Legislature(2011 - 2012)SENATE FINANCE 532

03/15/2012 09:00 AM Senate FINANCE


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09:06:19 AM Start
09:08:44 AM SB192
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 192 OIL AND GAS PRODUCTION TAX RATES TELECONFERENCED
Heard & Held
+ Presentation by PFC Energy TELECONFERENCED
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                      March 15, 2012                                                                                            
                         9:06 a.m.                                                                                              
                                                                                                                                
                                                                                                                                
9:06:19 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Stedman called the Senate Finance Committee                                                                            
meeting to order at 9:06 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Lesil McGuire, Vice-Chair                                                                                               
Senator Johnny Ellis                                                                                                            
Senator Dennis Egan                                                                                                             
Senator Donny Olson                                                                                                             
Senator Joe Thomas                                                                                                              
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Gerald Kepes, Partner, Head of Upstream & Gas, PFC Energy;                                                                      
Senator Joe Paskvan; Senator Cathy Giessel; Senator Hollis                                                                      
French.                                                                                                                         
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Janak Mayer, Manager, Upstream & Gas, PFC Energy,                                                                               
Washington, D.C.                                                                                                                
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
SB 192    OIL AND GAS PRODUCTION TAX RATES: Presentation by                                                                     
          PFC Energy                                                                                                            
                                                                                                                                
          SB 192 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
SENATE BILL NO. 192                                                                                                           
                                                                                                                                
     "An Act relating to the oil and gas production tax;                                                                        
     and providing for an effective date."                                                                                      
                                                                                                                                
9:08:44 AM                                                                                                                    
                                                                                                                                
Co-Chair   Stedman  stated   that  this   was  the   initial                                                                    
presentation   by  PFC   Energy  and   that  more   detailed                                                                    
information would be provided in subsequent presentations.                                                                      
                                                                                                                                
GERALD KEPES, PARTNER,  HEAD OF UPSTREAM &  GAS, PFC ENERGY,                                                                    
related that  PFC Energy was  an expertise  consultancy that                                                                    
dealt exclusively with  oil and gas.  He  explained that PFC                                                                    
Energy  was  a  global,  150  member  consultancy  that  was                                                                    
focused on  the nexus  between governments and  industry. He                                                                    
acknowledged  that oil  and gas  were government  businesses                                                                    
and that  companies needed to  learn work  within government                                                                    
structure.                                                                                                                      
                                                                                                                                
Co-Chair  Stedman   requested  a  definition  of   the  term                                                                    
"upstream". Mr. Kepes replied that  upstream referred to all                                                                    
activities  associated with  the exploration  and production                                                                    
of  oil and  gas. He  furthered that  upstream included  all                                                                    
onshore, offshore, deep water, and other activities.                                                                            
                                                                                                                                
9:10:52 AM                                                                                                                    
                                                                                                                                
Mr.   Kepes   began   a   PowerPoint   presentation   titled                                                                    
"discussion slides:  Alaska Senate Finance  Committee" (copy                                                                    
on file), and  discussed the slide on page  3 titled "fiscal                                                                    
regime design:  finding the  intersection of  efficiency and                                                                    
competitiveness."                                                                                                               
                                                                                                                                
       · Fiscal regime design is fundamentally about                                                                            
         maximizing State revenues, subject to two                                                                              
          important constraints:                                                                                                
                                                                                                                                
            · Efficiency: Not distorting investment                                                                             
               choices, or preventing marginal investments                                                                      
               that would otherwise have been made                                                                              
                                                                                                                                
            · Competitiveness: There is a global market for                                                                     
              upstream dollars                                                                                                  
                                                                                                                                
Mr.  Kepes explained  that  competiveness  was an  important                                                                    
part of  the context  of fiscal regime  design and  that any                                                                    
upstream  opportunity had  to  compete  globally with  other                                                                    
opportunities.                                                                                                                  
                                                                                                                                
Mr.  Kepes discussed  the  slide on  page  4 titled  "fiscal                                                                    
regime design:  finding the  intersection of  efficiency and                                                                    
competiveness." He  shared that  an overly  efficient fiscal                                                                    
regime,  which had  a  government take  that  was too  high,                                                                    
would result  in a loss  of competitiveness  and investment.                                                                    
He furthered  that if  the government  take was  lowered too                                                                    
far, the  objective of maximizing  government take  would be                                                                    
lost. He related  that the challenge was to  find the "sweet                                                                    
spot" between competiveness and  efficiency, given the other                                                                    
factors.                                                                                                                        
                                                                                                                                
9:13:41 AM                                                                                                                    
                                                                                                                                
Mr.  Kepes spoke  to the  slide on  page 5  titled "relative                                                                    
government  take (definition)."  He  explained  that in  the                                                                    
context of  the presentation, "government take"  referred to                                                                    
the  "relative government  take".  Relative government  take                                                                    
represented the  total government  take over  the "divisible                                                                    
income."                                                                                                                        
                                                                                                                                
     Divisible Income equals Gross Revenues less costs,                                                                         
     including capex and transportation costs.                                                                                  
                                                                                                                                
     Government Take includes all payments the government                                                                       
     mandates in its function as a sovereign:                                                                                   
                                                                                                                                
          • Royalties                                                                                                           
          • Land rental fees, property taxes                                                                                    
          • Production taxes                                                                                                    
          • Income taxes                                                                                                        
                                                                                                                                
     Government Take does not include amounts the                                                                               
     government earns via a direct equity stake                                                                                 
                                                                                                                                
Mr.  Kepes  discussed the  slide  on  page 6  titled  "fixed                                                                    
royalty   systems:  inefficient,   but  potentially   highly                                                                    
competitive."                                                                                                                   
                                                                                                                                
     · Given varying project costs, and varying prices,                                                                         
        fixed percentage royalty systems are inefficient                                                                        
        because they distort investment, making previously                                                                      
       economic projects uneconomic at a given price                                                                            
                                                                                                                                
          · Government Take from a fixed royalty system can                                                                     
             be very high when costs are high or prices are                                                                     
             low - 100% in the example of project 5                                                                             
                                                                                                                                
     · In high price environments, however, fixed royalty                                                                       
        systems can be very competitive                                                                                         
                                                                                                                                
          · Government Take can be very low when prices are                                                                     
             high, or costs are low - only ~33% in the                                                                          
             example of project 1                                                                                               
                                                                                                                                
Mr. Kepes  stated that  the slide  illustrated a  30 percent                                                                    
fixed  royalty system  on five  different projects  that had                                                                    
varying costs;  it showed  a fiscal  system design  that was                                                                    
very  competitive, but  was not  efficient from  the state's                                                                    
point  of view.  He pointed  out that  the black  horizontal                                                                    
line  on  the chart  was  at  30  percent. He  related  that                                                                    
project 5 was  a high cost development, while  project 1 had                                                                    
a low cost. He furthered that  in the case of project 5, the                                                                    
system  was very  efficient, but  that it  was probably  not                                                                    
very competitive.                                                                                                               
                                                                                                                                
Mr.  Kepes explained  the slide  on page  7 titled  "profit-                                                                    
based  fiscal  systems:  more efficient,  but  may  be  less                                                                    
competitive."                                                                                                                   
                                                                                                                                
     · A Profit-Based fiscal system may be:                                                                                     
                                                                                                                                
                                                                                                                                
            · A contractual arrangement, such as a                                                                              
              Production Sharing Contract                                                                                       
                                                                                                                                
            · A tax which applies to revenues less costs                                                                        
                                                                                                                                
                                                                                                                                
     · Such systems can be capable of raising greater                                                                           
        revenue, while reducing inefficiency:                                                                                   
                                                                                                                                
