurred in                                                               
Cook Inlet. Nonetheless, Cook Inlet  could not attract investors'                                                               
capital  unless  prices were  competitive  with  projects in  the                                                               
continental  United States.  "Costs  are  higher, conditions  are                                                               
rough, and "the  exploration risk is every bit as  tough as it is                                                               
down south". Thus gas price levels  of one, two, or three dollars                                                               
would not  attract investors. "That's  an economic  realty that's                                                               
not too hard to understand."                                                                                                    
                                                                                                                                
Mr. Zager stated that another  effect of long term contracts with                                                               
set prices and  "a certain market" for the gas  was that it would                                                               
provide  a base  upon  which  a producer  might  decide to  spend                                                               
money. However "on the flip side"  it would make it difficult for                                                               
companies  without  contracts or  a  selling  market, to  conduct                                                               
exploration activities.                                                                                                         
                                                                                                                                
Mr.   Zager   stressed  that   the   structure   of  Cook   Inlet                                                               
traditionally   included  long   term   contracts  with   utility                                                               
companies as  such agreements assured utilities  "they would have                                                               
gas out  into the future". Were  Cook Inlet prices to  follow the                                                               
Henry Hub spot  price for gas, "prices would  fluctuate much more                                                               
wildly".                                                                                                                        
                                                                                                                                
Mr. Zager also communicated that  due to the affects of Hurricane                                                               
Katrina in the Gulf of Mexico  area of the country in 2005, "Cook                                                               
Inlet consumers are  now going to see a slight  increase in their                                                               
price".  He  reminded that  Alaska  could  have  its own  set  of                                                               
natural  disasters  such  as  an  earthquake  that  could  affect                                                               
production. Such things  would affect a spot  price system. Thus,                                                               
long term contracts  would provide "assurance over  the long term                                                               
that  your  prices   are  going  to  be   relatively  stable  and                                                               
predictable".                                                                                                                   
                                                                                                                                
9:36:56 AM                                                                                                                    
                                                                                                                                
Senator Dyson  communicated that the  purpose of his  inquiry had                                                               
been  to   alert  fellow  Legislators   that,  rather   than  the                                                               
government take  being the  sole consideration,  numerous factors                                                               
were  involved  in  Chevron's   "economic  analyses".  Long  term                                                               
contracts  would  provide stability  but  would  also limit  what                                                               
could be  charged for a  product as costs  increased. Conversely,                                                               
"new explorers who  don't have a guaranteed market  to sell their                                                               
gas into" would also have challenges.                                                                                           
                                                                                                                                
Senator  Dyson asked  Chevron to  provide a  timeline as  to when                                                               
Cook Inlet's long term contracts  would terminate. The subsequent                                                               
renegotiation  process  would   reflect  more  current  commodity                                                               
values.                                                                                                                         
                                                                                                                                
9:38:01 AM                                                                                                                    
                                                                                                                                
Mr.  Zager  could speak  to  Chevron's  contracts. Their  current                                                               
contract  with Enstar  was  volume rather  than  time based.  The                                                               
volume for  that contract was  set at  450 billion cubic  feet of                                                               
natural gas  (BCF); 50 BCF had  been utilized to date.  Were this                                                               
volume trend  to continue,  the contract could  be in  effect for                                                               
another  20  years.  Furthermore, that  contract  was  renewable.                                                               
Chevron's   relationship  with   Chugiak  Electric   historically                                                               
allowed five-year contract  extensions. Chugiak Electric recently                                                               
issued  an RFP  for  additional gas  in  approximately 2011.  One                                                               
aspect  of  the  Cook  Inlet   gas  scenario  which  dramatically                                                               
differed from that  of the Lower 48 was that  a new gas discovery                                                               
in the  Lower 48 could typically  be hooked up and  sold within a                                                               
few weeks  or months. In  addition, the  volume could be  sold at                                                               
capacity at  current market prices. Conversely,  "a company could                                                               
not fully  "enjoy the upside" of  a very large discovery  in Cook                                                               
Inlet, "because you can't put it  to a market. You've got to wait                                                               
and stretch it  out over 20 years.  So there's a lot  of give and                                                               
take that makes  the Cook Inlet gas business very  unique." It is                                                               
the "only  market constrained environment in  North America". The                                                               
irony  is  that  we  "are  talking  about  shortages  and  market                                                               
constraints" at the same time.                                                                                                  
                                                                                                                                
9:40:15 AM                                                                                                                    
                                                                                                                                
Senator   Dyson  asked   when  the   present  operating   permits                                                               
associated with Agruim would terminate.                                                                                         
                                                                                                                                
Mr.  Zager understood  Agrium was  not operating  under a  permit                                                               
process.  Their operation  would  continue indefinitely  provided                                                               
they could receive sufficient quantities  of gas at a price which                                                               
would allow  them to operate  profitably. Their  current contract                                                               
with  Chevron  would terminate  in  October  2006. He  understood                                                               
Agruim  was  "soliciting  additional  gas  for  2006  and  2007".                                                               
Limited gas supplies prohibit Agruim's  ability to sign long term                                                               
contracts.                                                                                                                      
                                                                                                                                
Senator Dyson asked whether any  conditions in Agruim's RFP would                                                               
restrain the price of gas.  In addition, he asked for information                                                               
regarding Chevron's plans regarding LNG exports.                                                                                
                                                                                                                                
Mr. Zager noted  that Agruim's fertilizing products  were sold on                                                               
the world market  and therefore their price  must be competitive.                                                               
That would  affect the  price they  would be  willing to  pay for                                                               
gas.  Any contracts  established with  Agruim would  be finalized                                                               
after a negotiation process.                                                                                                    
                                                                                                                                
Mr.  Zager stated  that the  LNG  export question  would be  more                                                               
appropriately addressed  by John Barnes with  Marathon Oil during                                                               
his forthcoming presentation. That was "his field of business".                                                                 
                                                                                                                                
Senator Dyson acknowledged.                                                                                                     
                                                                                                                                
Mr. Zager refocused Committee attention  to the "Reasons to Lower                                                               
Taxes   and  Provide   Incentives  for   Additional  Cook   Inlet                                                               
Investment"  information  on  page  8 of  the  presentation.  Any                                                               
increase in  the production tax would  be passed on to  a utility                                                               
company's consumers. Additional Cook  Inlet oil development would                                                               
maintain and  add new  jobs and thereby  extend field  life. This                                                               
would be a major component  of a healthy economy; particularly in                                                               
the Kenai area.                                                                                                                 
                                                                                                                                
Mr.  Zager  addressed the  issue  of  how Alaska's  proposed  tax                                                               
regime would affect  its ability to compete in  the global market                                                               
for  capital  investment.  While  that was  a  consideration  for                                                               
activities  on the  North Slope,  he was  "absolutely sure"  that                                                               
this issue would  not apply to Cook Inlet as  Cook Inlet projects                                                               
did  not  compete  "for capital  against  a  major  international                                                               
project,   it's   competing   for  capital   against   lower   48                                                               
businesses". Cook  Inlet competed with "Wyoming,  New Mexico, and                                                               
Texas for the investment dollar".                                                                                               
                                                                                                                                
Mr.  Zager  communicated  that  Chevrons'  activities  in  Alaska                                                               
report  to  the  company's business  component  which  "allocates                                                               
capital to  North America".  The 25 percent  PPT tax  proposed in                                                               
CSSB 305  would place  Alaska and  the Cook  Inlet number  one in                                                               
having  the "worst  fiscal terms"  in the  United States.  Alaska                                                               
would  also  have  "some  of the  most  expensive  and  difficult                                                               
operating  conditions at  the same  time…"  He cautioned  against                                                               
implementing any tax regime change in the Cook Inlet.                                                                           
                                                                                                                                
9:44:18 AM                                                                                                                    
                                                                                                                                
Senator Hoffman asked  the percent of gas produced  in Cook Inlet                                                               
which   is   used   for  residential   rather   than   industrial                                                               
consumption.                                                                                                                    
                                                                                                                                
Mr. Zager  recalled that  approximately 50 to  60 percent  of the                                                               
gas  produced in  Cook Inlet  is utilized  to support  industrial                                                               
activities.                                                                                                                     
                                                                                                                                
Senator  Hoffman  asked  whether  the expectation  is  that  that                                                               
percentage  would  remain  constant   as  Cook  Inlet  production                                                               
diminished, as  depicted in the  "Cook Inlet  Production Forecast                                                               
with Four Year Capital Plan" on page 6 of the presentation.                                                                     
                                                                                                                                
Mr. Zager communicated that the  LNG and Agruim fertilizer plants                                                               
would continue  to utilize  a significant  percentage of  the gas                                                               
produced in  Cook Inlet. Were  one of those operations  to cease,                                                               
the  percentage "would  shift in  favor of  the utilities".  Were                                                               
both the  LNG plant and Agruim  to close, gas would  be available                                                               
for small commercial users or home usages.                                                                                      
                                                                                                                                
Senator Hoffman asked the usage forecast for Agruim.                                                                            
                                                                                                                                
Mr. Zager clarified  that the purpose of  the Production Forecast                                                               
chart  on  page  6  was  to  provide  an  offshore  oil  and  gas                                                               
production  forecast. Continuing,  he  conveyed  that the  Agruim                                                               
fertilizer  plant could  at peak  capacity consume  approximately                                                               
165 MCF per  day. Current operations were at half  capacity or 80                                                               
MCF per day. Half of the plant  had been shut down since the fall                                                               
of 2005. During  cold winters, their usage was less  than that as                                                               
gas  supplies were  not available.  The plant  could not  produce                                                               
products for a period  of ten days in January 2006  due to a lack                                                               
of gas. He understood that Agruim's  plan would be to run at half                                                               
capacity as long as gas was available.                                                                                          
                                                                                                                                
9:48:01 AM                                                                                                                    
                                                                                                                                
     Page 9 (upper diagram)                                                                                                     
                                                                                                                                
     Cook Inlet Provisions to Date                                                                                              
                                                                                                                                
        · House Resources - None                                                                                                
                                                                                                                                
        · Senate Resources - "5,000 BOPD exemption"                                                                             
          * Fails to provide any real help to Cook Inlet                                                                        
       * May be a "small company provision", but is not a                                                                       
            "Cook Inlet provision"                                                                                              
                                                                                                                                
        · Any "Cook Inlet Provision" should be specific to the                                                                  
          Cook Inlet                                                                                                            
                                                                                                                                
        · Reasons given not to consider Cook Inlet provision                                                                    
          * Adds complication                                                                                                   
                  o Some additional complication to help Cook                                                                   
                    Inlet is justified                                                                                          
          * System must be uniform over entire state                                                                            
                  o We already have statutes that distinguish                                                                   
                    geographic areas                                                                                            
                                                                                                                                
Mr. Zager addressed the PPT  provisions included in the House and                                                               
Senate committee  substitutes. He noted that  when Chevron became                                                               
aware  of  the   proposed  PPT  bill,  it   quickly  alerted  the                                                               
Administration and  the Legislature  of issues pertinent  to Cook                                                               
Inlet.  They   were  assured  by   those  entities   "that  those                                                               
differences were recognized" and would  be reflected in the bill.                                                               
Continuing,  he noted  that the  House PPT  committee substitute,                                                               
CSHB 488(RES)  [NOTE: This  bill is  referred to  as CSHB  488 in                                                               
these minutes]  did not include  any Cook Inlet  provisions. CSSB
305 included  a 5,000  barrel per day  exemption, which  had been                                                               
referred  to  as  the  Cook Inlet  exemption.  However,  he  took                                                               
exception  to that  because it  would "fail  to provide  any real                                                               
help" to Cook Inlet.                                                                                                            
                                                                                                                                
Mr.  Zager noted  the 5,000  barrel  per day  exemption could  be                                                               
regarded  as "a  small company  provision but  it is  not a  Cook                                                               
Inlet  provision".  Any consideration  of  Cook  Inlet should  be                                                               
specifically identified  as such.  This could  include provisions                                                               
pertinent to "anything south of  the Brooks Range". He reiterated                                                               
that  the   different  environment   in  Cook  Inlet   should  be                                                               
considered.                                                                                                                     
                                                                                                                                
Mr.  Zager   noted  that   several  arguments   against  applying                                                               
differing  provisions  to  Cook  Inlet had  been  presented.  One                                                               
position was that it would  complicate the bill. While this might                                                               
be true, the complications could  be minimal. As a representative                                                               
of  his company  and  its employees,  he  would be  uncomfortable                                                               
communicating to those employees that  the effort to address Cook                                                               
Inlet  activities  was  halted  because  it  proved  to  be  "too                                                               
complicated".  This  would not  be  accepted  as "a  good  enough                                                               
reason" not to address it.                                                                                                      
                                                                                                                                
Mr. Zager  communicated another  argument being  made was  that a                                                               
single  tax  system  should  apply  to  the  entire  State.  Even                                                               
"outside consultants"  had voiced how  difficult it was  to apply                                                               
"a one size fits all system"  to Alaska. Cook Inlet was a perfect                                                               
example of  that. Thus,  the argument  in favor  of a  single tax                                                               
structure would also be  unacceptable. Geographic differences are                                                               
already recognized in  State Statute as evidenced  by such things                                                               
as royalty reductions and expiration  incentives pertinent to oil                                                               
and gas activity in Cook Inlet.                                                                                                 
                                                                                                                                
9:50:39 AM                                                                                                                    
                                                                                                                                
Senator Stedman  communicated that this issue  had been discussed                                                               
in the Senate  Resources Committee and an  amendment containing a                                                               
tax formula had been adopted as a result.                                                                                       
                                                                                                                                
Mr.  Zager noted  that the  Senate Resources  Committee amendment                                                               
formula would be discussed in the next diagram.                                                                                 
                                                                                                                                
Senator Stedman  asked that  in the  discussion of  that diagram,                                                               
Mr. Zager specifically suggest a solution to the issue.                                                                         
                                                                                                                                
9:51:26 AM                                                                                                                    
                                                                                                                                
     Page 9 (lower diagram)                                                                                                     
                                                                                                                                
     Senate CS - BOE Exempted                                                                                                   
                                                                                                                                
     [This  chart depicts  how the  producing  companies in  Cook                                                               
     Inlet would be  affected by the up to 5,000  barrels per day                                                               
     exemption with a 0.2 modifier as  proposed in CSSB 305 and a                                                               
     0.1  modifier   as  initially   considered  by   the  Senate                                                               
     Resources  Committee. The  Exemption BOEPD  is presented  on                                                               
     the vertical axis  and the Production BOEPD  is reflected on                                                               
     the horizontal axis.]                                                                                                      
                                                                                                                                
Mr. Zager  explained the  chart. The  reddish-purple line  at the                                                               
top left  of the chart reflected  the up to 5,000  barrel per day                                                               
exemption with the 0.1 modifier  initially proposed by the Senate                                                               
Resources Committee. Under this  scenario, the exemption would be                                                               
zero for a company with  a 55,000 barrel Average Daily Production                                                               
(ADP).  Chevron  with  a statewide  production  of  approximately                                                               
40,000 barrels  would have received  a 187 barrel per  day credit                                                               
under that  formula. That  would not have  been an  incentive. He                                                               
had assumed,  when told the  0.1 formula would be  modified, that                                                               
the modifications  "would be favorable" to  Chevron. However, the                                                               
modification  was to  change the  modifier from  0.1 to  0.2. The                                                               
affect  of that  change was  reflected as  the blue  line on  the                                                               
chart. The  0.2 modifier served  to zero  the incentive out  at a                                                               
30,000 ADP rather than the 55,000  ADP under the 0.1 modifier. In                                                               
addition, Chevron's 187 barrel credit would change to zero.                                                                     
                                                                                                                                
Mr. Zager noted  that the impact of the formula  on all producing                                                               
companies in Cook  Inlet was depicted on the graph.  The only two                                                               
companies  that would  receive  the full  benefit  of the  credit                                                               
would  be Aurora  and XTO,  which each  produced less  than 5,000                                                               
barrels ADP.  The company,  Forest, which  produced approximately                                                               
7,000  barrels  ADP  would receive  slightly  less  credits  than                                                               
Aurora  and  XTO.  Marathon  Oil   with  a  daily  production  of                                                               
approximately 30,000 barrels ADP would  have had a 500 barrel per                                                               
day credit under  the 0.1 formula and less than  a 100 barrel per                                                               
day   credit  under   the  0.2   formula.  Chevron,   Exxon,  and                                                               
ConocoPhillips  would receive  "no deductions  at all"  under the                                                               
0.2 formula.                                                                                                                    
                                                                                                                                