            · In low oil price environments, or high cost                                                                       
              environments, Profit- Based Systems are less                                                                      
              likely to make marginal projects non-economic                                                                     
                                                                                                                                
     · By capturing more rent in high oil price                                                                                 
        environments, or low cost environments, however,                                                                        
        they may also not compete with royalty regimes:                                                                         
                                                                                                                                
            · Projects 1 and 2 would be significantly more                                                                      
              attractive to undertake under a royalty                                                                           
              regime                                                                                                            
                                                                                                                                
Mr.  Kepes related  that a  profit-based  fiscal system  was                                                                    
more efficient  in terms of  generating more income  for the                                                                    
state, but that  it may be less competitive.  He stated that                                                                    
the chart  depicted a  50 percent  profit-based tax  on five                                                                    
different projects  and that it showed  the divisible income                                                                    
that was available from the scenario's projects.                                                                                
                                                                                                                                
Co-Chair  Stedman  requested  a clarification  of  the  term                                                                    
"rent".  Mr.  Kepes  replied that  rent  was  the  divisible                                                                    
income and that it reflected  the amount of revenue that the                                                                    
state  would accrue.  He added  that the  "normal return  on                                                                    
capital" represented  the amount of money  that was returned                                                                    
the investor.                                                                                                                   
                                                                                                                                
Mr. Kepes  summarized that  slides 6  and 7  illustrated the                                                                    
point of efficiency versus competiveness  and that they were                                                                    
examples of two end member  cases. Mr. Kepes reiterated that                                                                    
it  was  a  challenge  to find  the  proper  combination  of                                                                    
efficiency and competitiveness.                                                                                                 
                                                                                                                                
9:18:11 AM                                                                                                                    
                                                                                                                                
Mr. Kepes stated  that upcoming slides would  comment on and                                                                    
analyze the global business environment  for the Alaskan oil                                                                    
and gas  sector. He  explained that  Alaska, like  any other                                                                    
oil and gas sector, did not sit in a vacuum.                                                                                    
                                                                                                                                
Mr.  Kepes discussed  the  slide on  page  9 titled  "fixed-                                                                    
royalty jurisdictions in U.S. Lower  48 are a key competitor                                                                    
to  Alaska  for investment  dollars."  He  related that  the                                                                    
slide made a  very important point and that  it examined the                                                                    
global  oil players'  aggregated  sources and  uses of  cash                                                                    
flow. He stated that the graph  on the left hand side of the                                                                    
slide  showed that  the listed  companies  had an  aggregate                                                                    
cash  surplus  in the  majority  of  the regions  that  they                                                                    
invested in.  He pointed  out that during  the 2003  to 2005                                                                    
period, the upstream  cash flow for companies  in Europe and                                                                    
North America was  much higher than the  capital being spent                                                                    
in the  two regions  and that there  was a  substantial cash                                                                    
surplus;  over the  three year  period, companies  generated                                                                    
$50 billion  of upstream  cash flow  premium of  the capital                                                                    
that they had spent in the  two regions. He pointed out that                                                                    
Sub Saharan Africa  was the only area on the  slide that was                                                                    
in cash deficit from 2003  to 2005; during that time period,                                                                    
companies  in Sub  Saharan Africa  were generating  slightly                                                                    
less upstream cash  flow than they were  spending on capital                                                                    
expenditures.                                                                                                                   
                                                                                                                                
Mr. Kepes  referenced the  chart on the  right hand  side of                                                                    
the  slide and  stated  that the  North American  investment                                                                    
area  had  changed  radically  for  the  large,  global  oil                                                                    
companies  from  2008 to  2010;  during  this period,  North                                                                    
America  was no  longer  generating surplus  cash flow,  but                                                                    
instead had  a cash deficit  of $50 billion to  $60 billion.                                                                    
He explained that developments in  the shale plays[There are                                                                    
two definitions for "play" in  relation to oil activity: The                                                                    
extent  of a  petroleum-bearing formation;  also, it  is the                                                                    
activities  associated  with  petroleum  development  in  an                                                                    
area.]in the  Lower 48  were responsible  for the  change in                                                                    
North America's oil  investment climate; as a  result of the                                                                    
change,  the larger,  global  oil  companies had  completely                                                                    
shifted their  onshore investment strategies in  the region.                                                                    
He offered that  it was important to know  where the capital                                                                    
from  the  global  oil  companies  was  going,  specifically                                                                    
regarding the three  major producers on the  North Slope. He                                                                    
concluded that the investment  opportunities for the onshore                                                                    
U.S. had changed  and that the change was  an important part                                                                    
of  the  context  regarding how  companies  made  investment                                                                    
decisions.                                                                                                                      
                                                                                                                                
Mr.  Kepes  declared that  the  Lower  48  was "a  very  key                                                                    
competitor to  Alaska for investment  dollars", specifically                                                                    
regarding the large, global oil companies.                                                                                      
                                                                                                                                
9:23:06 AM                                                                                                                    
                                                                                                                                
Mr. Kepes  discussed the slide  on page 10 titled  "all eyes                                                                    
on  the price,  but what  about  cost." He  stated that  the                                                                    
slide  showed  that  over  the  last ten  years,  a  lot  of                                                                    
attention had been on the  developments in the price of oil,                                                                    
but that  there had not  been much  focus on the  changes to                                                                    
costs. He  furthered that  the graph  on the  slide depicted                                                                    
the   total  spending   for  the   global  exploration   and                                                                    
production (E&P)  sector, the Brent  Index price of  oil, as                                                                    
well  as  the  costs  for exploration  and  development.  He                                                                    
stated that  onshore development  costs, which  were indexed                                                                    
to 100 in  the year 2000, had increased  to approximately 60                                                                    
percent to 70 percent over  that number. He pointed out that                                                                    
unit cost inflation  had been occurring since  the year 2000                                                                    
and  that it  was occurring  at  a higher  rate in  offshore                                                                    
projects;  however, both  onshore  and offshore  exploration                                                                    
and development  costs were  substantially higher  than they                                                                    
were in  the year 2000. He  stated that it was  important to                                                                    
note that the price of oil and  the price of gas at the pump                                                                    
were very  visible, but that sometimes  the associated costs                                                                    
were not  so visible; he pointed  out that this was  part of                                                                    
the  global environment  in the  context  of the  investment                                                                    
decisions that companies made.                                                                                                  
                                                                                                                                
Mr. Kepes  discussed the slide  on page 11  titled "Alaska's                                                                    
days of "easy oil" are  gone: high costs and high government                                                                    
take  present challenges."  He related  that  the slide  was                                                                    
meant to  bring observations  into focus,  make comparisons,                                                                    
and make some points about  costs. He reiterated that Alaska                                                                    
was  in a  global  oil market  and  referenced the  previous                                                                    
slide's  figure   that  the  global  industry   would  spend                                                                    
approximately $600  billion on E&P  in 2012. He  stated that                                                                    
the   slide  showed   that  Alaska   was   a  "somewhat   to                                                                    
substantially"  higher  cost  environment in  comparison  to                                                                    
other oil sectors in the  Lower 48; capital expenditures for                                                                    
Alaska conventional  oil were approximately  $17 to  $18 per                                                                    
barrel  and  the operating  expenditures  in  the area  were                                                                    
almost as high. He related  that the slide provided specific                                                                    
cost data  for unconventional  shale plays  in the  Lower 48                                                                    
and for  onshore, conventional E&P  activities in  Texas and                                                                    
Louisiana. The Bakken  shale oil play in North  Dakota was a                                                                    
high  cost play,  but was  not as  high cost  as Alaska.  He                                                                    
specified that  Haynesville was primarily  a shale  gas play                                                                    
and that the Barnett play contained gas and oil.                                                                                
                                                                                                                                