Mr. Zager pointed  out that "94 percent of  Cook Inlet production                                                               
is operated by companies that  are not eligible for a significant                                                               
exemption. So, to say that this  is a Cook Inlet exemption" would                                                               
be "stretching quite a bit".                                                                                                    
                                                                                                                                
     Page 10 (upper diagram)                                                                                                    
                                                                                                                                
     Senate Resources CS - The unique value and challenged                                                                      
     position of the Cook Inlet is not adequately addressed                                                                     
                                                                                                                                
     · Revisions as proposed in the CS lowers the economics of                                                                  
        capital investments in the Cook Inlet                                                                                   
                                                                                                                                
        o Puts Chevron's four year capital program in jeopardy                                                                  
        o At the very least, increased taxes will lower                                                                         
               investment                                                                                                       
        o Without capital McArthur River Field is gone in ~ 4                                                                   
          years                                                                                                                 
        o Critical mass for Cook Inlet oil industry is gone                                                                     
                                                                                                                                
Mr. Zager  was disappointed  that the  House or  Senate committee                                                               
substitutes did not really contain  provisions that would address                                                               
the situation in Cook Inlet "in  a meaningful way". The PPT would                                                               
cause Chevron "to re-examine its  capital investment program, and                                                               
at  the  very  least,  the  increased  taxes  will  put  negative                                                               
pressure  on   the  amount  of  capital   that's  spent.  Without                                                               
additional capital,  the McCarthy River Field"  would likely shut                                                               
down in approximately  four years. Its closure  would eliminate a                                                               
"critical mass"  that is supporting  the Cook Inlet  industry oil                                                               
business.                                                                                                                       
                                                                                                                                
     Page 10 (lower diagram)                                                                                                    
                                                                                                                                
     Recommendation on Cook Inlet                                                                                               
                                                                                                                                
     Consider the following options:                                                                                            
                                                                                                                                
        · Carve out Cook Inlet                                                                                                  
             o Leave under current system                                                                                       
                                                                                                                                
        · Apply PPT methodology to keep taxes near current                                                                      
          levels                                                                                                                
          o Adjust tax rates lower (5%)                                                                                         
          o Retain overall incentive rates (20%)                                                                                
                                                                                                                                
Mr.  Zager  pointed  out that  these  two  recommendations  could                                                               
address the Cook  Inlet dilemma. Eliminating Cook  Inlet from the                                                               
provisions of the PPT and  leaving the current structure in place                                                               
would  negate  increasing taxes  in  Cook  Inlet, and  operations                                                               
would  continue  as  long  as   they  were  economically  viable.                                                               
However,  continuing   the  status  quo  would   not  incentivize                                                               
investment which he  believed would be "warranted  given the very                                                               
critical nature of the gas supply in Cook Inlet".                                                                               
                                                                                                                                
9:55:06 AM                                                                                                                    
                                                                                                                                
Mr. Zager stated that the  other recommendation would be to apply                                                               
the PPT  methodology on a  statewide basis, but "lower  the front                                                               
end tax rate  to the point where  the tax in Cook  Inlet would be                                                               
more  or less  neutral on  the  current taxes"  being paid.  That                                                               
would equate  to approximately  a five  percent tax  rate. Adding                                                               
this minor complication  would "solve a lot of  the problems" and                                                               
retain   "the  incentives   available  to   encourage  additional                                                               
exploration and development".                                                                                                   
                                                                                                                                
Co-Chair Green  asked whether the second  recommendation had been                                                               
embodied  in any  version  of a  Senate  Resources PPT  committee                                                               
substitute.                                                                                                                     
                                                                                                                                
Mr. Zager replied "no".                                                                                                         
                                                                                                                                
9:56:12 AM                                                                                                                    
                                                                                                                                
Senator  Dyson recalled  previous [unspecified]  testimony before                                                               
the  Committee which  expressed that  the companies  operating in                                                               
Cook Inlet  should like any  of the  PPT versions because  of the                                                               
"credits  or incentives  for  exploration  and development"  they                                                               
provided. He  asked Mr. Zager  to comment  on this as  a separate                                                               
issue from the tax rate.                                                                                                        
                                                                                                                                
Mr. Zager stated that "the  investment incentives are a positive"                                                               
if viewed "in  isolation … or as part of  an exploration program,                                                               
but we  all know there's  no free  lunch. If the  State's getting                                                               
more, the companies are getting  less". While the upfront risk to                                                               
a company would  be lowered, the PPT would "take  out the profits                                                               
on the  backside when you're  successful". Thus the returns  on a                                                               
project would be  lower, "although in an NPV  [Net Present Value]                                                               
sense, the projects are getting  smaller" in that a company would                                                               
be required to  invest less capital upfront  "because the State's                                                               
subsidizing and you  are getting less on the back  side cause the                                                               
State's taking more".                                                                                                           
                                                                                                                                
Mr.  Zager also  noted  that "some  of the  numbers  in terms  of                                                               
return  on  investment  may not  change  significantly:  on  some                                                               
projects  they may  get better,  on some  they'll get  worse, but                                                               
overall the projects are getting smaller on a NPV basis."                                                                       
                                                                                                                                
Mr. Zager communicated  that the companies in  this industry "are                                                               
in the  risk business. They  are capable of funding  the projects                                                               
as long as they receive the  full exposure to the results". Thus,                                                               
"incentives would be an important  part of it certainly, when you                                                               
couple it  with the increased  taxes, but incentives  alone can't                                                               
compensate for taking the tax rate higher".                                                                                     
                                                                                                                                
Senator  Dyson understood  however,  that under  any  of the  PPT                                                               
versions being discussed,  a company would be able  "to write off                                                               
much of its unsuccessful exploration  costs". They were unable to                                                               
do that under the current tax structure.                                                                                        
                                                                                                                                
Mr.  Zager affirmed  that was  correct. "In  terms of  investment                                                               
incentives, allowing all  capital to be counted as a  credit is a                                                               
vast  improvement over  the current  system" which  only provided                                                               
advantages for  successful exploration  wells. Between 70  and 90                                                               
percent  of the  time,  exploration efforts  fail,  and thus,  no                                                               
investment incentive  was provided  currently on  the exploration                                                               
side.                                                                                                                           
                                                                                                                                
9:59:26 AM                                                                                                                    
                                                                                                                                
     Page 11 (upper diagram)                                                                                                    
                                                                                                                                
     General Comments on CS                                                                                                     
                                                                                                                                
        · 25% tax rate is too high and will discourage                                                                          
          investment, a return to 20% overall rate is in the                                                                    
          best interest of Alaska                                                                                               
                                                                                                                                
        · Prefer $12 million credit to 5,000 BOEPD exemption                                                                    
                                                                                                                                
        · Transition capital must be earned again on 2:1 basis                                                                  
             o Prefer original proposal, this is better than                                                                    
               nothing, suggest extending time period to 10                                                                     
               years                                                                                                            
                                                                                                                                
        · April 1, commencement rate, not practical, punitive                                                                   
          penalty and interest rate                                                                                             
                                                                                                                                
        · Progressivity - do not support - taking away the                                                                      
          "windfalls", no matter how you couch it, lowers                                                                       
          expected value to investors, and therefore will lower                                                                 
          overall investments                                                                                                   
                                                                                                                                
Mr. Zager communicated that, at  this point, he would address the                                                               
CSSB 305  PPT bill "in  general" rather than continuing  to dwell                                                               
on its impact on Cook Inlet.                                                                                                    
                                                                                                                                
Mr. Zager  deemed the 25 percent  tax rate to be  "too high". The                                                               
company's analysis indicated that a  25/20 rate would reduce "the                                                               
overall  economics  of  a  project".   CSHB  488's  PPT  proposal                                                               
allowing for  a $12  million credit would  be preferred  over the                                                               
5,000  BOEPD in  CSSB 305.  Since the  tax would  be on  profits,                                                               
which  was  dollars,  it  would   "make  sense"  to  include  "an                                                               
exemption based on  dollars and not on barrels".  The 5,000 BOEPD                                                               
"exemption at high  prices could be worth  significantly more" to                                                               
"a highly profitable"  company; conversely, it would  "be worth a                                                               
lot less" to a company that is not highly profitable.                                                                           
                                                                                                                                
Mr. Zager addressed the transition  capital provision included in                                                               
CSSB  305  which would  be  earned  on a  two  to  one basis.  He                                                               
preferred  the  provisions  in  SB  305  which  "recognized  past                                                               
investments". While  acknowledging that the inclusion  of the two                                                               
for one provision  would be preferable to that  of eliminating it                                                               
entirely,  he communicated  that  the  two for  one  "step up  in                                                               
spending  to  recover  your money  is  pretty  darn  aggressive".                                                               
Accepting the  two for one  ratio would  be easier were  the time                                                               
period increased  to ten  years, for,  "by the  time you  want to                                                               
invest  and get  exploration  going, ten  years  would, for  most                                                               
people,  …  still represent  a  very  healthy investment  program                                                               
especially" in consideration  of the fact that any  year in which                                                               
oil prices fell below $40 would be ineligible.                                                                                  
                                                                                                                                
Mr.  Zager  stated  that  a significant  tax  increase  would  be                                                               
experienced  were  the  retroactive April  first  effective  date                                                               
adopted. He noted that British  Petroleum addressed this issue at                                                               
great  length   during  it  April   fifth  presentation   to  the                                                               
Committee.  He deemed  "the  nature of  this  penalty when  we're                                                               
kinda guessing what our taxes are as  we go along… is a bit heavy                                                               
handed".                                                                                                                        
                                                                                                                                
10:01:51 AM                                                                                                                   
                                                                                                                                
     Page 11 (lower diagram)                                                                                                    
                                                                                                                                
     Alternate Progressivity (Windfall Profit) Provision                                                                        
                                                                                                                                
        · Reason for the state to support progressivity                                                                         
                                                                                                                                
          o To get a "fair share" when there is a price run up                                                                  
             accompanied by large profits                                                                                       
          o NOT to raise taxes if the price increase is gradual                                                               
             over time and is accompanied by increases in costs                                                                 
             and thus not accompanied by increased profits - NOT                                                              
             a creeping tax increase                                                                                            
                                                                                                                                
        · Problems with progressivity as currently proposed                                                                     
          o "Trigger" price tied to WTI (or Henry Hub) is not                                                                   
             inflated                                                                                                           
             · Over time prices and costs will rise - 30 years                                                                  
               is a long time                                                                                                   
          o "High Cost" oil will be produced in increasing                                                                      
             quantities                                                                                                         
          o Over the long term a fixed trigger price will not                                                                   
             work as intended                                                                                                   
                                                                                                                                
        · Consider changing the trigger from commodity price to                                                                 
          a "net profits" trigger                                                                                               
                                                                                                                                
Mr.  Zager did  not support  the inclusion  of the  Progressivity                                                               
provision in the bill. Testimony  had been provided regarding the                                                               
inherent risks  companies face when  investing in  this industry.                                                               
Risks were  weighed against a  distribution of outcomes.  A "very                                                               
good outcome"  would be when  a company  discovered a lot  of oil                                                               
and was able  to sell it at  a high price. A  variety of outcomes                                                               
were factored  into a company's investment  decisions. Thus, when                                                               
you "start  clipping out the  high part of the  distributions, it                                                               
does  affect in  a  significant way  your  attitudes towards  the                                                               
investments." The inclusion  of progressivity in the  PPT was not                                                               
welcome, "because taking away those  windfalls is going to affect                                                               
people's  investment decisions.  We're in  the risk  business and                                                               
we're  happy to  take those  risks  as long  as we  get the  full                                                               
distribution of  the outcomes. So,  having said that,  I'm pretty                                                               
concerned" about the current progressivity discussion.                                                                          
                                                                                                                                
To that  point, Mr.  Zager proposed a  different way  to consider                                                               
progressivity, especially  its trigger point. He  understood that                                                               
the  Progressivity  provision was  included  to  assure that  the                                                               
State  would  "get  a  fair share  when"  prices  increases  were                                                               
accompanied by  large profits. An  example of this would  be when                                                               
oil prices increased  to $100, but costs to the  industry did not                                                               
increase. This would  generate a significant level  of profit for                                                               
the  company. The  purpose  of progressivity  "was  not to  raise                                                               
taxes" when price  increases were "gradual over a  long period of                                                               
time"  and  were simultaneously  accompanied  by  an increase  in                                                               
costs.  In other  words  progressivity  was not  meant  "to be  a                                                               
creeping  tax   increase  that   is  triggered   by  inflationary                                                               
pressures". Its intent was "to capture windfall profits".                                                                       
                                                                                                                                
Mr. Zager  pointed out  that a  significant amount  of discussion                                                               
has  occurred  in  regards  to what  should  be  the  appropriate                                                               
trigger  for  the  Progressivity  factor. To  date,  the  trigger                                                               
options that  have discussed  have included  such things  as West                                                               
Texas  Intermediate  (WTI)  oil  prices, Henry  Hub  prices,  ANS                                                               
prices, or wellhead prices. His  concern was that whatever option                                                               
was identified as the trigger "would  be locked in for 30 years".                                                               
No one could  predict what might occur during  that timeframe. In                                                               
the 1960s,  a price  of five dollars  might have  been considered                                                               
the  appropriate  trigger point  for  windfall  profits. A  price                                                               
indexed for  inflation would include issues  regarding what would                                                               
be  considered the  appropriate  inflation  marker. For  example,                                                               
utilizing the national Gross Domestic  Product (GDP) might not be                                                               
appropriate  because  it  "is  not  necessarily  related  to  oil                                                               
prices".                                                                                                                        
                                                                                                                                
Mr. Zager identified  another issue pertinent to a  30 year time.                                                               
That would be that "lower  and lower quality prospects and higher                                                               
and higher  costs" would come  into play. "Higher oil  prices may                                                               
not be connected  to higher profitability….Over the  long term, a                                                               
fixed price trigger is a disaster waiting to happen".                                                                           
                                                                                                                                
10:05:11 AM                                                                                                                   
                                                                                                                                
Senator Bunde  concluded therefore  that a  company in  this risk                                                               
industry would  be opposed to  Progressivity because  the company                                                               
taking  "the  risk  should  get the  profit".  However,  a  large                                                               
portion  of the  PPT  delved into  reducing  the risks  investors                                                               
would be  taking. While  the industry  felt that  30 years  was a                                                               
long  time, it  was  asking the  State to  provide  "30 years  of                                                               
certainty". To  that point,  he stated that  "when you're  in the                                                               
risk  business, certainty  costs  money." He  identified that  as                                                               
being "one  of the  arguments for  Progressivity: that  if you're                                                               
going to  get some bottom  line certainty,  there has to  be some                                                               
flexibility for windfall".                                                                                                      
                                                                                                                                
Senator   Bunde  found   the  trigger   point  information   very                                                               
interesting and  worthy of further discussion.  However, he asked                                                               
the industry  to consider the  "certainty" factor  when analyzing                                                               
Progressivity.                                                                                                                  
                                                                                                                                
Mr.  Zager responded,  "in  general it's  hard  to disagree  that                                                               
certainty   will  cost   some  money   if  that's   what's  being                                                               
requested".                                                                                                                     
                                                                                                                                
10:06:30 AM                                                                                                                   
                                                                                                                                
Senator   Stedman  corrected   some   information  in   Chevron's                                                               
presentation:  the  transition  language  included  in  CSSB  305                                                               
specified a five-year  look-back and "a two for  one credit going                                                               
forward, but  there's no $40  price on  it below which  you can't                                                               
use it".  That provision was in  SB 305, but was  not included in                                                               
CSSB 305.                                                                                                                       
                                                                                                                                
Mr. Zager appreciated the clarifications.                                                                                       
                                                                                                                                
Senator Stedman  voiced discomfort with applying  an "indexation"                                                               
element to Progressivity, as there  were "inherent problems" with                                                               
that  process. The  State's current  six billion  dollar spending                                                               
limit was  an example of  those "inherent problems".  The problem                                                               
of utilizing  indexation in the  PPT would be  further compounded                                                               
since "oil prices and inflation are lowly correlated".                                                                          
                                                                                                                                