9:27:35 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  referenced the "new  conventional" Alaskan                                                                    
oil  on slide  11 and  inquired how  Alaska's "conventional"                                                                    
oil costs would  compare to other sectors on  the slide. Mr.                                                                    
Kepes replied that for infill  drilling or new opportunities                                                                    
in  the  currently  producing  areas,  the  costs  would  be                                                                    
"closer  to what  you see  here  between the  unconventional                                                                    
Bakken and  maybe even around  the Haynesville or  less." He                                                                    
concluded  that  the  costs   for  drilling  in  and  around                                                                    
existing production  on the  North Slope  were substantially                                                                    
lower than the costs for "new conventional" oil in Alaska.                                                                      
                                                                                                                                
Senator  Olson asked  for a  clarification on  slide 10.  He                                                                    
noted that  the header on  the slide stated that  oil prices                                                                    
would  increase by  450 percent  and queried  if this  meant                                                                    
that  the price  of  oil  would be  in  excess  of $500  per                                                                    
barrel. Mr.  Kepes replied that  the oil price on  the slide                                                                    
was an  index price and  that it was  based on the  price in                                                                    
the year  2000. He explained  that the prediction was  a 450                                                                    
percent increase to  the $15 or $16 per barrel  price of oil                                                                    
in  the year  2000. He  stated that  PFC Energy  thought oil                                                                    
prices could "drift" higher, but that  it also saw "a bit of                                                                    
softness" in  that price as  well. He urged that  PFC Energy                                                                    
was not  forecasting that oil  prices would be $400  or $500                                                                    
per barrel.                                                                                                                     
                                                                                                                                
9:29:20 AM                                                                                                                    
                                                                                                                                
Senator Thomas inquired if revenue  was considered a cost in                                                                    
the  chart on  page  10. Mr.  Kepes  responded that  Alaskan                                                                    
state revenues  were not  considered on  the chart  and that                                                                    
the chart's costs reflected capital expenditures.                                                                               
                                                                                                                                
Co-Chair  Stedman interjected  that  the costs  on slide  10                                                                    
were aggregate  numbers. Mr.  Kepes responded  that Co-Chair                                                                    
Stedman  was  correct  and pointed  out  that  PFC  Energy's                                                                    
databases covered  the entire  industry and  examined global                                                                    
costs  in   aggregate.  He   reiterated  that   the  numbers                                                                    
represented  an aggregate  amount  and that  there would  be                                                                    
specific  areas where  costs did  not increase  as much,  as                                                                    
well as areas where costs increased at a higher rate.                                                                           
                                                                                                                                
Mr.  Kepes  discussed the  slide  on  page 13  titled  "cost                                                                    
assumptions underlying fiscal analysis."                                                                                        
                                                                                                                                
                                                                                                                                
        · Two key forms of analysis have been undertaken on                                                                     
          project economics and government take levels in                                                                       
          this presentation                                                                                                     
                                                                                                                                
        · Existing Producer Analysis examines the economics                                                                     
          of  the fiscal  regime for  an existing  producer,                                                                    
          producing  200  mb/d in  2012,  with  a 6%  annual                                                                    
          production  decline rate,  and with  the following                                                                    
          costs:                                                                                                                
                  · $12/ flowing bbl operating expenditure                                                                      
                  · $5/ flowing bbl maintenance capital                                                                         
                    expenditure                                                                                                 
                                                                                                                                
        · New    Development     Analysis    examines    the                                                                    
          development-forward lifecycle economics of the                                                                        
          fiscal regime for the development of a new 10                                                                         
          mb/d development for a producer without existing                                                                      
          base production. Assumed costs are:                                                                                   
                                                                                                                                
                  · $17/ flowing bbl operating expenditure                                                                      
                  · $17/bbl reserves development capital                                                                        
                    expenditure                                                                                                 
                  · $1/ flowing bbl maintenance capital                                                                         
                    expenditure                                                                                                 
                                                                                                                                
Mr. Kepes  related that  the cost  figures for  the existing                                                                    
producer  analysis   were  germane  to   Co-Chair  Stedman's                                                                    
earlier  question regarding  how "conventional"  Alaskan oil                                                                    
would compare  to other  sectors on  slide 11.  He explained                                                                    
that the costs in Alaska  for the existing producer analysis                                                                    
on slide  13 were lower than  the costs for the  viscous and                                                                    
new conventional oil on slide 11.                                                                                               
                                                                                                                                
9:32:16 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  asked for a  definition of  "flowing oil."                                                                    
Mr. Kepes  responded that flowing  oil referred to  the cost                                                                    
of a barrel of oil in  production; it was exclusive of other                                                                    
cost factors  outside of  production and  was specific  to a                                                                    
field actually producing.                                                                                                       
                                                                                                                                
Mr. Kepes continued to speak to  slide 13 and related that a                                                                    
production level of 10,000 barrels  per day (bbl/d) would be                                                                    
indicative of  a 65 million  to 75 million barrel  field. He                                                                    
furthered   that  the   costs   associated   with  the   new                                                                    
development  analysis  were  substantially higher  than  the                                                                    
costs   in  the   existing   producer   analysis.  The   new                                                                    
development  analysis examined  new  developments that  were                                                                    
away  from  existing  infrastructure  and  did  not  include                                                                    
activities like infill drilling.                                                                                                
                                                                                                                                
Mr. Kepes  shared that  the next  four slides  simulated the                                                                    
existing  producer and  new  development  scenarios for  the                                                                    
Alaska's  Clear Equitable  Share  (ACES)  and the  Petroleum                                                                    
Production Tax's (PPT) tax regimes,  both as proposed and as                                                                    
enacted.                                                                                                                        
                                                                                                                                
Mr.  Kepes explained  the slide  on page  14 titled  "PPT as                                                                    
originally  proposed (existing  producer)" and  related that                                                                    
the slide  showed an  analysis of PPT  as it  was originally                                                                    
proposed.  He  discussed the  graph  on  the top  left  hand                                                                    
corner  of the  slide and  stated that  it was  based on  an                                                                    
existing  producer that  was  producing  200,000 bbl/d.  The                                                                    
black  line  represented  the  "after  tax  cash  flow."  He                                                                    
referenced  the table  in the  upper middle  portion of  the                                                                    
slide and  stated that  "PPT as  originally proposed"  had a                                                                    
net present value  (NPV) of just over $20 billion  at an oil                                                                    
price of $100 per barrel.  He observed that the larger table                                                                    
to the right  showed that the government  take reached about                                                                    
60  percent  through  the   intermediate  price  ranges.  He                                                                    
reiterated  that  the  slide   examined  PPT  as  originally                                                                    
proposed, under the existing producer scenario.                                                                                 
                                                                                                                                
Mr.  Kepes discussed  the slide  on page  15 titled  "PPT as                                                                    
enacted (existing  producer)" and  stated that it  showed an                                                                    
analysis of PPT as it  was enacted, under the same producing                                                                    
scenario  as  the  previous  slide.  He  switched  back  and                                                                    
forward between slides  14 and 15. He noted  that under "PPT                                                                    
as  enacted",  the government  take  was  72 percent  to  74                                                                    
percent compared  to the 60  percent government  take figure                                                                    
from  slide 14.  He related  that the  NPV on  slide 15  was                                                                    
approximately  $17  billion and  that  it  had decreased  by                                                                    
about  $3  billion  over  the   lifetime  of  the  field  in                                                                    
comparison to the  NPV on slide 14. He  concluded that there                                                                    
could be  differences in  how a  fiscal system  was proposed                                                                    
and how it was enacted.                                                                                                         
                                                                                                                                