Senator  Stedman  expressed,   however,  that  Progressivity  was                                                               
included  in the  PPT "to  maintain"  the "sharing  relationship"                                                               
between the government  take, specifically that of  the State and                                                               
the industry  as oil "prices advance  forward from $60 to  $80 to                                                               
$100 a barrel". Absent the  Progressivity factor, the State would                                                               
be "leveraged" in that its percent  of the pie would diminish and                                                               
the producers' would  increase. "And they're already  in the area                                                               
where  they're enhancing  shareholder wealth".  That share  would                                                               
continue to be  "magnified". Thus, the State  should endeavor "to                                                               
neutralize that so we aren't leveraged".                                                                                        
                                                                                                                                
Senator Stedman continued  that a mechanism must  be developed to                                                               
maintain that sharing relationship  balance over time. Otherwise,                                                               
the State  could find itself  in "the disadvantaged"  position it                                                               
is in today  under ELF. While he could  appreciate the industry's                                                               
position  against including  a Progressivity  factor in  the PPT,                                                               
"it's not in the best interest of the State to remove it".                                                                      
                                                                                                                                
Mr. Zager acknowledged Senator  Stedman's position, but expressed                                                               
that, even though the industry  does not support the inclusion of                                                               
a  Progressivity  element in  the  PPT,  it recognized  that  its                                                               
inclusion  might be  inevitable.  In consideration  of that,  the                                                               
industry would like to suggest  implementing "net profits" as "an                                                               
alternate" Progressivity trigger.                                                                                               
                                                                                                                                
10:09:34 AM                                                                                                                   
                                                                                                                                
     Page 12 (upper diagram)                                                                                                    
                                                                                                                                
     How would a "net profits" trigger work?                                                                                    
                                                                                                                                
        · Each company already will calculate a "net profits"                                                                   
          every month                                                                                                           
          o Divide monthly net profits by production to get a                                                                   
             "net profits/boe"                                                                                                  
                                                                                                                                
        · Set trigger point and escalation factor based on "net                                                                 
          profits/boe"                                                                                                          
                                                                                                                                
          o Suggest $50/boe net profits trigger and 2.0% for                                                                    
             each $10 increase in profits                                                                                       
          o Minimum general rate of 20% tax on net profit                                                                       
          o Maximum general rate of 30% tax on net profit                                                                       
                                                                                                                                
        · Advantages                                                                                                            
                                                                                                                                
          o Self correcting for inflation, costs, commodity,                                                                    
             high cost production (avoid discussion of WTI, ANS,                                                                
             Henry Hub, well head etc)                                                                                          
          o Fully captures the "windfall" upside, without                                                                       
             creating unintended consequences                                                                                   
          o System is fair, since taxes and progressivity will                                                                  
             only be attached to actual company profits                                                                         
                                                                                                                                
                                                                                                                                
Mr.  Zager  explained that  the  "net  profits" trigger  proposal                                                               
would  be  preferred  to  a   WTI  trigger.  Companies  routinely                                                               
calculate  their net  profits  on a  monthly  basis. That  figure                                                               
would be divided  by the company's production level  to achieve a                                                               
number referred  to as the  "net profits/BOE". Thus,  a specified                                                               
"net profits" level could replace  language the WIT Progressivity                                                               
trigger price in CSSB 305. "The  beauty of this system is that it                                                               
is self-correcting." For example, if  the WTI price increased but                                                               
costs did  not, companies would  experience a direct  increase in                                                               
profits. The tax  would be triggered at a  higher ratio. However,                                                               
in 20  years, for example,  were oil  prices to increase  to $100                                                               
per barrel  and costs to  increase from $20  per barrel to  $80 a                                                               
barrel, a company would not experience an increase in profits.                                                                  
                                                                                                                                
Mr.  Zager also  noted  that  the net  profits  trigger could  be                                                               
appropriately  applied  to  a  company  conducting  a  heavy  oil                                                               
project whose costs might be double  or triple those of light oil                                                               
projects. The net  profits trigger would also  be appropriate for                                                               
gas  projects.  Progressivity could  be  applied  to any  company                                                               
regardless of  whether they were in  the gas, heavy oil  or light                                                               
oil   industry,   when   their  profitability   level   met   the                                                               
progressivity component qualifications.                                                                                         
                                                                                                                                
10:12:01 AM                                                                                                                   
                                                                                                                                
Co-Chair Green  asked whether  the calculation  formula currently                                                               
utilized to  determine a company's  net profits could be  used or                                                               
whether it would require changes.                                                                                               
                                                                                                                                
Mr. Zager anticipated  "that the exact same  net profits" formula                                                               
currently utilized to  pay the industry net profits  tax would be                                                               
used.                                                                                                                           
                                                                                                                                
Senator Stedman clarified that while  the WTI price had initially                                                               
been considered  as the trigger  for Progressivity by  the Senate                                                               
Resources Committee, the Committee  ultimately decided to specify                                                               
ANS West Coast  as the trigger even though WTI  "is more actively                                                               
traded and  less likely to  be manipulated  because it is  a very                                                               
active market and there is a  lot of financial derivatives off of                                                               
it". ANS "is basically Alaska oil at Los Angeles".                                                                              
                                                                                                                                
Mr.  Zager stated  he  had  used WTI  solely  as  an example,  as                                                               
various Progressivity  benchmarks had  been considered.  CSSB 488                                                               
specified Henry  Hub as the  benchmark for gas  Progressivity. He                                                               
reiterated that  Cook Inlet companies were  concerned about their                                                               
"contracts that are fixed over  a number of years being connected                                                               
to Henry Hub".                                                                                                                  
                                                                                                                                
Mr.   Zager  suggested   the  benchmark   for  the   net  profits                                                               
Progressivity tax be $50 a barrel,  with a minimum tax rate of 20                                                               
percent. Each  ten dollar increase  in profits could  subject the                                                               
rate to  an additional two percent  tax, with a maximum  tax rate                                                               
of 30 percent.  This maximum tax level "is  an important feature"                                                               
for it  would provide "investors  some assurance that at  least a                                                               
bigger percent  of the upside  would remain … and  business could                                                               
be planned a  little better for sharing in  the increased profits                                                               
between those ranges".                                                                                                          
                                                                                                                                
Mr. Zager  summarized the  advantages provided  by a  net profits                                                               
trigger. "It would be self  correcting for inflation, costs, what                                                               
commodity  you're producing,  if you  decide to  get into  higher                                                               
cost type of  production. We don't know what could  be coming out                                                               
there in the future". Basing the  trigger on net profits would be                                                               
easier  to  implement  than  WTI, ANS,  Henry  Hub,  or  wellhead                                                               
prices. It would also "fully  capture the windfall upside without                                                               
creating  unintended  consequences  of  simply  increasing  taxes                                                               
because  price of  oil has  gone up"  without being  connected to                                                               
increased  profitability.  This would  be  a  "fair system  since                                                               
taxes  and   Progressivity  will  only  be   attached  to  actual                                                               
profits".                                                                                                                       
                                                                                                                                
     Page 12 (lower diagram)                                                                                                    
                                                                                                                                
     Examples of "Net Profits" Trigger                                                                                          
                                                                                                                                
     1. Windfall Case - Price double  - Costs fixed                                                                           
          Average Rev/BOE          60.00     110.00                                                                             
          Expense Per BOE           7.00       7.00                                                                             
          Capital Per BOE                                                                                                       
          (incl. Cap. Credit)      3.00        3.00                                                                             
          Net "Profit" per BOE     50.00     100.00                                                                             
          PPT%                     20.0%      30.0%                                                                             
          Actual Tax per BOE       10.00 $    30.00                                                                             
                                                                                                                                
     2. Increase Profits - Price double- Costs up                                                                               
          Average Rev/BOE          60.00     110.00                                                                             
          Expense Per BOE           7.00      37.00                                                                             
          Capital Per BOE                                                                                                       
           (incl. Cap. Credit)      3.00       3.00                                                                             
          Net "Profit" per BOE     50.00      70.00                                                                             
          PPT%                     20.0%      24.0%                                                                             
          Actual Tax per BOE       10.00 $    16.80                                                                             
                                                                                                                                
     3. Constant Profit - Price double - Costs keep pace                                                                        
          Average Rev/BOE          60.00     110.00                                                                             
          Expense Per BOE           7.00      57.00                                                                             
          Capital Per BOE                                                                                                       
          (incl. Cap. Credit)      3.00        3.00                                                                             
          Net "Profit" per BOE     50.00      50.00                                                                             
          PPT%                     20.0%      20.0%                                                                             
          Actual Tax per BOE       10.00 $    10.00                                                                             
                                                                                                                                
Mr.  Zager  reviewed three  examples  of  how the  suggested  net                                                               
profits  Progressivity  trigger  would   work.  Example  1  would                                                               
reflect  a "true  windfall profits"  scenario with  barrel prices                                                               
increasing  from  $60  to  $110.  Fixed  costs  remained  at  ten                                                               
dollars. $60 less the ten dollars  of fixed costs would result in                                                               
a net profit  of $50. That would  be subject to a  20 percent tax                                                               
equating  to  ten dollars.  A  $110  barrel  price less  the  ten                                                               
dollars in  fixed costs  would result  in a  net profit  of $100.                                                               
This would  be subject to  a maximum 30  percent tax rate  for an                                                               
actual BOE tax of $30.                                                                                                          
                                                                                                                                
Mr.  Zager stated  that Example  2 would  reflect a  situation in                                                               
which  both the  BOE  price and  expenses  increased: BOE  prices                                                               
increased  from $60  to $110  and expenses  increased from  seven                                                               
dollars  to $37.  Capital investment  remained constant  at three                                                               
dollars BOE. The next profit would  be $70 BOE at the $110 price.                                                               
This would  qualify for a 24  percent PPT tax equating  to $16.80                                                               
BOE.                                                                                                                            
                                                                                                                                
Mr.  Zager noted  that Example  3  would reflect  a situation  in                                                               
which  both BOE  prices and  expenses significantly  increased in                                                               
alignment, resulting in  a constant net profit  level. Absent the                                                               
net profits Progressivity  approach, and were the  PPT "tied only                                                               
to  oil" prices,  a company's  profitability would  not increase,                                                               
but the tax percent could  increase "dramatically". That would be                                                               
"fundamentally  unfair  because  it's  a  net  profits  tax;  the                                                               
escalator should be tied to tax and not just to gross revenue".                                                                 
                                                                                                                                
10:18:24 AM                                                                                                                   
                                                                                                                                
Senator  Stedman assured  that  this issue  was being  addressed.                                                               
While  Mr.   Zager  had  presented   advantages  of   basing  the                                                               
Progressivity trigger on  net profits, the advantage  of it being                                                               
based on gross should also be  discussed. One was "that it's less                                                               
likely to  be manipulated";  it would  be "un-impacted  by moving                                                               
expenditures" or  credits. "Credits can be  triggered, if they're                                                               
accumulated, when they want to  be triggered". There was also the                                                               
potential  impact   of  expenditures  "moving  from   quarter  to                                                               
quarter, month to  month". That would affect the  bottom line. It                                                               
was "a generally accepted concept"  that "a corporation would try                                                               
to   minimize   their  tax   and   maximize   their  profit".   A                                                               
progressivity trigger based on gross  dollars would eliminate the                                                               
possibility of such manipulation.                                                                                               
                                                                                                                                
Senator Stedman  stated the reason the  Progressivity trigger was                                                               
initially based on  WTI oil prices instead of ANS  West Coast was                                                               
that placing  it on  a more active  market would  remove possible                                                               
manipulations. The  historical two dollar difference  between the                                                               
two  markets would  be  accounted for  when  setting the  trigger                                                               
price. A third  "benefit" of basing the trigger on  the gross was                                                               
that  it  would be  "much  more  predictable"  in the  effort  of                                                               
keeping the  government share  percentage relatively  constant at                                                               
various price ranges.                                                                                                           
                                                                                                                                
10:20:32 AM                                                                                                                   
                                                                                                                                
Senator   Stedman  acknowledged   there   being  advantages   and                                                               
disadvantages to  both approaches;  however, it  would be  in the                                                               
"State's best interest" to base  the trigger on gross rather than                                                               
net  profits. The  trigger  and the  slope of  the  tax could  be                                                               
adjusted to  address concerns. The  State must avoid  a situation                                                               
in which "expenditures  and credits could be moved  around to try                                                               
to  impact" the  tax  rate.  The effort  should  be  to hold  the                                                               
government's take constant.                                                                                                     
                                                                                                                                
Senator Stedman  reminded the  Committee that  the effect  of the                                                               
credits on  the tax  was unknown.  He shared  that Dr.  Pedro van                                                               
Meurs,  an   economic  consultant  to  the   Administration,  had                                                               
communicated to  him his concern  that the impact of  the credits                                                               
on the State's revenue "could  be substantial". Economic analyses                                                               
should be  conducted to determine  how the State's  revenue would                                                               
be  affected by  a net  profits trigger.  An in-depth  discussion                                                               
with State  economic consultants should occur  before any changes                                                               
were considered in this regard as  it was a complex issue and the                                                               
impacts might not be "readily apparent".                                                                                        
                                                                                                                                
10:21:59 AM                                                                                                                   
                                                                                                                                
Senator Hoffman voiced  concern that under Example 3  the risk to                                                               
the State could  increase were expenses to exceed  beyond $57 BOE                                                               
to approximately  $70 BOE. At a  20 percent tax rate,  the actual                                                               
amount of  revenue the  State would receive  could be  zero under                                                               
the net profits Progressivity formula.                                                                                          
                                                                                                                                
Mr. Zager expressed that that  scenario could occur under the PPT                                                               
regardless of  the Progressivity  formula. He clarified  that the                                                               
net  profits  methodology being  proposed  was  specific "to  the                                                               
Progressivity feature  of the formula". Were  a company's profits                                                               
to  reduce to  zero, the  State's take  would also  be zero.  His                                                               
effort was  to address  "how to capture  this windfall"  and what                                                               
would be  "the fairest  way to  implement the  windfall trigger".                                                               
There  would  be problems  were  the  trigger simply  "pegged  to                                                               
something  like WTI"  without being  connected to  profitability;                                                               
"this is a tax on profits, it's not a tax on gross revenue".                                                                    
                                                                                                                                
10:23:26 AM                                                                                                                   
                                                                                                                                
Senator  Stedman qualified  that CSSB  305 would  implement a  25                                                               
percent tax rate rather than the  20 percent rate depicted in the                                                               
presentation.  Nonetheless,  the   concept  being  discussed  was                                                               
valid. The details could be addressed later.                                                                                    
                                                                                                                                
10:24:00 AM                                                                                                                   
                                                                                                                                
Senator  Stedman  also noted  that  "imbedded"  in the  CSSB  305                                                               
Progressivity formula, "is the impact  of having it deductible by                                                               
one less  the tax rate".  In effect, a  company "would get  a tax                                                               
deduction indirectly, but  clearly it is a tax on  gross". It was                                                               
"intentionally set that way".                                                                                                   
                                                                                                                                
Co-Chair  Green understood  the  State  currently recognized  net                                                               
profits  as   the  basis  for  determining   a  business's  State                                                               
corporate  tax. Thus,  basing the  Progressivity  feature on  net                                                               
profits would not  be "a new contrived formula;  it's an accepted                                                               
calculation".                                                                                                                   
                                                                                                                                
Senator  Stedman affirmed;  however,  expressed that  introducing                                                               
the credit mechanism  into the tax formula would  alter things as                                                               
a  company  with credits  "could  move  its income  around".  Any                                                               
proposal to incorporate a net  profits Progressivity trigger must                                                               
be first  thoroughly discussed with  the State's  consultants. He                                                               
maintained  his position  that it  would be  in the  State's best                                                               
interest  to base  the Progressivity  feature  on gross  revenue.                                                               
Were it  determined in  the future  that it  was a  deterrent "to                                                               
getting the commodity  out of the ground", it  could be revisited                                                               
and adjusted. "It  would be virtually impossible to  come up with                                                               
something that  would last  the test of  time without  some minor                                                               
adjustments; otherwise  we're going to  have our necks  stuck out                                                               
ten miles."                                                                                                                     
                                                                                                                                
10:26:32 AM                                                                                                                   
                                                                                                                                
Senator  Olson observed  that,  as a  businessman,  he had  hired                                                               
accountants  to deal  with  the  complications accompanying  such                                                               
things  as  depreciation   schedules,  deductions,  and  credits.                                                               
Manipulation  of numbers  could occur  in the  endeavor to  avoid                                                               
paying taxes.  Thus, he  was uncomfortable  with the  proposal to                                                               
utilize net profits in the Progressivity component.                                                                             
                                                                                                                                