9:36:08 AM                                                                                                                    
                                                                                                                                
Mr. Kepes  explained the  slide on page  16 titled  "ACES as                                                                    
proposed (existing  producer)" and stated that  it showed an                                                                    
analysis  of  ACES  as  it  was  proposed,  under  the  same                                                                    
producing  scenarios as  the two  previous slides.  "ACES as                                                                    
proposed"  generated  a  NPV  of  $6.6  billion  and  had  a                                                                    
government take ranging from 68 percent to 74 percent.                                                                          
                                                                                                                                
Mr. Kepes  discussed the  slide on page  17 titled  "ACES as                                                                    
enacted (existing  producer)" and  stated that it  showed an                                                                    
analysis  of  ACES  as  it   was  enacted,  under  the  same                                                                    
producing scenarios  as the three previous  slides. "ACES as                                                                    
enacted" had  government take  of 75  percent to  83 percent                                                                    
and a  NPV of about  $4.5 billion;  the NPV had  declined by                                                                    
about $1.5 billion from the NPV in the previous slide.                                                                          
                                                                                                                                
Mr.   Kepes  explained   the  slide   on   page  18   titled                                                                    
"limitations on price upside:  a probabilistic approach." He                                                                    
stated  that  the  slide  showed PPT  as  proposed,  PPT  as                                                                    
enacted, ACES as proposed, and  ACES as enacted for existing                                                                    
base production,  under the same producing  scenarios as the                                                                    
four previous  slides. He  stated that  ACES as  enacted was                                                                    
represented by the dark blue line  and related that it was a                                                                    
progressive tax regime.  The red bar graph on  the bottom of                                                                    
the  slide forecasted  the probability  of oil  prices being                                                                    
within $30 per  barrel to $230 per barrel  over the lifetime                                                                    
of the field.  He observed that PPT  as originally proposed,                                                                    
which was represented  by the dark yellow  line, was neutral                                                                    
in terms  of progressivity.  He stated  that changes  to PPT                                                                    
and   subsequent  changes   to  ACES   had  generated   more                                                                    
progressive tax regimes, which had  a higher government take                                                                    
at higher oil prices.                                                                                                           
                                                                                                                                
9:38:41 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman asked  for a definition of  "EV". Mr. Kepes                                                                    
replied that  EV was the  expected value of all  future cash                                                                    
flows for  the listed  projects, under the  listed producing                                                                    
scenarios.  He  further  explained  that  the  EV  would  be                                                                    
reflective of all aggregated cash  flows that were generated                                                                    
over a 30 year period.                                                                                                          
                                                                                                                                
Co-Chair Stedman  observed that the  EV for PPT  as proposed                                                                    
was $22.862 billion and that the  EV for ACES as enacted was                                                                    
$14.988  billion; he  noted the  difference between  the two                                                                    
figures  and inquired  where the  missing funds  were going.                                                                    
Mr.  Kepes replied  that  the  money went  to  the State  of                                                                    
Alaska and the federal government  and clarified that the EV                                                                    
on  the  slide  represented  the values  for  the  investing                                                                    
consortium.                                                                                                                     
                                                                                                                                
9:40:08 AM                                                                                                                    
                                                                                                                                
Mr.   Kepes  discussed   the  slide   on   page  19   titled                                                                    
"limitations on price upside:  a probabilistic approach." He                                                                    
explained that the  previous slide was based  on an existing                                                                    
producer that  was producing  200,000 bbl/d;  however, slide                                                                    
19  represented  a  new  development,  which  was  producing                                                                    
10,000 bbl/d in a 65 million  to 75 million barrel field. He                                                                    
noted that  a new  development would have  higher associated                                                                    
costs  and reiterated  that  the EV  was  reflective of  the                                                                    
values to  the investment  consortium. Under  this scenario,                                                                    
PPT  as proposed  would generate  an EV  of $236  million in                                                                    
comparison to the $12 million  EV that would be generated by                                                                    
ACES as  enacted. He  stated that  a higher  government take                                                                    
was  occurring   at  higher  oil   prices  because   of  the                                                                    
progressivity of the ACES fiscal  regime; furthermore, a new                                                                    
development existed in a "much higher" cost environment.                                                                        
                                                                                                                                
Mr.  Kepes  explained the  slide  on  page 20  titled  "ACES                                                                    
impact  on oil-price  upside, and  on high  cost development                                                                    
economics." The slide examined how  ACES impacted the upside                                                                    
to  high  oil  prices,   particularly  regarding  high  cost                                                                    
development economics. He reiterated  that Alaska was a high                                                                    
cost environment.  He referenced the overall  cost increases                                                                    
to  the   industry  at  large   and  offered  that   it  was                                                                    
appropriate   to  look   specifically  at   the  high   cost                                                                    
development economics  regarding new  development production                                                                    
scenarios. He  noted that a  new development was based  on a                                                                    
production level of  10,000 bbl/d in a 65  million to 70[75]                                                                    
million   barrel  field.   Under   this   scenario,  a   new                                                                    
development in the  ACES regime, which was  reflected by the                                                                    
dark yellow  line, achieved a  positive NPV at an  oil price                                                                    
of $100  per barrel;  a project  like this  would presumably                                                                    
not  be pursued  when the  price was  under $100  per barrel                                                                    
because the  conditions made it  uneconomic. He  pointed out                                                                    
that the profitability of base  production under ACES, which                                                                    
was reflected  by the  dark red line,  was much  higher than                                                                    
the  profitability  of  a new  development  under  ACES.  He                                                                    
pointed out  that the dotted  blue and green lines  showed a                                                                    
representation   of    possible   changes   to    the   ACES                                                                    
progressivity structure  and that  the two lines  showed the                                                                    
high impact  of the  changes to the  project economics  of a                                                                    
high  cost  investment  scenario. He  concluded  that  under                                                                    
ACES, the base production on  the North Slope was attractive                                                                    
and profitable, but that there  was an issue of higher costs                                                                    
in new developments.                                                                                                            
                                                                                                                                
9:44:43 AM                                                                                                                    
                                                                                                                                
Mr. Kepes related  that the next section  of slides examined                                                                    
the  global competitiveness  of  ACES and  offered that  the                                                                    
state needed to be aware  that the market for E&P investment                                                                    
dollars was global.                                                                                                             
                                                                                                                                
Mr.  Kepes discussed  the slide  on page  22 titled  "regime                                                                    
competitiveness:  average government  take." He  stated that                                                                    
slides 22 through  slide 25 showed the  average and marginal                                                                    
government  takes at  an oil  price of  $100 per  barrel and                                                                    
$140 per barrel of oil.                                                                                                         
                                                                                                                                
Co-Chair Stedman asked for a  brief explanation of where PFC                                                                    
Energy  had received  the data  for slide  22. He  explained                                                                    
that there were similar  presentations, which used data that                                                                    
did  not   include  production  tax.  He   pointed  out  the                                                                    
importance  of knowing  what information  was in  the slides                                                                    
and where  the data  had come from.  Mr. Kepes  replied that                                                                    
the data came from PFC  Energy's global databases, which PFC                                                                    
Energy had  been constructing for  over 25 years.  He stated                                                                    
that PFC  Energy's slides differed from  other presentations                                                                    
the  committee had  seen,  both in  the  specificity of  the                                                                    
fiscal  structures and  the specificity  of the  opportunity                                                                    
sets  in the  localities in  question. He  further explained                                                                    
that a  similar analysis might  use a generic size  field to                                                                    
calculate the  returns or government  takes in  60 different                                                                    
government jurisdictions.  He offered that an  analysis that                                                                    
applied  a generic,  100 million  barrel field  in a  fiscal                                                                    
system and  region like  New Zealand,  where the  field size                                                                    
was closer  to 10 million  barrels, did not  generate useful                                                                    
comparative  knowledge.  He   concluded  that  PFC  Energy's                                                                    
analysis used field  sizes that were specific  to the target                                                                    
locations;  furthermore, the  fiscal  system estimates  were                                                                    
inclusive of property  taxes, costs, and other  parts of the                                                                    
government  take  structure  that were  particular  to  that                                                                    
jurisdiction.                                                                                                                   
                                                                                                                                
Co-Chair  Stedman  stated  that  there  had  been  confusion                                                                    
during  previous presentations  regarding  the inclusion  or                                                                    
exclusion  of private  royalties in  calculations and  asked                                                                    
for  a clarification  regarding  how  PFC Energy  calculated                                                                    
royalties.  Mr.  Kepes  responded  that in  all  cases,  PFC                                                                    
Energy included  royalties in its calculations.  Even when a                                                                    
royalty  accrued   to  private   land  owners,   PFC  Energy                                                                    
considered  it  part  of the  government  take  because  the                                                                    
royalty was  not available to the  investment consortium. He                                                                    
pointed out that  in most of the world, very  little oil and                                                                    
gas production  was taking  place on  private land  and that                                                                    
the onshore Lower 48 was  unique in that respect; 97 percent                                                                    
of  shale  play  production  activity in  the  U.S.  was  on                                                                    
privately  held  land.  He  concluded  that  the  matter  of                                                                    
private  royalties was  a "big  issue", but  that it  mostly                                                                    
applied to the onshore Lower 48.                                                                                                
                                                                                                                                
9:50:09 AM                                                                                                                    
                                                                                                                                
Mr. Kepes continued  to discuss slide 22 and  stated that it                                                                    
showed  the costs,  field sizes,  and fiscal  tax structures                                                                    
that were  specific to  the localities;  the slides  did not                                                                    
input generic field sizes or  generic costs. He offered that                                                                    
PFC Energy's method  gave a better measure  of what actually                                                                    
occurred  in  the jurisdictions.  He  pointed  out that  the                                                                    
Organisation  for  Economic   Co-operation  and  Development                                                                    
(OECD) countries were labeled in  yellow. He noted that OECD                                                                    
countries generally had a lower  government take, while non-                                                                    
OECD countries tended  to have a higher  government take. He                                                                    
commented that oil and gas  tax policies differed in design;                                                                    
some  policies  were designed  to  generate  revenues for  a                                                                    
government,  while some  were structured  to provide  energy                                                                    
"feedstocks" for an economy.                                                                                                    
                                                                                                                                
Mr. Kepes continued to speak to  slide 22 and stated that it                                                                    
showed, at a  price of $100 per barrel,  the government take                                                                    
of the  ACES Alaskan  new development and  existing producer                                                                    
scenarios relative  to other tax  regimes around  the world.                                                                    
He added that the field  sizes and production levels for the                                                                    
specific  Alaskan scenarios  were  as  outlined in  previous                                                                    
slides.                                                                                                                         
                                                                                                                                
9:52:17 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman pointed out that  there had previously been                                                                    
work  done that  compared Alaska  to other  tax regimes  and                                                                    
mentioned in  particular a comparison  to the North  Sea. He                                                                    
observed that  at an  oil price of  $100 per  barrel, Norway                                                                    
had  a  slightly higher  government  take  than the  Alaskan                                                                    
existing producer  scenario, but  that the two  regions were                                                                    
pretty close  in that  respect. Mr.  Kepes replied  that Co-                                                                    
Chair Stedman  was correct and  that Norway was  directly in                                                                    
the  middle in  terms  of government  take  relative to  the                                                                    
Alaskan existing producer and new development scenarios.                                                                        
                                                                                                                                
Co-Chair  Stedman  furthered  that   there  had  been  prior                                                                    
testimony indicating  that the government take  for existing                                                                    
production should range  from 70 percent to  75 percent, and                                                                    
pointed out that the existing  producer scenario on slide 22                                                                    
was at  government take of  73 percent. Mr.  Kepes commented                                                                    
that  Norway was  a  standout in  comparison  to other  OECD                                                                    
countries  because it  had two  national oil  companies that                                                                    
held equity stakes  in oil and gas production and  that as a                                                                    
result,  Norway was  generating  additional  income via  the                                                                    
national oil companies. He added  that the revenue generated                                                                    
via  Norway's   nationally  owned  oil  companies   was  not                                                                    
included with  the government take  on slide 22.  He pointed                                                                    
out  that there  were other  factors at  play that  were not                                                                    
reflected   in  the   slide  and   that   aspects  such   as                                                                    
competiveness,  the number  of operating  investors, or  the                                                                    
participation  of   nationally  owned  companies   were  not                                                                    
represented.                                                                                                                    
                                                                                                                                
Co-Chair  Hoffman queried  why the  slide did  not show  the                                                                    
existing producer  and new  development scenarios  for other                                                                    
countries,  such as  Norway. Mr.  Kepes  responded that  PFC                                                                    
Energy had  the requested data  and could provide it  in the                                                                    
future.                                                                                                                         
                                                                                                                                
9:55:26 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  requested  that PFC  Energy  provide  the                                                                    
committee with  a slide  that reflected  existing production                                                                    
scenarios  and another  slide  that  showed new  development                                                                    
scenarios.  Mr. Kepes  responded that  PFC Energy  could run                                                                    
the separate slides based on  200,000 bbl/d and 10,000 bbl/d                                                                    
of production, but that the  information generated might not                                                                    
be very  applicable. He related  that in some  cases, within                                                                    
specific localities, there were  no 200,000 bbl/d fields; in                                                                    
other  instances,   a  10,000  bbl/d  field   would  not  be                                                                    
economic.  He  stated that  in  the  case of  the  Norwegian                                                                    
operating  environment, a  10,000 bbl/d  field would  not be                                                                    
economic  as  a  stand-alone development.  He  offered  that                                                                    
using the  exact same field  sizes as the  Alaskan scenarios                                                                    
would  generate a  less  applicable  analysis. He  concluded                                                                    
that PFC  Energy could design  a specific analysis  that was                                                                    
appropriate  to the  localities,  which  would more  closely                                                                    
reflect  the   reality  on  the  ground.   Co-Chair  Stedman                                                                    
observed that the committee wanted  the information that was                                                                    
presented to be "as reality based as possible."                                                                                 
                                                                                                                                
Co-Chair Stedman asked for an  explanation of how PFC Energy                                                                    
factored in very small oil  wells, such as stripper wells in                                                                    
Texas.  Mr. Kepes  replied that  the U.S.  probably had  the                                                                    
most  complex sets  of  applicable tax  regimes  due to  the                                                                    
nexus between  private, federal,  and state lands.  He added                                                                    
that  regarding  stripper  wells, fiscal  terms  on  private                                                                    
lands were often were more  stringent for investors than the                                                                    
terms  on public  lands.  He noted  that  King Ranch,  Texas                                                                    
consisted  entirely  of privately  held  land  and that  the                                                                    
region might have a government  take in excess of 50 percent                                                                    
or 60 percent. He concluded  that typically, fiscal terms on                                                                    
private  lands were  higher  than the  terms  on federal  or                                                                    
state lands.                                                                                                                    
                                                                                                                                