10:27:03 AM                                                                                                                   
                                                                                                                                
Mr.  Zager  reiterated  that  the  PPT was  a  net  profits  tax.                                                               
Therefore,  proposing to  base the  Progressivity trigger  on net                                                               
profits  "is  no more  subject  to  manipulation than  the  basic                                                               
monthly  tax payment.  Whatever it  is, it's  going to  be highly                                                               
scrutinized." He questioned how this  could "add another layer of                                                               
manipulation"  since the  trigger would  be based  on an  already                                                               
agreed  upon level  of  tax  owed by  a  company.  A net  profits                                                               
trigger formula would  recognize each month that,  when a company                                                               
was highly profitable,  the State could take a  higher percent of                                                               
the  profits.  Conversely it  would  recognize  when a  company's                                                               
"profits didn't  go up cause your  costs went up as  much as your                                                               
revenue,  and therefore  you  shouldn't be  subject  to a  higher                                                               
percentage tax".                                                                                                                
                                                                                                                                
Senator  Stedman  referred the  Committee  to  an April  5,  2006                                                               
presentation  [NOTE: See  April 5,  2006 House  Finance Committee                                                               
minutes  on  HB 488]  in  which  Barry  Pulliam and  Dr.  Anthony                                                               
Finizza, consultants  with Econ  Research, the  economic research                                                               
and  consulting  firm hired  by  the  Administration, reviewed  a                                                               
chart [copy not  provided] which depicted their  estimates of how                                                               
the credits  in the PPT would  the impact the State's  revenue at                                                               
oil prices ranging  from $25 to $70 as affected  by the tax rates                                                               
proposed in SB  305, CSSB 305 and CSHB 488.  The credits proposed                                                               
in the bill would decrease the  tax rates. Decisions must be made                                                               
carefully as numerous  things must be considered  in the decision                                                               
making  process.  He  suggested   that  Econ  One  present  their                                                               
findings in regards  to additional investment in  the State would                                                               
affect the effective tax rate under the provisions of CSSB 305.                                                                 
                                                                                                                                
10:29:51 AM                                                                                                                   
                                                                                                                                
Mr. Zager determined  that "having a lot of credits  to deal with                                                               
would  be  a good  thing",  as  that  would  indicate "a  lot  of                                                               
investment" was  occurring. It would  equate to "growing  the pie                                                               
and that royalty piece over  there's getting a lot bigger". Thus,                                                               
he  agreed with  Senator Stedman  "that  the credits  can have  a                                                               
significant affect here,  but it could only be  a positive affect                                                               
from the  State's perspective  if we're  investing so  much money                                                               
that  our severance  tax is  going down".  There were  tradeoffs.                                                               
There  was  danger  in  looking  at pieces  of  the  proposal  in                                                               
isolation.                                                                                                                      
                                                                                                                                
Co-Chair Green interjected to note  that the Committee would meet                                                               
until 11:00 AM and then reconvene at approximately 3:00 PM.                                                                     
                                                                                                                                
10:30:54 AM                                                                                                                   
                                                                                                                                
     General Comments on CS                                                                                                     
                                                                                                                                
        · Debate between "get it now" and "grow the pie"                                                                        
          o "Get it now" option will balloon short term revenue                                                                 
             creating a state windfall that must be well managed                                                                
          o "Grow the pie" option will create long term                                                                         
             opportunities for investors and for Alaska                                                                         
          o I am optimistic about the ingenuity and technology                                                                  
             available in out industry and the people of Alaska                                                                 
             to greatly extend oil production for the next                                                                      
             generation                                                                                                         
                                                                                                                                
        · Consultants will one day leave and we will be left to                                                                 
          deal with our decisions                                                                                               
          o First you vote on behalf of the people of Alaska                                                                    
          o Then over the coming years investors vote with their                                                                
             dollars                                                                                                            
             · Original industry support was astounding                                                                         
             · However, Investors big and small, old and new,                                                                   
               are now saying that the Senate Resources CS                                                                      
               structure will discourage investment in Alaska                                                                   
                                                                                                                                
Mr. Zager  overviewed the information. Chevron  believed it would                                                               
be in the best interests of the State to "grow the pie".                                                                        
                                                                                                                                
10:31:13 AM                                                                                                                   
                                                                                                                                
     Summary Comments on CS                                                                                                     
                                                                                                                                
        · Chevron cannot support the Senate Resources CS in its                                                                 
          current form                                                                                                          
        · Urge return to original PPT terms, while inserting a                                                                  
          5/20 Cook Inlet provision                                                                                             
        · Recommend inclusion of an additional capital credit                                                                   
          for heavy oil or tertiary recovery (CO2) projects                                                                     
          statewide                                                                                                             
        · Chevron has been in Alaska for many years and intends                                                                 
          to continue an active exploration and production                                                                      
          operation in the state if a sound and stable fiscal                                                                   
          regime can be offered                                                                                                 
                                                                                                                                
Mr. Zager shared that Chevron did  not support the 25 percent tax                                                               
rate proposed in CSSB 305 and  urged the Committee to further the                                                               
provisions of  SB 305 with  the inclusion  of a five  percent tax                                                               
rate and 20  percent credit on Cook  Inlet activities. Additional                                                               
credits for heavy oil and  other tertiary projects should also be                                                               
added to  the bill. Chevron  hoped to continue its  operations in                                                               
Alaska.                                                                                                                         
                                                                                                                                
10:31:59 AM                                                                                                                   
                                                                                                                                
Senator  Bunde asked  whether Chevron  desired  the five  percent                                                               
tax/20  percent credit  provisions  to apply  solely to  existing                                                               
activity  in Cook  Inlet or  to  both existing  and new  activity                                                               
there.                                                                                                                          
                                                                                                                                
Mr.  Zager expressed  the  desire that  the  five percent  tax/20                                                               
percent credit  apply uniformly  to all  activity in  Cook Inlet.                                                               
This would encourage more activity. A  higher tax rate would be a                                                               
disincentive.  In  addition,  the  five  percent  tax/20  percent                                                               
credit would "encourage  investors and owners to  try new things"                                                               
they might not try otherwise.                                                                                                   
                                                                                                                                
10:32:57 AM                                                                                                                   
                                                                                                                                
Senator Hoffman asked  whether the application of  a five percent                                                               
tax/20 percent credit  should be extended to other  new fields in                                                               
the State including those in the Tanana Basin and Bristol Bay.                                                                  
                                                                                                                                
Mr. Zager thought this should be  a policy call of the State. His                                                               
"immediate interest"  was to Cook  Inlet. However,  other "virgin                                                               
basins"  such  as  the  Nenana  Basin  near  Fairbanks  could  be                                                               
included as  it was a  "challenged" field.  At this time,  he had                                                               
"no opinion" on how the State should address Bristol Bay.                                                                       
                                                                                                                                
10:33:37 AM                                                                                                                   
                                                                                                                                
Co-Chair Wilken  appreciated both the presentation  and Chevron's                                                               
recognition and  assistance in addressing  some of  the decisions                                                               
the Committee must make.                                                                                                        
                                                                                                                                
Co-Chair  Wilken   asked  whether,  in  an   effort  to  "realize                                                               
economies  of scale"  that would  benefit  the various  entities,                                                               
Chevron  had long  term operating  agreements with,  for example,                                                               
Marathon Oil  Company, Exxon, ConocoPhillips,  and Forest  in its                                                               
exploration, production,  and operation activities in  Cook Inlet                                                               
and on the North Slope.                                                                                                         
                                                                                                                                
Mr. Zager responded that Chevron  had numerous agreements in Cook                                                               
Inlet. Each  field or  recognized government  unit that  had more                                                               
than  one  owner   would  "be  governed  by   a  joint  operating                                                               
agreement". Some agreements  had been in effect  since the 1960s.                                                               
However,  such   agreements  were  primarily  "confined   to  the                                                               
operations within  the given unit"  such as the Trading  Bay Unit                                                               
or the Granite  Point Unit. "Specific rules that  govern who does                                                               
what,  who pays  what, etc.  etc."  On occasion,  Area of  Mutual                                                               
Interest agreements (AMIs), which  are "fairly transient, shorter                                                               
term, come  and go as companies  see fit", were made  for "larger                                                               
areas  usually outside  of existing  units." They  were typically                                                               
exploration agreements  in which parties "agree  to work together                                                               
to  explore".   Chevron  was  not   currently  involved   in  any                                                               
"significant"  AMI outside  of its  current units.  He was  aware                                                               
however that  other companies  had AMIs to  conduct work  in Cook                                                               
Inlet.                                                                                                                          
                                                                                                                                
Co-Chair  Wilken  shared  the  basis for  his  question:  he  was                                                               
troubled about  "this notion of  a 30 year" or  longer commitment                                                               
without  a  re-opener. "It  would  seem  to  me that  those  that                                                               
operate in unit  agreements and AMIs are  fairly comfortable with                                                               
re-openers if  the terms of  the re-opener are agreed  to" before                                                               
the agreement  was signed.  He asked whether  he was  drawing the                                                               
wrong analogy  between unit agreements  and AMIs and how  the oil                                                               
companies talk and  interact with each other.  "Why that wouldn't                                                               
be applicable  to the State  and the producers entering  into re-                                                               
openers  given we  struggled through  the terms  for those?"  The                                                               
point  was that  since the  industry routinely  operated in  this                                                               
matter, it would not be "foreign territory".                                                                                    
                                                                                                                                
10:36:48 AM                                                                                                                   
                                                                                                                                
Mr. Zager was  unaware of any re-openers in  the industry's joint                                                               
operating  agreements  (JOAs).  Issues might  become  contentious                                                               
were  one  party to  feel  that  a  JOA  was no  longer  working.                                                               
Unfortunately  when a  contract  agreed upon  in  the 1960s,  for                                                               
example, was  no longer working,  areas of conflict  and possibly                                                               
litigation could develop.  A common term used in  the 1960s would                                                               
have been  "how much money  can you spend without  your partner's                                                               
approval".  While that  amount  might have  been  $10,000 in  the                                                               
1960s, it  would not accomplish anything  substantial today. Such                                                               
things had been  addressed from time to time  in recognition that                                                               
changes must be  made. Difficulties would arise  were partners to                                                               
disagree on the changes.                                                                                                        
                                                                                                                                
Co-Chair  Wilken appreciated  this insight  as it  helped clarify                                                               
the re-opener  relationship in terms  of the industry and  to the                                                               
State.                                                                                                                          
                                                                                                                                
There  being  no  further  questions,  Mr.  Zager  concluded  his                                                               
presentation.                                                                                                                   
                                                                                                                                
AT EASE 10:38:19 AM / 10:43:44 AM                                                                                           
                                                                                                                                
     State of Alaska Petroleum Production Tax                                                                                   
     Testimony to Senate Finance Committee                                                                                      
     (SB 305 RES)                                                                                                               
                                                                                                                                
     John A Barnes, Marathon                                                                                                    
     April 6, 2006                                                                                                              
                                                                                                                                
[Note: The  pages in this  document are not  numbered; therefore,                                                               
for reference  purposes, the  Senate Finance  Committee Secretary                                                               
made a  notation on each  page of the corresponding  timestamp in                                                               
which  that   page  was  addressed   in  this   hearing.  General                                                               
descriptive information of  each page is provided in  the body of                                                               
these  minutes  when feasible.  A  copy  of  the handout  can  be                                                               
obtained  by  contacting  the  Legislative  Research  Library  at                                                               
(907)465-3808.]                                                                                                                 
                                                                                                                                
10:43:49 AM                                                                                                                   
                                                                                                                                
JOHN  A   BARNES,  Production  Manager,  Marathon   Oil  Company,                                                               
informed the Committee that Marathon's  activity in the State was                                                               
limited to natural gas production  in Cook Inlet. The company had                                                               
operated  in the  State for  more than  50 years.  He appreciated                                                               
this opportunity to present Marathon's  perspectives on CSSB 305.                                                               
He also noted  that the information provided by  Chevron was very                                                               
informative.                                                                                                                    
                                                                                                                                
Mr.  Barnes  stressed it  was  impossible  to compare  the  PPT's                                                               
impact on gas  production in Cook Inlet to  other global markets,                                                               
as Cook Inlet does not  have "world class exploration potential".                                                               
Cook  Inlet   was  "disadvantaged   by  price"  and   the  future                                                               
projections of its "types of reserves and resources".                                                                           
                                                                                                                                
10:45:05 AM                                                                                                                   
                                                                                                                                
     Marathon Testimony - Alaska PPT                                                                                            
     Impact of SB 305(RES) on Alaska Natural Gas                                                                                
                                                                                                                                
        · Cook inlet Natural Gas summary: Pre PPT                                                                               
        · Financial Impacts of PPT                                                                                              
        · Consequences of PPT                                                                                                   
        · What is Needed                                                                                                        
                                                                                                                                
Mr. Barnes  stated that these four  issues would be the  focus of                                                               
this presentation (copy on file).                                                                                               
                                                                                                                                
10:45:24 AM                                                                                                                   
                                                                                                                                
     Cook Inlet Natural Gas Summary: Pre PPT                                                                                    
                                                                                                                                
        · Declining reserves and production rate.                                                                               
        · High operating and capital costs as compared to lower                                                                 
          48 natural gas provinces.                                                                                             
        · Difficult permitting and regulatory arena.                                                                            
        · Need for additional exploration and development to                                                                    
          moderate price increase to consumers and to continue                                                                  
          to provide industrial feedstock.                                                                                      
        · Historic price differential to Henry Hub.                                                                             
                                                                                                                                
Mr. Barnes reviewed existing conditions in Cook Inlet.                                                                          
                                                                                                                                
10:46:09 AM                                                                                                                   
                                                                                                                                
Mr. Barnes shared  some "Cook Inlet Areawide  Lease sale Results"                                                               
for the  years 2000 to 2004  which were compiled by  the Division                                                               
of  Oil and  Gas,  Alaska Department  of  Natural Resources.  The                                                               
information  could  be  summarized   as  "encouragement  for  the                                                               
Inlet".  He  remarked  favorably  about the  State's  lease  sale                                                               
program  conducted  in Cook  Inlet.  The  number of  tracts  sold                                                               
increased from  27 in the year  2000 to 72 in  2004. In addition,                                                               
the  increase in  the number  of  multiple bids  on tracts  would                                                               
indicate  there being  increased interest  in the  development of                                                               
gas in the Cook Inlet.                                                                                                          
                                                                                                                                
10:46:45 AM                                                                                                                   
                                                                                                                                
     Timeline of Cook Inlet Exploration                                                                                         
                                                                                                                                
     [This   graph  depicts   a  timeline   of  the   exploration                                                               
     activities in Cook Inlet between  1950 and 2004. Exploration                                                               
     activities  peaked  in  the  late  1960s  and  early  1970s.                                                               
     Exploration   activities   declined  and   remained   steady                                                               
     thereafter. Increased exploration  activities began to occur                                                               
     shortly after the year 2000.]                                                                                              
                                                                                                                                
Mr.  Barnes   noted  that  the   State  experienced  a   boom  in                                                               
exploration  activities in  the 1960s  and 1970s.  At that  time,                                                               
Cook  Inlet "was  truly a  world class  opportunity". Lean  years                                                               
followed that boom. An increase  in gas exploration wells drilled                                                               
has occurred  during the last  several years. While  "seven wells                                                               
is a  pretty good  step", it  was not enough.  It was  however, a                                                               
good indicator  that some  of the  incentives and  lease programs                                                               
the  State implemented  have been  beneficial.  Higher gas  sales                                                               
prices also assisted in increasing well activity.                                                                               
                                                                                                                                