9:59:00 AM                                                                                                                    
                                                                                                                                
Senator Egan asked  how a small well for  an Alaska existing                                                                    
producer  would  compare  to the  other  localities  on  the                                                                    
slide. Mr. Kepes referred back to slide 20 and replied that                                                                     
a small well  in Alaska would probably be in  the form of an                                                                    
infill well,  which was tied to  existing infrastructure and                                                                    
was  not  a stand-alone  development.  He  furthered that  a                                                                    
smaller  well in  Alaska could  also be  in the  form of  an                                                                    
older  well   that  was   reentered  or   reconstructed.  He                                                                    
explained that some of the  original producing wells were 35                                                                    
to  40 years  old and  that the  producers sometimes  reused                                                                    
these wells  with "coiled tube"  drilling rigs, which  had a                                                                    
lower operating cost;  He added that for  an Alaska existing                                                                    
producer,   these   types   of  projects   were   relatively                                                                    
profitable and  would generate a  government take  of around                                                                    
70 percent as implied on the slide's dark red line.                                                                             
                                                                                                                                
Mr. Kepes  continued to  speak to slide  20 and  pointed out                                                                    
that investing in existing  production, infill drilling, and                                                                    
replacing  old wells  were  very  profitable activities  for                                                                    
companies.  He  concluded  that  under  ACES,  investing  in                                                                    
existing  infrastructure was  "quite  profitable", but  that                                                                    
the  challenge was  the  higher cost  of  new production  in                                                                    
Alaska.                                                                                                                         
                                                                                                                                
10:02:01 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:07:52 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
10:08:09 AM                                                                                                                   
                                                                                                                                
Mr.  Kepes explained  the slide  on page  23 titled  "regime                                                                    
competiveness: average government take."  He stated that the                                                                    
slide  examined the  average  government  take of  different                                                                    
regimes  at $140  per  barrel. He  related  that under  this                                                                    
analysis, both  the ACES new  development and  ACES existing                                                                    
producer scenarios  had gone up in  government take relative                                                                    
to the other regimes on the  slide. He observed that both of                                                                    
the ACES scenarios had a  higher government take than Norway                                                                    
on the slide.                                                                                                                   
                                                                                                                                
Mr.  Kepes discussed  the slide  on page  24 titled  "regime                                                                    
competitiveness: marginal government  take." He related that                                                                    
slide showed  the marginal  government take,  which examined                                                                    
the  difference  in government  or  investor  take when  the                                                                    
price of  oil increased  $1 per barrel.  On a  marginal take                                                                    
basis and  an oil  price of  $100 per  barrel, the  ACES new                                                                    
development and  ACES existing producer scenarios  were even                                                                    
higher  [when  compared  to the  average  government  take],                                                                    
relative to the other jurisdictions on the slide.                                                                               
                                                                                                                                
Co-Chair  Stedman referenced  comments that  were made  in a                                                                    
prior presentation,  which had indicated that  Argentina had                                                                    
a 100  percent marginal government  take at an oil  price of                                                                    
$60 per  barrel or over.  He requested Mr. Kepes  to comment                                                                    
on Argentina and inquired why companies would invest there.                                                                     
Mr. Kepes  replied that  as a result  of export  tariffs and                                                                    
other  more complicated  factors, Argentina  had created  an                                                                    
environment where  very little investment was  occurring. He                                                                    
explained that  the 100 percent marginal  government take in                                                                    
Argentina  maximized  efficiency   from  a  government  take                                                                    
perspective,  but  that  it resulted  in  a  non-competitive                                                                    
environment  with  "almost  no investment."  He  noted  that                                                                    
there   were  political   battles  currently   occurring  in                                                                    
Argentina  over the  issue of  its high  marginal government                                                                    
take.                                                                                                                           
                                                                                                                                
10:11:14 AM                                                                                                                   
                                                                                                                                
JANAK   MAYER,  MANAGER,   UPSTREAM  &   GAS,  PFC   ENERGY,                                                                    
WASHINGTON,  D.C.   (via  teleconference),  stated   that  a                                                                    
particular  aspect of  Argentina's  tax  structure that  was                                                                    
peculiar to the country was  its export tax; the tax limited                                                                    
exported  oil   to  a  specific  maximum   price  level.  He                                                                    
concluded that  investing in  Argentina's export  tax regime                                                                    
was  "very undesirable"  and  noted that  there  had been  a                                                                    
corresponding impact on investment levels in the country.                                                                       
                                                                                                                                
Co-Chair  Stedman  observed  that   there  seemed  to  be  a                                                                    
relationship  between the  prospectivity of  regional basins                                                                    
and  how jurisdictions'  tax structures  were organized.  He                                                                    
noted  that  Ireland was  at  the  bottom  of slide  24  and                                                                    
inquired how much oil Ireland  had. Mr. Kepes responded that                                                                    
Ireland  did   not  have  "much  oil"   and  explained  that                                                                    
prospectivity  was not  well represented  on  the slide.  He                                                                    
stated  that generally,  the lower  government take  systems                                                                    
existed  in jurisdictions  where prospectivity  was low.  He                                                                    
explained  that  governments   with  low  prospectivity  oil                                                                    
basins  had  to  offer  "some   of  the  best  fiscal  terms                                                                    
available to  investors on the  planet" in order  to attract                                                                    
more  investment.   He  stated   that  there  had   been  no                                                                    
commercial production to date  in Greenland's frontier play.                                                                    
He  pointed out  that in  Greenland, despite  the high  cost                                                                    
environment,  a single  company  had been  attracted to  the                                                                    
very low government  take and had drilled  seven "dry holes"                                                                    
offshore.  [dry hole:  An  exploratory  or development  well                                                                    
found  to be  incapable of  producing either  oil or  gas in                                                                    
sufficient  quantities to  justify completion  as an  oil or                                                                    
gas well]                                                                                                                       
                                                                                                                                
Mr. Kepes  concluded that generally, higher  government take                                                                    
regimes   had    substantial   known   reserves    or   high                                                                    
prospectivity; at a minimum,  higher government take systems                                                                    
had known or existing commercial production.                                                                                    
                                                                                                                                
Mr.  Kepes discussed  the slide  on page  25 titled  "regime                                                                    
competitiveness: marginal  government take" and  stated that                                                                    
it showed the marginal government  take of the global fiscal                                                                    
regimes at a price of $140 per barrel of oil.                                                                                   
                                                                                                                                
Co-Chair  Stedman  noted that  there  had  been claims  that                                                                    
Alaska's government  take was the  highest in the  world and                                                                    
inquired if that  was true. Mr. Kepes  responded that Alaska                                                                    
did not  have the world's  highest government take  and that                                                                    
Turkmenistan had the highest government take on slide 25.                                                                       
                                                                                                                                
10:15:47 AM                                                                                                                   
                                                                                                                                
Mr. Kepes stated that slides  26 and 27 examined another way                                                                    
of looking at  progressivity and that the  slides showed the                                                                    
marginal government  take minus the average  government take                                                                    
for the same regimes that were in previous slides.                                                                              
                                                                                                                                
Mr.   Kepes  explained   the  slide   on   page  26   titled                                                                    
"benchmarking progressivity for a  range of global regimes."                                                                    
He noted that  at an oil price of $100  per barrel, Columbia                                                                    
was at  the top of  the slide  and was a  highly progressive                                                                    
regime  in  terms   of  the  impact  of   higher  prices  on                                                                    
government  take.  He pointed  out  that  the ACES  existing                                                                    
producer  scenario  was  just  underneath  Columbia  on  the                                                                    
slide.                                                                                                                          
                                                                                                                                