10:47:27 AM                                                                                                                   
                                                                                                                                
Mr.  Barnes stated  that  the comparison  chart  depicted on  the                                                               
graph  titled "Historic  HH,  Department of  Revenue  PV and  DNR                                                               
Royalty  Value" depicted  Henry  Hub (HH)  prices, Department  of                                                               
Revenue (DOR)  Cook Inlet Prevailing Values  (PV), and Department                                                               
of  Natural  Resources (DNR)  royalty  values  from January  2001                                                               
through  January  2005. As  reflected  on  the chart,  Henry  Hub                                                               
prices could  be "very  volatile". While  gas prices  ranged from                                                               
approximately  $1.50  per  MCF  to  $8.00  per  MCF  during  this                                                               
timeframe, Henry  Hub gas prices spiked  to $18 in the  year 2005                                                               
as  a result  of  the  immense impact  of  that year's  hurricane                                                               
season. The DOR PVs and the  DNR royalty value lines on the chart                                                               
were recognized  as "very good  proxies for any type  of indexing                                                               
or snapshot about what's really going  on in the Cook Inlet". Gas                                                               
prices have  trended upward in  recent years due "to  indexing of                                                               
old  legacy contracts  as  well  as new  contracts"  such as  the                                                               
Chevron gas contract with Enstar Natural Gas Company.                                                                           
                                                                                                                                
10:48:27 AM                                                                                                                   
                                                                                                                                
     Future of Supply                                                                                                           
                                                                                                                                
        · We have moved from an "Excess Supply" market to a                                                                     
          "Supply & Demand" market                                                                                              
             o Cost of Natural Gas will go up                                                                                   
             o More supply contracts are needed and will likely                                                                 
               be for smaller volumes                                                                                           
             o Supply contracts will likely be more complicated                                                                 
             o Pipeline system will be more complicated to                                                                      
               operate                                                                                                          
                                                                                                                                
        · We are working to identify and evaluate options to                                                                    
          meet future demand                                                                                                    
             o LNG imports may be economic at some point                                                                        
             o Storage options are being explored for peaking                                                                   
               purposes                                                                                                         
             o We have achieved Federal support for an in-depth                                                                 
               DOE study of In-State demand and for conceptual                                                                  
               engineering of a spur pipeline to Nenana                                                                         
               Basin/Fairbanks                                                                                                  
                                                                                                                                
     Source: Enstar Natural Gas Company - Energy Supply in South                                                                
     Central Alaska, November 14, 2005                                                                                          
                                                                                                                                
Mr.  Barnes  stated that  this  information  indicated that  "the                                                               
energy  situation  in  Cook  Inlet is  being  recognized  by  all                                                               
parties.  Enstar is  working  diligently to  try  to provide  new                                                               
opportunities, new incentives, to bring gas to the Cook Inlet".                                                                 
                                                                                                                                
10:48:49 AM                                                                                                                   
                                                                                                                                
     Residential Costs by Region                                                                                                
                                                                                                                                
     Natural Gas Cost ($/Mcf)                                                                                                   
                                                                                                                                
     Western States:                                                                                                            
     Washington, Oregon and California … $14.87                                                                                 
     Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona,                                                                  
     and New Mexico … $11.63                                                                                                    
     Midwest:                                                                                                                   
     North Dakota, Minnesota, South Dakota, Nebraska, Kansas,                                                                   
     Iowa, and Missouri … $15.33                                                                                                
     Oklahoma, Arkansas, Texas, and Louisiana … $16.45                                                                          
     Wisconsin, Michigan, Illinois, Indiana, and Ohio … $15.63                                                                  
     Kentucky, Tennessee, Mississippi, and Alabama … $17.78                                                                     
     East:                                                                                                                      
     New    Hampshire,    Maine,   Massachusetts,    New    York,                                                               
     Pennsylvania, Connecticut, Rhode Island, New Jersey …$19,67                                                                
     West Virginia, Virginia, Delaware, Maryland, Washington DC,                                                                
     North Carolina, South Carolina, Georgia, and Florida …                                                                     
     $19.39                                                                                                                     
     Alaska $6.70                                                                                                               
                                                                                                                                
     Source: Enstar Natural Gas Company: Energy Supply in South                                                                 
     Central Alaska November 14, 2005                                                                                           
                                                                                                                                
Mr. Barnes stated  that the price ranges of  residential costs of                                                               
delivered gas  in various regions  of the country  would indicate                                                               
"the  disconnect that  exists in  the gas  business between  Cook                                                               
Inlet  and the  Lower  48 gas  provinces."  Delivered gas  prices                                                               
included  such  things  as   transportation  fees,  storage,  and                                                               
delivery of gas by a  local distributing company (LDC). The $6.70                                                               
price  of  delivered  gas  in   Alaska  was  less  than  half  of                                                               
practically every other state's  price. Western states gas prices                                                               
were lower than other continental  gas province prices because of                                                               
less demand and  the fact that some of those  areas had their own                                                               
gas exploration. The prices depicted  were the delivered price to                                                               
consumers  rather than  the prices  gas producers  received. This                                                               
chart demonstrated the benefits consumers of Cook Inlet gas                                                                     
received now and would receive in the future were sufficient                                                                    
exploration activity to occur.                                                                                                  
                                                                                                                                
10:49:46 AM                                                                                                                   
                                                                                                                                
Senator Hoffman understood that the $6.70 delivered gas price                                                                   
depicted for Alaska was solely relative to Cook Inlet.                                                                          
                                                                                                                                
Mr. Barnes affirmed.                                                                                                            
                                                                                                                                
Senator Olson asked for confirmation that the gas prices                                                                        
depicted for the contiguous states were to delivered gas.                                                                       
                                                                                                                                
Mr. Barnes stated that the entirety of prices depicted was                                                                      
delivered gas to the consumer. The price of gas in Cook Inlet                                                                   
benefited the area.                                                                                                             
                                                                                                                                
10:50:35 AM                                                                                                                   
                                                                                                                                
     Conceptual Competitive Comparison                                                                                          
     Common Input - Per Well Analysis                                                                                           
                                                                                                                                
     Recoverable Reserves          5 BCF                                                                                        
     Development Cost (Capital)    $5 million                                                                                   
     Operating Cost                $.050/mcf                                                                                    
     Royalty                       1/8                                                                                          
                                                                                                                                
     Based on House PPT (SB305,RES) and domestic severance tax                                                                  
     rates                                                                                                                      
                                                                                                                                
     Competitiveness Comparison:                                                                                                
     Cook Inlet Natural Gas Investments                                                                                         
     Disadvantaged Against Competition                                                                                          
                                                                                                                                
     [This analysis compares the BFIT Profit/Inv. for Alaska to                                                                 
     that of Oklahoma, Texas, Wyoming, and Louisiana.]                                                                          
                                                                                                                                
     Based on Senate PPT (SB305, RES) and domestic severance tax                                                                
     rates                                                                                                                      
                                                                                                                                
     [NOTE: The presentation incorrectly specified that the                                                                     
     analysis was based on the provisions of CSHB 488. It was                                                                   
     actually based on the provisions of CSSB 305.]                                                                             
                                                                                                                                
Mr. Barnes  informed the Committee  that this  analysis presented                                                               
the  conceptual  economics  of  a   well  drilled  in  Alaska  to                                                               
opportunities in other  parts of the country.  The comparison was                                                               
based on recoverable  reserves of five billion  cubic feet (BCF);                                                               
development costs of five million  dollars; operating costs of 50                                                               
cents  per  million   cubic  feet  (MCF),  and,   for  Alaska,  a                                                               
one/eighth royalty  share. The  effective domestic  severance tax                                                               
rate  pertinent to  each  of the  other states  was  used in  the                                                               
comparison. Oklahoma,  Texas, Wyoming, and Louisiana  were chosen                                                               
for this  comparison analysis  because they  were areas  in which                                                               
companies could drill for natural gas.                                                                                          
                                                                                                                                
Mr. Barnes informed the Committee  that the analysis was based on                                                               
the provisions  of CSSB 305  rather than CSHB 488  as incorrectly                                                               
reflected on the chart.                                                                                                         
                                                                                                                                
10:51:44 AM                                                                                                                   
                                                                                                                                
Mr. Barnes reminded the Committee  that Henry Hub gas prices were                                                               
approximately six  or seven dollars  MCF while Cook  Inlet prices                                                               
were in  the three dollar  MCF range. A  Cook Inlet MCF  price of                                                               
four dollars was  used in this comparison to  determine the "BFIT                                                               
Profit  to Investment"  (Profit/Inv.) reflected  on the  vertical                                                               
axis. Cook  Inlet gas was also  factored at a MCF  price of seven                                                               
dollars  in  order   to  compare  it  to   other  markers.  "BFIT                                                               
Profit/Inv." was defined as "for  every dollar after you've taken                                                               
out  your capital  costs" and  royalty and  PPT severance  taxes,                                                               
"that's the  profit that you would  make before you go  through a                                                               
tax calculation".  It was important  to note that under  the Cook                                                               
Inlet four dollar and other  markets seven dollar price scenario,                                                               
a project in Alaska would  yield slightly more than $1.50 profit;                                                               
other markets  would yield profits  exceeding four  dollars. When                                                               
Cook Inlet gas  was factored at a seven dollar  price, its profit                                                               
exceeded  $3.50. Cook  Inlet's  profit levels,  when compared  to                                                               
those of  other markets, would  substantiate the claim  that Cook                                                               
Inlet gas was  "disadvantaged". "All things being  equal", it was                                                               
obvious  where investors  would  spend their  money. However,  in                                                               
spite of this  economic background, "money is being  spent in the                                                               
Inlet" for a variety of reasons.                                                                                                
                                                                                                                                
10:53:10 AM                                                                                                                   
                                                                                                                                
     Cook Inlet Competitive Analysis                                                                                            
                                                                                                                                
        · Must   compare   Cook   Inlet   to   N   American   gas                                                               
          opportunities                                                                                                         
             o Cook Inlet does not have world class exploration                                                                 
               opportunities                                                                                                    
             o However, viable smaller exploration opportunities                                                                
               exist                                                                                                            
        · Good access to lands                                                                                                  
        · Disadvantaged by high costs                                                                                           
        · Disadvantaged by permitting and regulatory burden                                                                     
        · Disadvantaged by price and closed market                                                                              
        · Disadvantaged or incentivized by fiscal regime??????                                                                  
                                                                                                                                
Mr. Barnes reviewed the competitive advantages and disadvantages                                                                
of Cook Inlet.                                                                                                                  
                                                                                                                                
10:54:10 AM                                                                                                                   
                                                                                                                                
     Consequences of SB 305 (RES) - Cook Inlet Gas                                                                              
                                                                                                                                
        · Existing Fields                                                                                                       
             o Nothing wrong with ELF for Cook Inlet natural gas                                                                
             o Loss of ELF and higher tax rate in low gas price                                                                 
               environment will result in                                                                                       
                  ƒHigher rate required to pay for costs                                                                       
                    (economic limit)                                                                                            
                  ƒFields will be shut in at higher production                                                                 
                    rates                                                                                                       
                  ƒReserves will be lost                                                                                       
                                                                                                                                
        · New Exploration and Development                                                                                       
             o Higher taxes will result in:                                                                                     
               · Less competitive opportunities compared to N                                                                   
                  American gas provinces                                                                                        
               · Renewed decline in Cook Inlet exploration and                                                                  
                  development                                                                                                   
               · Cancelled projects                                                                                             
               · NO NEW RESERVES DEVELOPED                                                                                      
                                                                                                                                
        · Loss of industrials and jobs                                                                                          
                                                                                                                                
        · Higher and volatile costs to utility customers                                                                        
                                                                                                                                
Mr.  Barnes claimed  there was  nothing wrong  with the  existing                                                               
Cook Inlet gas ELF tax regime.  "It's keeping old fields that are                                                               
very  much near  their economic  limit producing.  It was  put in                                                               
place  to moderate  State take  in recognition  of the  desire to                                                               
keep  the field  on  production." Changing  the  current ELF  tax                                                               
regime would require  the amount of money generated  by the field                                                               
to increase. Absent this, uneconomic  fields would become be shut                                                               
in  and  reserves would  be  lost.  He reviewed  the  information                                                               
regarding  the  impact the  PPT  would  have on  exploration  and                                                               
development in Cook Inlet.                                                                                                      
                                                                                                                                
10:55:58 AM                                                                                                                   
                                                                                                                                
Senator Dyson asked Mr. Barnes his  view of the provisions in the                                                               
PPT which  would allow credits  for unsuccessful  exploration and                                                               
development efforts occurring within  three miles from shore. ELF                                                               
did not allow such credits.                                                                                                     
                                                                                                                                
Mr. Barnes  presented his  view of how  the credits  should work.                                                               
They  credits  should  encourage  companies  to  spend  money  on                                                               
drilling  efforts to  find new  gas. Further  information on  the                                                               
credits  proposed in  CSSB 305  for successful  explorations were                                                               
included in his presentation's  Competitive Comparison chart [See                                                               
Time  Stamp  10:50:35  AM].  While   the  credits  increased  the                                                               
economic merit, they did not  increase it beyond the threshold of                                                               
being competitive.  A dry  hole credit would  be helpful  once or                                                               
twice,  but he  voiced that  few companies  would desire  to have                                                               
unsuccessful wells beyond  that number, as "you don't  make a lot                                                               
of money drilling dry holes."                                                                                                   
                                                                                                                                
Mr. Barnes concluded therefore that  the exploration credit would                                                               
"not drive the business". Marathon  had some alternate Cook Inlet                                                               
tax proposal  recommendations similar  to those suggested  by Mr.                                                               
Zager. The goal would be to  "balance the State take and then the                                                               
credit opportunity  which clearly  would be  part of  an economic                                                               
analysis".                                                                                                                      
                                                                                                                                
10:57:48 AM                                                                                                                   
                                                                                                                                
Senator  Hoffman recalled  ConocoPhillips stating  that the  vast                                                               
majority  of  available production  on  the  North Slope  was  in                                                               
existing fields.  Known discoveries were located  in four percent                                                               
of the fields and exploration  activities were occurring in three                                                               
percent  of the  fields.  Furthering that  point, he  anticipated                                                               
that the level of exploration  activities in Cook Inlet was lower                                                               
than that occurring on the North Slope.                                                                                         
                                                                                                                                
Mr.  Barnes disclosed  that exploration  activity  in Cook  Inlet                                                               
slightly exceeded that  of the North Slope as the  result of such                                                               
things as  incentives provided by  the State.  50 MCF per  day of                                                               
new gas  was brought to  market in the  last few years  from Cook                                                               
Inlet: the Ninilchik field produced  approximately 40 MCF per day                                                               
and the  Happy Valley  field might  produce approximately  10 MCF                                                               
per day.  Marathon anticipated having  a new field at  Kasilof in                                                               
production around the end of this year.                                                                                         
                                                                                                                                
Senator  Hoffman  defined  those fields  as  "known  discoveries"                                                               
rather than new exploration fields.                                                                                             
                                                                                                                                
Mr.  Barnes  estimated  that approximately  ten  percent  of  the                                                               
current gas production in Cook Inlet was new gas.                                                                               
                                                                                                                                
Senator Hoffman communicated that the  intent of his question was                                                               
to determine the  "piece of the pie" that would  be classified as                                                               
exploration.  This would  assist in  understanding the  potential                                                               
for   projects  occurring   there.  He   would  appreciate   this                                                               
information being provided.                                                                                                     
                                                                                                                                
Mr. Barnes  responded that  an attempt would  be made  to provide                                                               
such information.  To further clarify Senator  Hoffman's request,                                                               
he advised  there being  two issues:  "one is  recent new  gas or                                                               
activity level  and then  maybe a projection  of what  the future                                                               
might look like as to cancelled projects.                                                                                       
                                                                                                                                
Senator  Hoffman  qualified  the   issue  to  consist  of  "known                                                               
discoveries and future exploration".                                                                                            
                                                                                                                                
11:00:40 AM                                                                                                                   
                                                                                                                                
Mr. Barnes noted that another issue  of concern with CSSB 305 was                                                               
the  "pass through"  of expenses  to consumers.  Approximately 50                                                               
percent of  the severance taxes  in Cook Inlet were  "passed onto                                                               
industrials"  and  approximately 50  percent  were  passed on  to                                                               
consumers. Any  tax increase  under the PPT  would be  passed on.                                                               
The  amount  could  increase  were gas  Cook  Inlet  "linked"  or                                                               
"indexed"  to   "a  volatile  outside  market";   thus  he  would                                                               
discourage  that   linkage.  It  would  also   create  additional                                                               
problems  associated with  the monthly  calculations of  an index                                                               
for  the  utilities.  Dialogue should  occur  with  utilities  in                                                               
regards  to how  they  would determine  their  rate structure  in                                                               
consideration  of  this  volatility. "Most  utilities  prefer  to                                                               
understand for  their upcoming year  what their cost of  gas will                                                               
be."  Problems   would  be  anticipated   were  the   utility  to                                                               
incorporate  a monthly  variable  into the  equation  as to  what                                                               
would be charged to consumers.                                                                                                  
                                                                                                                                