Co-Chair Stedman queried  if the regimes on  the bottom half                                                                    
of  the   slide  were  regressive  systems,   in  which  the                                                                    
government  takes went  down as  prices went  up. Mr.  Kepes                                                                    
responded in the affirmative and  added that in a regressive                                                                    
system as  oil prices  went up, a  larger proportion  of the                                                                    
divisible income when to the investor.                                                                                          
                                                                                                                                
10:17:08 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman asked  if the  state could  manipulate the                                                                    
upper part  of the graph by  changing the base tax  rate and                                                                    
the  slope. He  further inquired  if decreasing  the state's                                                                    
progressivity,  increasing its  base tax  rate, and  keeping                                                                    
its cash flow the same  would "shorten those bars" and drive                                                                    
the progressivity closer  to zero. Mr. Kepes  replied in the                                                                    
affirmative  and   offered  that  Janak  Mayer   might  have                                                                    
comments to add.                                                                                                                
                                                                                                                                
Co-Chair  Stedman asked  if Mr.  Mayer had  any comments  on                                                                    
slide 26. Mr. Mayer replied  that Columbia was a progressive                                                                    
regime, but  that it  was progressive on  a much  lower base                                                                    
rate of  government take. He referenced  previous slides, in                                                                    
which  Columbia was  in  the bottom  half  of global  fiscal                                                                    
regimes in  terms of government  take. He offered  that just                                                                    
looking at progressivity  was only one part  of the equation                                                                    
and that  progressivity in  relation to  the basic  level of                                                                    
government  take  was  a  critical  factor  to  examine.  He                                                                    
concluded  that  in  contrast to  OECD  countries,  Alaska's                                                                    
regime  had a  relatively  high government  take  and had  a                                                                    
significant progressivity feature.                                                                                              
                                                                                                                                
Co-Chair  Hoffman stated  that the  committee was  trying to                                                                    
encourage new  development and new  oil in the  pipeline. He                                                                    
noted  that  there  was  a large  cost  spread  between  new                                                                    
developments and  existing producers under ACES  and queried                                                                    
if the same  disparity between the two  scenarios existed in                                                                    
other oil producing countries.                                                                                                  
                                                                                                                                
Co-Chair Stedman  asked PFC Energy to  include the requested                                                                    
information in future  slides that it was  preparing for the                                                                    
committee.                                                                                                                      
                                                                                                                                
Mr.  Mayer  stated  that  the  disparity  in  costs  between                                                                    
existing  developments and  new production  was particularly                                                                    
important for Alaska due of  the impact of the deductibility                                                                    
of  capital  expenses  and the  production  tax  credit.  He                                                                    
clarified that  a new producer  had no prior  production and                                                                    
that  as  a   result,  new  developments  did   not  have  a                                                                    
production base  against which to write-off  capital credits                                                                    
or  net   operating  loss  credits.  He   offered  that  the                                                                    
inability  to use  the deductions  was the  principle reason                                                                    
why  the   government  take  was  significantly   higher  in                                                                    
Alaska's new developments than  with existing production. He                                                                    
added that  the difference in progressivity  between new and                                                                    
existing  producers was  a result  of the  actual government                                                                    
take  being  higher  for new  developments,  while  marginal                                                                    
rates stayed the same for both new and existing producers.                                                                      
                                                                                                                                
10:20:52 AM                                                                                                                   
                                                                                                                                
Mr.   Kepes  spoke   to  the   slide  on   page  27   titled                                                                    
"benchmarking progressivity  for a range of  global regimes"                                                                    
and stated that it showed  the same analysis as the previous                                                                    
slide, but  at an oil price  of $140 per barrel;  under this                                                                    
analysis,  Turkmenistan had  the  highest progressivity.  He                                                                    
pointed out  that a "big  take away"  from slides 26  and 27                                                                    
was  that  all  of  the Lower  48  regimes  were  regressive                                                                    
regimes and that when the price  of oil went up, more of the                                                                    
divisible  income  in the  Lower  48  went to  the  investor                                                                    
consortium.                                                                                                                     
                                                                                                                                
Co-Chair Stedman  commented that Alaska differed  from other                                                                    
jurisdictions in  its land ownership  and tax  structure. He                                                                    
furthered that  it was his  understanding that that  most of                                                                    
North America  had a  tax and  royalty system,  while Alaska                                                                    
had a  hybrid system of  tax and royalty, plus  a concession                                                                    
system.  Mr.  Kepes  responded  that  Co-Chair  Stedman  was                                                                    
correct.                                                                                                                        
                                                                                                                                
Co-Chair   Stedman   requested   a  clarification   of   the                                                                    
differences  in land  ownership  and  tax structure  between                                                                    
Alaska and the Lower 48.                                                                                                        
                                                                                                                                
Mr.  Kepes  stated  that  97   percent  of  the  shale  play                                                                    
activities in the  Lower 48 were on privately  held land and                                                                    
that  each  of  the  private  land  holdings  could  have  a                                                                    
different  fiscal structure.  He  pointed  out that  private                                                                    
land  owners  did not  offer  capital  credits and  did  not                                                                    
incentivize  companies to  make large  investments. Many  of                                                                    
the  investments  were  incremental for  smaller,  privately                                                                    
held  tracks;  investments  under  this  scenario  might  be                                                                    
spread  out over  a large  area of  land, a  long period  of                                                                    
time, and  involve multiple land  owners. He  explained that                                                                    
Alaska  had a  concession  system, while  the  Lower 48  had                                                                    
leases that were  conditional and had a  shorter time frame.                                                                    
He stated that  lease holds in the Lower  48 had conditional                                                                    
language, which specified that investment  had to take place                                                                    
within a  certain period of  time or the lease  would revert                                                                    
back to  the land  owner; relinquishment provisions  were in                                                                    
place  to insure  asset liquidity  and require  companies to                                                                    
invest.  He concluded  that the  nature of  the duration  of                                                                    
lease hold  agreements in the  Lower 48 were  different than                                                                    
the concession agreements in Alaska.  He noted that the size                                                                    
of the leases in the Lower  48 were usually smaller than the                                                                    
leases  in  Alaska.  He  explained   that  in  the  case  of                                                                    
Louisiana's private  land holdings, there might  be hundreds                                                                    
on land owners  involved in a play that was  similar in size                                                                    
to the "footprint for the North Slope."                                                                                         
                                                                                                                                
Mr.  Kepes addressed  the slide  on page  28 titled  "ACES -                                                                    
effective as a harvest area fiscal regime."                                                                                     
                                                                                                                                
        · ACES appears to work well as a "harvest" regime                                                                       
                                                                                                                                
               · Existing mature fields remain profitable,                                                                      
                  including capital work required to achieve                                                                    
                  ~6% decline (renewal capex)                                                                                   
                                                                                                                                
               · Maximum 'rent' extracted from a declining                                                                      
                  production base is captured for the state                                                                     
                                                                                                                                
        · ACES inhibits the development of new projects and                                                                     
          resources that might help stem or even reverse                                                                        
          the decline                                                                                                           
                                                                                                                                
               · ACES is not progressive with regard to                                                                         
                  costs, so high government take applies                                                                        
                  even to very high cost projects                                                                               
                                                                                                                                
               · Existing system of capital credits etc                                                                         
                  appears to do more to encourage 'renewal                                                                      
                  capex' than it does new production                                                                            
                  spending                                                                                                      
                                                                                                                                
               · Progressivity can have a major detrimental                                                                     
                  impact on breakeven prices for high-cost                                                                      
                  projects at current oil prices                                                                                
                                                                                                                                