11:02:04 AM                                                                                                                   
                                                                                                                                
     Cook Inlet - What is Needed                                                                                                
                                                                                                                                
        · Problems with Progressivity                                                                                           
             o Potential higher tax rate at lower margins                                                                       
             o Must not link Cook Inlet PPT to volatile non-                                                                    
               related index                                                                                                    
             o Link to Cook Inlet Department of Revenue                                                                         
               Prevailing Value                                                                                                 
                                                                                                                                
        · Must include provision for marginal low rate fields                                                                   
             o 5/20 Plan for Cook Inlet                                                                                         
                                                                                                                                
        · Prioritize   efforts   to   incentivize,   not   hinder                                                               
          exploration and development                                                                                           
             o Include some form of transitional investments                                                                    
               credits                                                                                                          
                                                                                                                                
        · Actions by this Legislature will have immediate and                                                                   
          measurable impact on Cook Inlet oil and gas industry                                                                  
                                                                                                                                
Mr.  Barnes reviewed  the information.  He supported  including a                                                               
Cook Inlet specific five percent  tax/20 percent credit provision                                                               
in the  PPT. The  average tax  currently paid  in Cook  Inlet was                                                               
approximately five percent.                                                                                                     
                                                                                                                                
Mr.  Barnes reiterated  that when  production in  Cook Inlet  was                                                               
analyzed under  a 20  percent PPT tax  rate, the  incentives were                                                               
insufficient to  maintain viability  in Cook Inlet.  He estimated                                                               
that the impacts of the PPT  would be "felt sooner" in Cook Inlet                                                               
than they would on the North Slope.                                                                                             
                                                                                                                                
Senator  Hoffman  recalled  that approximately  $1.5  billion  in                                                               
investments  were being  made on  the North  Slope. The  proposed                                                               
credits  could increase  that  amount to  $2.5  billion. To  that                                                               
point, he  asked the current  and forecasted  investment scenario                                                               
for gas in Cook Inlet.                                                                                                          
                                                                                                                                
Mr. Barnes  was uncertain  of the  overall Cook  Inlet investment                                                               
picture.  He  recalled Chevron  stating  they  might invest  $200                                                               
million  over the  next  four  years. That  number  would not  be                                                               
"dissimilar  to what  Marathon has  spent over  the last  several                                                               
years" in its  drilling activities. Marathon drilled  50 wells in                                                               
the   last  five   years,  several   fields  were   brought  into                                                               
production,  and a  new pipeline  was  laid. A  similar level  of                                                               
activity  would be  anticipated in  the future.  That was  really                                                               
"what's at stake".                                                                                                              
                                                                                                                                
Mr. Barnes noted that Cook  Inlet "currently burns" approximately                                                               
200  BCF annually.  In order  to replace  reserves at  a 50  cent                                                               
exploration and  development cost,  $100 million  a year  must be                                                               
spent  "just on  your wells".  That activity  level had  not been                                                               
occurring.  However, the  construction of  exploration wells  was                                                               
one of "many good signs" of increased activity in Cook Inlet.                                                                   
                                                                                                                                
Co-Chair  Wilken  requested  that  information  provided  by  the                                                               
Department of Revenue  and other presenters to  be made available                                                               
on the  internet. He also  asked that  a meeting be  scheduled to                                                               
allow   "invited"  individuals   to  testify   on  the   PPT  via                                                               
teleconference,  as  there were  some  who  could not  attend  in                                                               
person.                                                                                                                         
                                                                                                                                
Co-Chair Green concurred.                                                                                                       
                                                                                                                                
Co-Chair  Green specified  that  the Committee  would recess  and                                                               
reconvene  at  approximately  1:00  PM.  She  noted  that  public                                                               
testimony on the PPT bill would be held Saturday, April 8th.                                                                    
                                                                                                                                
Co-Chair  Wilken   announced  the  tentative  schedule   for  the                                                               
Operating Budget hearings.                                                                                                      
                                                                                                                                
RECESS TO CALL OF CHAIR 11:07:51 AM / 1:09:55 PM                                                                            
                                                                                                                                
Co-Chair Green called the Committee back to order.                                                                              
                                                                                                                                
KEN THOMPSON,  Managing Director,  Alaska Venture  Capital Group,                                                               
testified  via teleconference  from an  offnet location.  He read                                                               
his testimony [copy on file] as follows.                                                                                        
                                                                                                                                
     April 6, 2006, Comments to Alaska Senate Finance Committee                                                                 
     CS For SB305 - Petroleum Production Tax                                                                                    
     By Ken Thompson                                                                                                            
                                                                                                                                
     Introduction                                                                                                               
                                                                                                                                
     For  the  record, my  name  is  Ken  Thompson. I  reside  in                                                               
     Anchorage.  I am  the Managing  Director  of Alaska  Venture                                                               
     Capital  Group,  or  AVCG, an  independent  oil  exploration                                                               
     company with a  focus on the North Slope of  Alaska. AVCG is                                                               
     a consortium  of 15  independent oil  and gas  companies and                                                               
     individuals  from Kansas  and my  personally owned  company,                                                               
     Pacific Star  Energy, here in  Alaska. AVCG has  a technical                                                               
     and operational  services' subsidiary company  called Brooks                                                               
     Range  Petroleum, with  newly opened  offices in  Anchorage.                                                               
     Many of you know me as  the former President of ARCO Alaska,                                                               
     Inc., and  a past Executive Vice-President  over ARCO's Asia                                                               
     Pacific region.                                                                                                            
                                                                                                                                
Mr. Thompson had 12 years of professional experience on the                                                                     
North Slope and Cook Inlet.                                                                                                     
                                                                                                                                
     AVCG has been  very active in the past six  North Slope (NS)                                                               
     areawide  lease  sales and  we  have  acquired over  160,000                                                               
     acres  of exploration  leases in  five exploration  prospect                                                               
     areas,  including  new acreage  we  acquired  in the  recent                                                               
     March 1,  2006, NS lease  sale. Our exploration  strategy is                                                               
     to  explore in  the  central  part of  the  North Slope  for                                                               
     fields  in the  25-150+ million  barrels range,  fields that                                                               
     may be  too small  for the giant  producers but  fields that                                                               
     can be  produced profitably by smaller  companies like ours.                                                               
     We believe  there are hundreds  of millions if  not billions                                                               
     of barrels of oil left on  the North Slope in smaller fields                                                               
     of this  size and  these fields  near infrastructure  can be                                                               
     brought  on  more quickly.  Our  first  exploration well  in                                                               
     partnership with  Pioneer Natural Resources -  the Cronus #1                                                               
     about  10  miles southwest  of  the  large Kuparuk  Field  -                                                               
     completed  drilling  last  week   but  results  will  remain                                                               
     confidential for some time.                                                                                                
                                                                                                                                
     AVCG  plans two  NS exploration  wells next  winter and  two                                                               
     wells the  following winter.  Our 3-year  exploration budget                                                               
     is $46  million and  with any  future discovery  success, we                                                               
     could have a gross development  budget of $500 million to $1                                                               
     billion in future years.                                                                                                   
                                                                                                                                
     Let me now focus my comments  on the CS for Senate Bill 305.                                                               
     As  background,  I   reluctantly  supported  the  Governor's                                                               
     proposed  20/20 PPT  and even  many details  of the  initial                                                               
     House version of the bill,  HB 488. But, somehow, things are                                                               
     beginning to derail. The CS SB  305 and CS HB 488 with their                                                               
     revisions  from the  original draft  of  a simple  petroleum                                                               
     profits tax  have evolved into  very complex bills  that are                                                               
     no  longer a  win-win  for  the State  and  industry, in  my                                                               
     opinion.  I  don't  fully understand  how  things  began  to                                                               
     derail into such  complexity…perhaps it was due  to anger at                                                               
     the Big 3  producers and the Governor for  not revealing the                                                               
     natural gas contract details before  demanding a new oil tax                                                               
     fiscal structure. Perhaps  its anger at the  Big 3 companies                                                               
     who are  demanding tax  certainty for  30 years  when asking                                                               
     for   three  full   decades  of   certainty   truly  is   an                                                               
     unreasonable  demand  with   Alaska's  legislative  type  of                                                               
     democracy.                                                                                                                 
                                                                                                                                
1:14:05 PM                                                                                                                    
                                                                                                                                
Mr. Thompson clarified that AVCG and other independent oil                                                                      
exploration companies "are not asking for 30 years of certainty.                                                                
We realize the world and circumstances do change".                                                                              
                                                                                                                                
1:14:14 PM                                                                                                                    
                                                                                                                                
     I don't understand all the  dynamics of the past three weeks                                                               
     in the legislature, but  this I do know.  The  CS for SB 305                                                               
     needs  to  be  greatly  simplified  and  it  needs  to  move                                                               
     somewhere  between  what  it   is  now  and  the  Governor's                                                               
     proposal if a win-win solution is  to be the end result that                                                               
     balances more  revenue share  for the  State but  in balance                                                               
     with attracting  more new entrants and  increased investment                                                               
     amounts.                                                                                                                   
                                                                                                                                
     I am an optimist. I personally  think there is still time to                                                               
     avoid  a  train  wreck  in   this  complicated  business  of                                                               
     restructuring Alaska's  petroleum taxation  system …  if the                                                               
     Senate Finance Committee acts quickly.  I, for one, have not                                                               
     given  up  hope  that  there   is  a  version  -  easier  to                                                               
     understand  and to  implement -  that can  be a  win-win for                                                               
     both  the State  and the  industry. There  is a  simpler and                                                               
     better  way,  in  my  opinion,  for  the  State  to  improve                                                               
     government   take  while   not  dampening   exploration  and                                                               
     development investment. Let me  outline my suggestions for a                                                               
     win-win and my suggestions for simplification.                                                                             
                                                                                                                                
1:15:30 PM                                                                                                                    
                                                                                                                                
     AVCG Owners' Perspectives                                                                                                
                                                                                                                                
     First,  however,  let  me  say  that  while  I  am  Managing                                                               
     Director of  AVCG, our other  owners disagree  strongly that                                                               
     any change should be made  to the 20/20 PPT formula proposed                                                               
     by the  Governor. The 20%  PPT tax  rate and the  20% credit                                                               
     originally presented  in the Governor's  bill should  be the                                                               
     tax  rate and  credit enacted.    Some of  the AVCG  owners,                                                               
     however, do  not even  support the  PPT concept  and believe                                                               
     the petroleum tax should be  as simple as 10-14% of revenues                                                               
     and exclude any economic limit factor.                                                                                     
                                                                                                                                
     Quite honestly,  the AVCG owners listened  in disbelief when                                                               
     I  told   them  the   production  profits  tax   rate  being                                                               
     considered  in the  current CS  to SB305  draft could  add a                                                               
     "surcharge" at high prices that  could significantly ramp up                                                               
     the additional  taxes above  the base PPT  rate of  25%. And                                                               
     this  surcharge will  be  in addition  to  the higher  other                                                               
     revenues  the State  and  Federal  governments will  already                                                               
     benefit from  at higher oil  prices: the  State's 12.5-16.7%                                                               
     royalty,  the ad  valorem property  tax, the  3-9% corporate                                                               
     income  tax, lease  bonus bid  amounts,  the ongoing  annual                                                               
     lease  rental  amounts, and  the  Federal  income tax  rates                                                               
     averaging 20-35% of taxable income.                                                                                        
                                                                                                                                
     It  all adds  up, and  AVCG  Owners are  saying, "enough  is                                                               
     enough."                                                                                                                   
                                                                                                                                
     When I was  communicating the latest CS to  SB305 details to                                                               
     the  AVCG owners  by teleconference  and  email recently,  I                                                               
     felt  two  overwhelming  emotions.  The  first  emotion  was                                                               
     discouragement.  My business  judgment  tells  me the  State                                                               
     crossed  the line  to excessive  taxation  that will  dampen                                                               
     capital  investment. Why  invest in  Alaska where  you loose                                                               
     the upside  gain at  high oil  prices to  offset exploration                                                               
     risk when  the government  take will  exceed 60%?  There are                                                               
     politically  secure  opportunities  in  other  U.S.  states,                                                               
     Canada, the  Gulf of  Mexico offshore,  the U.K.,  and other                                                               
     nations where  government take is  55% or less. CS  to SB305                                                               
     takes  away  too  much  of the  upside  potential  from  the                                                               
     investor who is taking the risk.                                                                                           
                                                                                                                                
     But I  also found interesting another  strong emotion during                                                               
     that teleconference which  surprised me a great  deal. I was                                                               
     embarrassed.  Here  I  was,  telling   a  group  of  outside                                                               
     investors that recently put all  of their focus and personal                                                               
     exploration budgets on the North  Slope of Alaska, and now I                                                               
     was telling them that Alaska  was creating the most complex,                                                               
     confusing  production  tax  bill   ever  created  since  the                                                               
     disastrous  Federal  windfall   profits  tax.  The  windfall                                                               
     profits tax - structured similarly  to the CS SB 305 revenue                                                               
     surcharge  - stalled  investment  in the  U.S.  oil and  gas                                                               
     industry, resulting in an alarming  increase in U.S. foreign                                                               
     oil imports which  our nation lives with to this  day. I was                                                               
     telling them  that Alaska was  levying the highest  tax rate                                                               
     and government take in North America.                                                                                      
                                                                                                                                
1:19:27 PM                                                                                                                      
                                                                                                                                
Mr. Thompson  expressed his love for  the State. It was  his home                                                               
and he  hoped it  would prosper. However,  he was  embarrassed to                                                               
tell AVCG's investors the State  was considering implementing the                                                               
highest severance tax in North America.                                                                                         
                                                                                                                                
     To back  my points up,  please let me cite  some statistics.                                                               
     Currently, the  total Alaska  and Federal  governments' take                                                               
     is just over 50%.                                                                                                          
                                                                                                                                
Mr. Thompson understood and supported the State's desire to                                                                     
increase "its share of the take at higher prices".                                                                              
                                                                                                                                
     The Governor's  proposal moved  this to 53%  or so  then the                                                               
     original SB  305 moved  the government  take closer  to 55%.                                                               
     Then  the  CS  to  HB  488 [NOTE:  SB  305  was  incorrectly                                                               
     referenced in  the written  testimony] moved  the government                                                               
     take closer to  55 %. Then the  CS to SB 305 with  a 25% PPT                                                               
     boosted   the  government   take  to   over  60%   with  its                                                               
     "surcharge."   This compares  to following  total government                                                               
     take including Federal government shares:                                                                                  
                                                                                                                                
      Alaska currently         50%+ or less, dependent on                                                                       
                    oil price and field size                                                                                    
          Alaska Governor's bill   53%                                                                                          
          Alaska original HB488    55%                                                                                          
          Alaska CS SB305          60%+                                                                                         
                                                                                                                                
          U.S. Gulf of Mexico      45%                                                                                          
          Colorado                 51%                                                                                          
          Wyoming                  52%                                                                                          
          Kansas                   53%                                                                                          
          Texas                    53%                                                                                          
          New Mexico               53%                                                                                          
          Oklahoma                 53%                                                                                          
          California               53%                                                                                          
          Louisiana                57%                                                                                          
                                                                                                                                
     These tax rates apply to newer fields. Older, more mature                                                                  
     fields at low production rates typically get exempted from                                                                 
     these maximum tax percentages in various ways.                                                                             
                                                                                                                                
Mr.  Thompson  noted   that  the  average  state   tax  rate  was                                                               
approximately 53 percent.                                                                                                       
                                                                                                                                
          U.K.                     50%                                                                                          
          Canada                   39-56%                                                                                       
                                                                                                                                
     The lower  rates in Canada  apply to the oil  sands projects                                                               
     where billions  of dollars for new  investment are occurring                                                               
     with  Canada's  vision  to lower  government  take  on  this                                                               
     resource base.                                                                                                             
                                                                                                                                
1:21:44 PM                                                                                                                    
                                                                                                                                
Mr. Thompson  noted that the  39 percent  tax rate in  Canada was                                                               
"typically  the result  of  incentives in  the  very viscous  oil                                                               
sands".  He found  it  "interesting how  capital  varies" in  the                                                               
differing tax  regimes. Capital investments between  $1.5 billion                                                               
and two  billion had been  annually invested in Alaska's  oil and                                                               
gas  industry  under its  current  tax  structure. Those  amounts                                                               
would increase due  to tax credits. The investment  in the United                                                               
States Gulf  of Mexico  (GoM) with a  45 percent  government take                                                               
had  experienced annual  five to  ten billion  dollar investments                                                               
and on  occasion $15  billion a year.  Lower government  take had                                                               
been accompanied by continued investment to improve production.                                                                 
                                                                                                                                
Mr. Thompson noted  that a March 28, 2006 New  York Times article                                                               
specified that major companies had  committed ten billion dollars                                                               
a year for the next ten  years in capital spending to the Alberta                                                               
oil  sands.  While those  fields  had  immense prospectivity  and                                                               
reserve potentials, the  39 percent government tax  rate was also                                                               
an important factor in that investment.                                                                                         
                                                                                                                                
1:22:47 PM                                                                                                                    
                                                                                                                                
     My overall key recommendation in  my comments today is this:                                                               
     the  State  should  not  exceed a  threshold  of  55%  total                                                               
     government take, 45%  producer take. The State  does own the                                                               
     resource and may  be due more than a 50%  take. On the other                                                               
     hand, it  is the  producer who is  taking the  capital risks                                                               
     and deserves  at least  45% for making  things happen  … for                                                               
     moving an  innovative exploration  or development  idea into                                                               
     production without which no revenues would flow.                                                                           
                                                                                                                                
     Let  me  say that  I'm  excited  about what's  happening  in                                                               
     Alaska's  oil patch  right  now, and  let's  not dampen  the                                                               
     spirit.  The current  versions of  SB  305 and  HB 488  have                                                               
     dampened my spirit.  I am discouraged. Let's have  a new tax                                                               
     bill that  encourages, not discourages  new entrants.  But I                                                               
     do believe  it is time the  State share more in  the take at                                                               
     high prices but there is a much simpler way.                                                                               
                                                                                                                                
1:24:07 PM                                                                                                                    
                                                                                                                                
     My Personal Perspective                                                                                                  
                                                                                                                                
     Now let  me shift  gears in  my comments  to you.  Because I                                                               
     could  not get  buy-in for  any alternatives  from the  AVCG                                                               
     owners except  the 20/20 case,  I have decided to  speak out                                                               
     alone. As an Alaskan, I am  concerned and feel I must try to                                                               
     share a personal perspective trying  to balance what is best                                                               
     for  my  continued  involvement  in  Alaska's  oil  and  gas                                                               
     industry  in balance  with  how the  State  must change  its                                                               
     system to be  competitive in the world and  realize a higher                                                               
     government share.                                                                                                          
                                                                                                                                
     So, let  me turn my  attention to  what key changes  I would                                                               
     make to the CS of SB  305. Again, my views are not supported                                                               
     by AVCG  owners or  others in industry;  rather they  are my                                                               
     personal views.                                                                                                            
                                                                                                                                
1:25:28 PM                                                                                                                    
                                                                                                                                
Mr.  Thompson  stated  that  were a  bumper  sticker  created  to                                                               
reflect his foremost  position on the appropriate  State take, it                                                               
would be  "55/45". A  55 percent  government take  would increase                                                               
revenue to the State without  dampening capital investment in the                                                               
oil  and   gas  industry.  He   provided  an  overview   of  five                                                               
suggestions as to how to accomplish the "55/45" tax regime. Each                                                                
of the five suggestions were addressed individually as follows.                                                                 
                                                                                                                                
1:27:27 PM                                                                                                                    
                                                                                                                                
     1)  Make  Tax  Rate  Progressive But  Greatly  Simplify  The                                                             
     Taxation Formula                                                                                                         
                                                                                                                                
     When the  Governor's office first  announced a 25%  tax rate                                                               
     then  amended  that  to  20%,   I  could  see  the  move  by                                                               
     legislators  to somehow  bridge  the gap  from  20% to  25%.                                                               
     However,  the approach  used by  the legislative  committees                                                               
     based  on the  legislature's  outside  consultants' work  is                                                               
     simply  too complex  and  will be  arduous  to implement.  I                                                               
     think - and perhaps all of  you think - the Federal tax code                                                               
     is too complex.  The changes to SB 305 are  also too complex                                                               
     and  will lead  to different  interpretation, "gamesmanship"                                                               
     possibly  by   some  companies   because  of   the  unwieldy                                                               
     progressive  tax   structure  formula,  and   future  costly                                                               
     lawsuits  when   the  State   disagrees  with   a  company's                                                               
     calculations. And  the number of  accountants to  keep track                                                               
     of these  complexities on  both sides  will balloon!  I urge                                                               
     you to  simplify, simplify,  simplify...yet still  have some                                                               
     progression at higher prices.                                                                                              
                                                                                                                                
     For my company  which drills the smaller oil  traps that may                                                               
     add up, we  do not have a lot of  upside potential in seeing                                                               
     these smaller fields grow much  larger in reserves over time                                                               
     in contrast to the giant  Prudhoe Bay and Kuparuk fields. So                                                               
     our  main  upside  is  in oil  price  escalation  to  offset                                                               
     exploration risks  and to  offset the  cycles of  oil prices                                                               
     downward, a reality over time  for any commodity. I urge you                                                               
     to consider a PPT rate of  20% at lower prices but gradually                                                               
     escalating to the 25% level only at higher prices.                                                                         
                                                                                                                                
     I found it  so interesting to see the  Econ1 consultants and                                                               
     consultant  Daniel  Johnston  saying the  government  should                                                               
     take more  and more at  high prices  when not one  member of                                                               
     the legislature  asked them a  very important  question they                                                               
     should have been  asked: "how much are you  and your company                                                               
     investing  in  Alaska?" I  was  shocked  to see  that  these                                                               
     consultants,  when calculating  the future  revenues to  the                                                               
     State  at  various  escalating  rates,  used  the  same  oil                                                               
     production curves.  In reality,  less capital will  be spent                                                               
     by industry at exorbitant  production profits tax rates (tax                                                               
     rates above  25% when coupled  with all other  payments such                                                               
     as  royalty, corporate  income tax,  ad  valorem tax,  lease                                                               
     costs and  rentals, etc.). With  less capital  spending, the                                                               
     production curve will be lower  … an increasingly higher tax                                                               
     rate may  not in the  end yield the forecasted  revenues for                                                               
     the State.                                                                                                                 
                                                                                                                                
1:31:03 PM                                                                                                                    
                                                                                                                                
Mr. Thompson reiterated that capital spending in Canada and the                                                                 
GoM, which were areas with lower government take percentages                                                                    
than Alaska, far exceeded capital investments made in Alaska.                                                                   
                                                                                                                                
1:31:26 PM                                                                                                                    
                                                                                                                                
     On a related note, our company  plans to go into the private                                                               
     or  public  equity  markets  to  raise  capital  for  future                                                               
     development.    Such  equity investors  invest  in  the  oil                                                               
     markets to  be fully  exposed to crude  price upside.   When                                                               
     they look  at investments all  over the world, and  see that                                                               
     Alaska could tax with an  escalating "surcharge" when others                                                               
     have a predictable  flat tax, they will  place their capital                                                               
     elsewhere  to  continue  their   exposure  to  higher  crude                                                               
     prices.  The  consultants did not address this  issue of the                                                               
     private and  public equity markets  and the desire  for such                                                               
     investors  to  fully  benefit from  upside  commodity  price                                                               
     swings  without  hedging  or   escalated  taxation  at  high                                                               
     prices.   This was indeed  a major  oversight by Econ  1 and                                                               
     Daniel Johnston.                                                                                                           
                                                                                                                                
1:32:59 PM                                                                                                                    
                                                                                                                                
     I  also could  not believe  that the  consultants failed  to                                                               
     show  capital  spending  elasticity  graphs  from  different                                                               
     countries.  They did  the legislature  a  disservice by  not                                                               
     doing so.  By convincing  legislative committees to  adopt a                                                               
     complex progressive tax rate  structure, or windfall profits                                                               
     tax,  the consultants  may feel  they have  been successful,                                                               
     but not  one of these  consultants will be around  to defend                                                               
     their views in the future  when capital spending declines at                                                               
     increasingly higher tax rates above the 25% level.                                                                         
                                                                                                                                
1:33:55 PM                                                                                                                    
                                                                                                                                
     So, what  is a simpler  alternative? What is  an alternative                                                               
     to yield  more revenues  to the State  at higher  oil prices                                                               
     with a balance to attract increased investment?                                                                            
                                                                                                                                
     I  suggest that  the Finance  Committee revise  the bill  to                                                               
     keep  the production  profits tax  simply  that …  a tax  on                                                               
     production profits, and not a  complex way to further burden                                                               
     gross revenues  with a surcharge.  A simpler way  in getting                                                               
     the progressive rate  from 20% to 25%  without the surcharge                                                               
     treatment complexity is  to adopt a graduated  PPT that does                                                               
     accomplish a higher State take  at higher prices, yet leaves                                                               
     a reasonable producer take.                                                                                                
                                                                                                                                
     I recommend  the following  production profits  tax schedule                                                               
     as a  suggested one to "simulate"  revenue results somewhere                                                               
     between  the  Governor's  proposal  and the  CS  to  SB  305                                                               
     proposal. It  is one that  everyone could  easily understand                                                               
     and implement with the State  realizing upside at higher oil                                                               
     prices  yet  not   too  much  upside  is   taken  away  from                                                               
     explorers/producers for re-investment:                                                                                     
                                                                                                                                
1:34:39 PM                                                                                                                    
                                                                                                                                
     Up to monthly average wellhead                                                                                             
    price of $50/barrel for a company:      PPT rate of 20%                                                                     
                                                                                                                                
1:34:48 PM                                                                                                                    
                                                                                                                                
     When monthly average wellhead                                                                                              
     price is between $50-75/barrel:         PPT rate of 22.5%                                                                  
                                                                                                                                
     When monthly average wellhead                                                                                              
    price exceeds $75/barrel:               PPT rate of 25%                                                                     
                                                                                                                                
1:35:17 PM                                                                                                                    
                                                                                                                                
     Let's be  honest with ourselves:  the surcharge is  simply a                                                               
     windfall  profits  tax  under a  different  name.  I  highly                                                               
     respect  industry  consultant  Daniel   Yergin  who  has  an                                                               
     excellent   reputation   among    industry   personnel   and                                                               
     government officials  alike.  In November,  2005, Mr. Yergin                                                               
     said this  about a  windfall profits  tax: "What  a windfall                                                               
     profits  tax  does is  introduce  a  lot of  distortion.  It                                                               
     reduces investment,  it increases a sense  of political risk                                                               
     and it doesn't  achieve the goal that is intended  … it will                                                               
     really lead to decreased supply."                                                                                          
                                                                                                                                
     I  urge the  Finance  Committee to  seriously consider  this                                                               
     simpler  approach.   I  personally  ask  that you  have  the                                                               
     Department  of Revenue  run the  above case  to compare  the                                                               
     State revenues  from the Governor's proposal  to the current                                                               
     CS SB305  proposal, and  to the  existing ELF  severance tax                                                               
     program.  But  when DOR models this approach,  also ask them                                                               
     to   run  some   sensitivity   cases   to  reduced   capital                                                               
     expenditures and reduced future  oil production levels if CS                                                               
     SB305  stays in  its current  form. Please  greatly simplify                                                               
     the bill. The complexity is simply not needed.                                                                             
                                                                                                                                
1:36:47 PM                                                                                                                    
                                                                                                                                
     2) "Trigger  Points" For  Escalating PPT  Should Not  be WTI                                                             
     But Wellhead Value                                                                                                       
                                                                                                                                
     Let  me now  address a  second, very  leveraging issue.  The                                                               
     "trigger point"  that increases  the PPT  tax rate  from 20%                                                               
     should not be  based on ANS West Coast (ANS)  oil price. The                                                               
     "trigger point" should be when  a company's average realized                                                               
     wellhead price  in Alaska exceeds  $50 per barrel.  Some say                                                               
     the trigger  point should  be at  a lower  price like  in SB
     305, but  I do think  there is  strong merit that  those who                                                               
     have  invested and  taken exploration  risk and  exposure to                                                               
     low  prices should  be able  to benefit  from the  increased                                                               
     profits  at   higher  prices…"share  the  pain,   share  the                                                               
     gain"…to   this  $50/barrel   wellhead  level.   However,  I                                                               
     personally am  fine with the State  gradually increasing the                                                               
     PPT  tax rate  eventually  to  a cap  of  25% when  wellhead                                                               
     prices exceed $50/ barrel.                                                                                                 
                                                                                                                                
     Why should the State tie  the PPT calculation to a company's                                                               
     realized  wellhead  price instead  of  to  West Coast  crude                                                               
     price?  In reality on the  North Slope, not one company ever                                                               
     sees West Coast crude prices.   Every crude oil in Alaska is                                                               
     different in quality with viscous  crude receiving less than                                                               
     the lighter crude oils, and  oil produced from wells farther                                                               
     away from  infrastructure receiving less wellhead  value due                                                               
     to higher shipping costs. Conversely,  oil in the Cook Inlet                                                               
     is close to  actual refining or on the water  to ship out of                                                               
     state and  thus realizes on  average a much  higher wellhead                                                               
     value than most  North Slope crude oils,  a substantial plus                                                               
     to  Cook Inlet  operators  who face  higher operating  costs                                                               
     with maturing fields.                                                                                                      
                                                                                                                                
Mr. Thompson  referenced Co-Chair Green's earlier  question as to                                                               
whether  the net  profits calculation  suggested  by Chevron  had                                                               
been included in  any version of the PPT  proposals. He suggested                                                               
that perhaps  what she had  in mind  was actually to  a company's                                                               
gross wellhead value.                                                                                                           
                                                                                                                                
1:38:56 PM                                                                                                                    
                                                                                                                                
     So I  ask, why  should the  tax rate  increase with  a price                                                               
     index  such  as  West  Coast  price when  there  is  such  a                                                               
     variance in  crude oil pricing  factors on the Slope  at the                                                               
     wellhead  that directly  affect each  field's economics  and                                                               
     economic  limit differently?    The  production profits  tax                                                               
     rate  should not  escalate at  the same  time for  those who                                                               
     produce  viscous crude  or oil  from a  farther distance  as                                                               
     compared to  those who have  good quality oil right  next to                                                               
     the TAPS line.  If there is a "trigger point",  it should be                                                               
     one based  on a company's average  monthly realized wellhead                                                               
     price for production.                                                                                                      
                                                                                                                                
1:40:05 PM                                                                                                                    
                                                                                                                                
     I  recommend  that the  "trigger  point"  for PPT  tax  rate                                                               
     escalation be  $50 per barrel realized  wellhead price based                                                               
     on a  company monthly average and  not be based on  $40 West                                                               
     Coast price, thus allowing explorers  and producers to share                                                               
     in  the upside  profits  at  prices to  this  level with  no                                                               
     higher  burden than  the 20%  PPT tax  rate (plus  burden of                                                               
     royalty, corporate income tax,  ad valorem tax, Federal tax,                                                               
     etc.).  Dr.  Pedro  van  Meurs  also  recommended  that  the                                                               
     threshold  level  of  $40/bbl   be  re-considered.  As  also                                                               
     recommended by  Dr. van Meurs,  this threshold  price should                                                               
     be linked with inflation.                                                                                                  
                                                                                                                                
1:41:37 PM                                                                                                                    
                                                                                                                                
     3) The Transitional Deductible Allowance                                                                                 
                                                                                                                                
     Jumping immediately from the prior  ELF severance tax to the                                                               
     PPT  formula   overnight  wreaks  havoc  with   a  company's                                                               
     budgeting  and their  forecast of  available  cash flow  for                                                               
     near-term capital  investment.   A transition  adjustment of                                                               
     some sort is appropriate and is fair.                                                                                      
                                                                                                                                
     I support  the CS  to SB305  that allows  for a  producer to                                                               
     take  a  credit  with  part  of  a  producer's  transitional                                                               
     investment expenditures  between April  1, 2001,  and before                                                               
     April 1, 2006.                                                                                                             
                                                                                                                                
1:42:10 PM                                                                                                                    
                                                                                                                                
     4) The Tax Credit "Standard Allowance"                                                                                   
                                                                                                                                
     The  Governor proposed  a  $73,000,000  annual allowance  of                                                               
     production  profits that  would  not be  taxed  by the  PPT,                                                               
     essentially giving  a $14.6 million tax  credit per company.                                                               
     The Senate  Resources Committee revised  this downward  to a                                                               
     $50,000,000 annual allowance as  a reasonable compromise, or                                                               
     a $10,000,000 tax credit; CS  HB 488 further changed this to                                                               
     a flat $12,000,000  annual credit. The CS to  SB 305 further                                                               
     proposed that  this be  changed to  an annual  "standard tax                                                               
     credit allowance"  for the  first 5,000  barrels per  day of                                                               
     production.                                                                                                                
                                                                                                                                
     This  "standard deduction"  is very  important to  a startup                                                               
     company   like  AVCG/Brooks   Range   Petroleum  trying   to                                                               
     establish  a  foothold  in  Alaska  and  someday  contribute                                                               
     substantial oil revenues to the State.                                                                                     
                                                                                                                                
     I favor  the HB  488 solution of  a $12,000,000  annual flat                                                               
     tax  credit exemption  due to  its  simplicity and  it is  a                                                               
     level  playing field  for producers  of  various crude  oils                                                               
     with different wellhead values.                                                                                            
                                                                                                                                
1:43:59 PM                                                                                                                    
                                                                                                                                
     5) Institute A Tax Credit Repurchase Program                                                                             
                                                                                                                                
     As protection for explorers and  new entrants to Alaska, the                                                               
     version  of the  profits  tax in  the House,  CS  to HB  488                                                               
     devised a tax credit  repurchasing program for those credits                                                               
     a company earns  on expenditures up to  $10,000,000 per year                                                               
     for  investments in  exploration and/or  lease purchases  in                                                               
     Alaska.                                                                                                                    
                                                                                                                                
     This is  important to explorers  like AVCG who does  not yet                                                               
     have   production  revenues.   Without  such   a  repurchase                                                               
     program, our  company might be  able to sell our  annual tax                                                               
     credits to  one of  the major producers  but have  to accept                                                               
     only 90-95%  on the dollar or  less. On the other  hand, the                                                               
     State  would not  be giving  up anything  to repurchase  the                                                               
     credits at 100%  of value because the  major producers would                                                               
     otherwise  use the  credits  to reduce  their  tax bill  and                                                               
     reduce revenue to the State.  But using the State repurchase                                                               
     approach,  the  small explorer  could  turn  around and  re-                                                               
     invest the  State-refunded credit  into new  leases, seismic                                                               
     or exploration drilling.                                                                                                   
                                                                                                                                
     I  recommend the  Finance Committee  support the  tax credit                                                               
     repurchase program  outlined in the  CS to HB 488  and amend                                                               
     CS to SB 305 to  incorporate a similar tax credit repurchase                                                               
     program.                                                                                                                   
                                                                                                                                
     And the  Alaska gas  pipeline revenues will  be significant.                                                               
     The State should own 20%.                                                                                                  
                                                                                                                                
1:45:35 PM                                                                                                                    
                                                                                                                                
     Other Revenue Sources                                                                                                    
                                                                                                                                
     As a concluding  remark, I urge the State in  this period of                                                               
     high oil prices  to not simply try to gain  into that upside                                                               
     by  pulling  only  one  lever excessively  …  the  lever  of                                                               
     petroleum production taxes. The  State could be well advised                                                               
     to ensure they  gain additional revenues from  oil in Alaska                                                               
     by  being  an  entrepreneur and  considering  revenues  from                                                               
     other  new  related  business, such  as  acquiring  a  12.5%                                                               
     interest in  the TAPS pipeline and  stop paying $3.70/barrel                                                               
     profitable  tariffs to  major producers  when  you could  be                                                               
     sharing in those profits.                                                                                                  
                                                                                                                                
1:46:47 PM                                                                                                                    
                                                                                                                                
     And  work with  the Federal  government now  to ensure  that                                                               
     they share part  of the Federal royalties with  the State on                                                               
     future  offshore oil  and gas  production from  the Beaufort                                                               
     Sea which I  consider to be of great  potential as evidenced                                                               
     by  major leasing  recently by  Shell  and other  companies.                                                               
     Other  states  are  pursuing a  share  of  Federal  offshore                                                               
     royalties.                                                                                                                 
                                                                                                                                
1:47:36 PM                                                                                                                    
                                                                                                                                
Mr.  Thompson  shared  that Congress  was  currently  considering                                                               
legislation, proposed  by a senator  from Louisiana,  which would                                                               
allow  energy  producing states  to  receive  50 percent  of  the                                                               
federal revenue  generated by  oil and  gas production  off their                                                               
coasts. While he was uncertain of  the degree this might apply to                                                               
Alaska, the  adoption of this  bill would provide  Louisiana $600                                                               
million  per year.  In a  decade or  so, such  revenues might  be                                                               
provided to  Alaska for activity  occurring in the  Beaufort Sea,                                                               
were the State to participate in that federal legislation.                                                                      
                                                                                                                                
Mr.  Thompson expressed  that the  State could  garner additional                                                               
revenues were it to adopt a  tax regime of "55/45". It would also                                                               
benefit from revenues generated by  an Alaska gas line. The State                                                               
should own a minimum of 20 percent in such a project.                                                                           
                                                                                                                                
1:48:47 PM                                                                                                                    
                                                                                                                                
     Concluding Remarks                                                                                                       
                                                                                                                                
     The  above comments  are my  personal views  offered with  a                                                               
     hope that there can be  an eventual win-win solution to this                                                               
     complex  subject of  the State  realizing  more revenues  at                                                               
     higher prices  while attracting exploration  and development                                                               
     investors who  can also realize  upside at higher  prices. I                                                               
     do  believe  the Senate  Finance  Committee  can get  things                                                               
     "back on track" and better balanced.                                                                                       
                                                                                                                                
     I  sincerely  thank the  Committee  for  the opportunity  to                                                               
     present my comments.                                                                                                       
                                                                                                                                
Mr. Thompson reiterated  that a tax rate of "55/45"  would be the                                                               
"winning" tax structure for the State. He concluded his remarks.                                                                
                                                                                                                                
1:49:38 PM                                                                                                                    
                                                                                                                                
Co-Chair  Wilken  acknowledged  being  educated  about  the  term                                                               
"prospectivity"  and  its  association  with how  the  State  was                                                               
graded for investment potential.  He was surprised that potential                                                               
reserves in ANWR and NPR-A  hade been ignored in this discussion.                                                               
Thus,  he asked  whether the  State might  be "selling  ourselves                                                               
short  by not  recognizing those  giant fields  in our  grade for                                                               
prospectivity".                                                                                                                 
                                                                                                                                
1:51:06 PM                                                                                                                    
                                                                                                                                
Mr. Thompson responded that entities  from outside the State view                                                               
prospectivity  in Alaska  as  having diminished  "significantly".                                                               
While this might be true  when considering the central portion of                                                               
the North Slope and the mature  fields in Cook Inlet, he believed                                                               
there were "very very significant  oil reserves" in NPR-A. He had                                                               
personally viewed "a large number  of good looking stratographic"                                                               
seismic  tracks there.  He anticipated  "major discoveries  being                                                               
announced"  there in  the next  few years.  The prospectivity  of                                                               
fields in  near shore  State waters was  also promising.  "One of                                                               
the best  strategic moves" he  had witnessed  in the oil  and gas                                                               
industry in  several years was  the "very bold strategic  move by                                                               
Shell" to acquire  Beaufort Sea leases. One reserve  in that area                                                               
had  "a proven  200  million  barrels of  reserves,  yet was  not                                                               
commercial at  $18 because it was  far from shore" in  the Arctic                                                               
Icepack.  Nonetheless, he  thought Shell  would be  successful in                                                               
their endeavor. There  was also increased interest  in areas such                                                               
as Bristol Bay.                                                                                                                 
                                                                                                                                
1:53:05 PM                                                                                                                    
                                                                                                                                
Mr.   Thompson  suggested   that  in   order  to   determine  the                                                               
prospectivity  of an  area, the  Committee should  "look out  the                                                               
window  and see  who's  flying". In  addition  to Shell's  recent                                                               
reentry  in the  Alaska marketplace,  large companies  from Italy                                                               
and  France and  large,  respected independents  such as  Pioneer                                                               
Natural  Resources were  also  active in  the  State. While  some                                                               
people consider  there to  have been  a prospectivity  decline on                                                               
the central part of the North  Slope, companies such as AVCG were                                                               
"playing"  the area  because "25  to 50  million barrels"  was "a                                                               
company maker  to us". Fields  that size were not  even reflected                                                               
as reserves in a major company's records.                                                                                       
                                                                                                                                
Mr. Thompson considered the prospectivity  of Alaska to have been                                                               
"sold short"  by many. There  could be the potential  for another                                                               
hundred trillion cubic feet of natural gas yet to be found.                                                                     
                                                                                                                                
                                                                                                                                
1:54:18 PM                                                                                                                    
                                                                                                                                
Mr. Thompson  urged the Committee  to conduct an  internet search                                                               
and  view  industry  journals about  the  State's  proposed  PPT.                                                               
"Article  after article"  would be  presented. "People  are being                                                               
turned off  by it: they don't  understand it but they  know it is                                                               
complex, they know it would increase  taxes and take away some of                                                               
the upside at  high prices". He was concerned that  the effect of                                                               
the  proposed  tax  would  be  to  discourage  newcomers  in  the                                                               
industry. A simpler  method could be developed  which would allow                                                               
a  government take  of 55  percent.  A balance  of "55/45"  would                                                               
increase  State   revenue  without  discouraging   industry  from                                                               
operating in the State.                                                                                                         
                                                                                                                                
1:55:45 PM                                                                                                                    
                                                                                                                                
Senator  Dyson  appreciated  the  comments.  Earlier  in  today's                                                               
hearing, it  was suggested that  a different tax rate  be applied                                                               
to  Cook  Inlet  because exploration  and  production  activities                                                               
there differed  dramatically from  those on  the North  Slope. He                                                               
asked Mr. Thompson to comment in that regard.                                                                                   
                                                                                                                                
Mr. Thompson affirmed that Cook  Inlet was "a very mature basin".                                                               
The tax  rate comparisons he  had shared earlier,  which averaged                                                               
approximately 53 percent, were specific  to new production. "Most                                                               
of those states  have some type of exemption that  can allow less                                                               
of  a tax  burden on  more  mature areas".  He did  not have  any                                                               
recent  experience in  Cook Inlet,  however, his  "old view"  was                                                               
that, while "something  different needed to be done",  it was not                                                               
that  a  different production  tax  structure  should be  applied                                                               
since that  might require separate  sets of accounting  to occur.                                                               
He  preferred there  being different  "investment tax  credits to                                                               
try  to spur  on  new  exploration". There  could  be a  "special                                                               
increased incentive for Cook Inlet exploration".                                                                                
                                                                                                                                
Mr. Thompson  thought that "an  experiment that has  done wonders                                                               
for spending  in the  Gulf of  Mexico" could  be applied  to Cook                                                               
Inlet. "That was  a straight royalty reduction".  While a royalty                                                               
reduction law was  currently available in Alaska,  it was complex                                                               
and  a company  must provide  a  significant amount  of data  and                                                               
paperwork to the  State. The methodology utilized in  the Gulf of                                                               
Mexico "simply"  lowered the royalty  from 12.5 to  five percent.                                                               
The   result  was   that  capital   "flew  to   that  area"   and                                                               
prospectivity increased.  Thus, he suggested a  blanket reduction                                                               
in  royalties  in  Cook  Inlet  be  considered.  Nonetheless,  he                                                               
deferred to the expertise of current Cook Inlet producers.                                                                      
                                                                                                                                
There  being no  further  questions, Mr.  Thompson concluded  his                                                               
remarks.                                                                                                                        
                                                                                                                                
2:00:10 PM                                                                                                                    
                                                                                                                                
Co-Chair  Green asked  Committee  members to  advise  her of  any                                                               
issue   they  desired   desire   additional  information   about.                                                               
Suggestions  for  changes  and  other  questions  would  also  be                                                               
appreciated. The purpose  would be to garner  as much information                                                               
as possible going forward.                                                                                                      
                                                                                                                                
Co-Chair  Green  noted  that the  House  of  Representatives  had                                                               
conducted  a "very  successful" PPT  panel discussion  earlier in                                                               
the  day. She  suggested that  a similar  event be  considered by                                                               
this Committee.                                                                                                                 
                                                                                                                                
2:01:34 PM                                                                                                                    
                                                                                                                                
Co-Chair Wilken stated  he had personally developed a  list of 12                                                               
items he  would like further  information about. This  list would                                                               
be  provided  to  Co-Chair  Green.   Continuing,  he  shared  his                                                               
understanding that the cost of  transporting a barrel of oil from                                                               
Prudhoe Bay to  the West Coast was $4.31. Within  that $4.31 cost                                                               
was an item  referred to as a "profit component"  which was being                                                               
claimed by  the producers. Thus  his question to  Senator Stedman                                                               
and  Senator Dyson,  who  were members  of  the Senate  Resources                                                               
Committee, was whether the State  currently recognized "profit as                                                               
a cost  and if  so, was that  a policy call  or is  that standard                                                               
procedure in the way we transport oil around the nation".                                                                       
                                                                                                                                
2:02:54 PM                                                                                                                    
                                                                                                                                
Senator Stedman stated that while  this issue had been discussed,                                                               
it was  not addressed in great  detail. The answer to  "the issue                                                               
of a  profit on a profit  and the majors owning  the Trans Alaska                                                               
Pipeline System (TAPS) and having  a regulated profit in that and                                                               
then being able to layer another  profit on top of that" was yes.                                                               
The Committee should explore the impact of that.                                                                                
                                                                                                                                
Co-Chair  Wilken   communicated  that  this  question   would  be                                                               
included  on his  list, "cause  it just  doesn't make  sense…" It                                                               
would be interesting to delve into the reasoning behind this.                                                                   
                                                                                                                                
Senator Stedman agreed it would be  a good question to present to                                                               
the Department of Revenue and Econ One.                                                                                         
                                                                                                                                
2:04:20 PM                                                                                                                    
                                                                                                                                
Senator  Hoffman  communicated  that  the  profit  component  was                                                               
included  in the  Transportation expense  because the  industry's                                                               
investment  in  the  Trans Alaska  Pipeline  Service  (TAPS)  was                                                               
considered "a  risk". He did  not view this  as an issue,  as the                                                               
line had to be built. The  question would not have been asked had                                                               
another  company made  that investment.  Continuing, he  stressed                                                               
that one of the reasons the  State was interested in investing in                                                               
the proposed gas pipeline would be  to make a profit, rather than                                                               
to "simply break even".                                                                                                         
                                                                                                                                
Co-Chair  Green understood  that  investing in  such an  endeavor                                                               
would be considered "high risk".                                                                                                
                                                                                                                                
Senator Hoffman affirmed.                                                                                                       
                                                                                                                                
Senator  Stedman noted  there  was also  concern  about how  TAPS                                                               
tariffs were levied and how that ultimately affected the State.                                                                 
                                                                                                                                
Co-Chair Green asked whether such things were regulated.                                                                        
                                                                                                                                
Senator  Stedman  stated  they  were, but  communicated  "that  a                                                               
regulated return on that tariff gets to be a … contested issue".                                                                
                                                                                                                                
Co-Chair Green was uncertain as  to how action by the Legislature                                                               
could address that.                                                                                                             
                                                                                                                                
Senator  Stedman concluded  that  the concern  was  to how  these                                                               
things  "play into  the mathematical  modeling".  They might  not                                                               
have any affect.                                                                                                                
                                                                                                                                
Co-Chair Wilken  communicated that these questions  could best be                                                               
addressed  by   Dan  Dickinson,  the  consultant   hired  by  the                                                               
Administration.                                                                                                                 
                                                                                                                                
Co-Chair  Green  expected "lots  more  information"  on the  bill                                                               
would be forthcoming.  The Committee would then  dissect the bill                                                               
section by section.                                                                                                             
                                                                                                                                
There  being no  further discussion,  Co-Chair Green  ordered the                                                               
bill HELD in Committee.                                                                                                         
                                                                                                                                
AT EASE 2:07:30 PM / 2:07:47 PM                                                                                             
                                                                                                                                
                                                                                                                                
ADJOURNMENT                                                                                                                 
                                                                                                                                
Co-Chair Lyda Green adjourned the meeting at 2:08:00 PM.                                                                      

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