10:26:19 AM                                                                                                                   
                                                                                                                                
Senator Thomas  noted that the  production decline  had been                                                                    
in  place prior  to ACES  being enacted,  but that  ACES had                                                                    
been blamed  for the  lack of  investment. He  observed that                                                                    
prior to  ACES, concerns  had already  been raised  over the                                                                    
age and  constraints of the  facilities in Prudhoe  Bay, "as                                                                    
well  as  the  pipeline   situation  that  has  arisen."  He                                                                    
furthered  that  the industry  might  have  been looking  at                                                                    
projects  that were  aimed at  reversing the  decline around                                                                    
the same  that ACES  was enacted  and inquired  whether ACES                                                                    
had unfortunate  timing. Mr. Kepes  replied that he  was not                                                                    
in a  position to  comment on the  political process  at the                                                                    
time.  He  offered  that  the  natural  rate  of  production                                                                    
decline on  the North  Slope was roughly  15 percent  a year                                                                    
and that  quite a bit of  capital was spent to  maintain a 6                                                                    
percent rate. A  lot of capital was  going towards replacing                                                                    
old infrastructure, some of which  was over 30 years old. He                                                                    
furthered  that  significant  capital  was  being  used  for                                                                    
things  that  did  not generate  new  production,  but  that                                                                    
maintained  the decline  rate. He  stated that  the question                                                                    
was whether Alaska  wanted to increase production  above a 6                                                                    
percent rate of decline.                                                                                                        
                                                                                                                                
Mr. Kepes  responded to Senator Thomas'  second question and                                                                    
stated that  there was a  timing issue involved.  He pointed                                                                    
out that  much of the  capital equipment on the  North Slope                                                                    
was 35 years  old and needed to be replaced.  He stated that                                                                    
another timing aspect was the  age of the North Slope Basin;                                                                    
as the  basin ages,  the opportunities  in the  field become                                                                    
higher   cost   and   more  limited.   He   furthered   that                                                                    
improvements   in   production   technology   and   maturing                                                                    
resources  had resulted  in a  different investment  picture                                                                    
for   Alaska.   He   pointed   out   that   the   investment                                                                    
opportunities  had also  changed  throughout  the world  and                                                                    
that  there  was a  "massive  shift  of capital"  from  West                                                                    
Africa  and Alaska  to the  Lower  48. He  offered that  the                                                                    
shift  in capital  was a  "driver" that  was not  present 10                                                                    
years ago.  He concluded that  timing was an issue  and that                                                                    
he  "would  not  conclude  that  ACES  was  responsible  for                                                                    
everything."  He offered  that ACES  was a  very appropriate                                                                    
regime for an  area in harvest mode. He  observed that under                                                                    
ACES,  the government  was getting  a higher  percentage for                                                                    
every barrel that  was being produced and  that the industry                                                                    
was  making profit  on existing  production.  He added  that                                                                    
without respect  to the long-term impacts  of the production                                                                    
decline,  ACES  was  working  for  the  state  and  remained                                                                    
profitable for industry. He stated  that ACES worked well in                                                                    
a  harvest  area situation.  He  offered  that the  question                                                                    
facing the  state was whether  it wanted a  different result                                                                    
and how the system could be changed to encourage growth.                                                                        
                                                                                                                                
10:34:13 AM                                                                                                                   
                                                                                                                                
Co-Chair   Stedman  related   that  he   had  directed   the                                                                    
Legislative Finance  Division to prepare historical  data of                                                                    
Alaska's oil basin for PFC Energy  and that there would be a                                                                    
presentation  in  the  committee  based  on  the  data;  the                                                                    
presentation  would determine  the value  of the  basin, the                                                                    
funds that had gone to the  state from the basin, as well as                                                                    
a rough calculation  of what the government  share had been.                                                                    
He  furthered that  in the  future,  there would  also be  a                                                                    
presentation that  would parcel out the  current production;                                                                    
the  presentation would  show the  increment that  was being                                                                    
spent to keep  the North Slope's natural decline  rate of 15                                                                    
percent  at  the  current  rate   of  6  percent  and  would                                                                    
identify, relative  to current  production, what  was needed                                                                    
to  move  the  decline  rate  to  minus  one  percent,  zero                                                                    
percent,  or plus  one percent.  He pointed  out that  there                                                                    
would  be a  discussion on  policy after  the committee  had                                                                    
seen  the  two  presentations.  He noted  that  the  current                                                                    
presentation  was  "laying  the  foundation"  and  that  the                                                                    
committee  would  look  at the  subject  matter  in  greater                                                                    
detail at a later date.                                                                                                         
                                                                                                                                
Co-Chair Hoffman  referenced the  bullet point on  the lower                                                                    
half  of  slide  28  and  inquired  if  Mr.  Kepes  had  any                                                                    
recommendations to  address ACES' inhibitions  on developing                                                                    
new projects. He queried if  there should be a different tax                                                                    
structure  for  new projects.  Mr.  Kepes  replied that  the                                                                    
different ways to approach the  issue were laid out in later                                                                    
slides,  but  that  PFC  Energy  had  not  made  a  specific                                                                    
recommendation yet.                                                                                                             
                                                                                                                                
10:37:23 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman  pointed  out  that he  had  provided  PFC                                                                    
Energy with the  packet on the "tax  holiday", which Senator                                                                    
Wagoner had worked on in  the Senate Resources Committee. He                                                                    
noted   that   PFC   Energy   was   currently   working   on                                                                    
incorporating  the   tax  holiday  document  and   the  "$10                                                                    
allowance",  which was  in the  current version  of SB  192,                                                                    
into future models.  He furthered that the  substance of the                                                                    
current bill,  options from committee members,  options from                                                                    
the  Senate  Resources Committee,  and  new  ideas from  PFC                                                                    
Energy  would  all  be considered.  He  concluded  that  the                                                                    
committee  would be  open for  concept discussions  and that                                                                    
the discussions  would be  "a subject in  and of  itself" in                                                                    
hearings.                                                                                                                       
                                                                                                                                
Mr. Kepes  observed that  PFC Energy  had not  yet completed                                                                    
its analysis  on the  "gross minimum tax",  but that  it had                                                                    
completed  its   analysis  on  the  "$10   dollar,  new  oil                                                                    
allowance."  Co-Chair  Stedman  stated that  the  "floor"[in                                                                    
reference to  the gross minimum  tax] subject matter  was in                                                                    
flux,   and   that  changes   within   the   system  had   a                                                                    
corresponding  impact  on the  floor.  He  offered that  the                                                                    
floor  would probably  be one  of  the last  items that  the                                                                    
committee would work on.                                                                                                        
                                                                                                                                
Mr. Kepes  continued to  speak to slide  28. He  stated that                                                                    
the slide depicted the ACES  base production in the dark red                                                                    
and the ACES new developments  in the dark yellow. The slide                                                                    
compared  the progressivity  in ACES  to progressivity  of a                                                                    
neutral and a regressive regime.                                                                                                
                                                                                                                                
        · ACES appears to work well as a "harvest" regime                                                                       
                                                                                                                                
               · Existing mature fields remain profitable,                                                                      
                  including capital work required to achieve                                                                    
                  ~6% decline (renewal capex)                                                                                   
                                                                                                                                
               · Maximum 'rent' extracted from a declining                                                                      
                  production base is captured for the state                                                                     
                                                                                                                                
        · ACES inhibits the development of new projects and                                                                     
          resources that might help stem or even reverse                                                                        
          the decline                                                                                                           
                                                                                                                                
               · ACES is not progressive with regard to                                                                         
                  costs, so high government take applies                                                                        
                  even to very high cost projects                                                                               
                                                                                                                                
               · Existing system of capital credits etc                                                                         
                  appears to do more to encourage 'renewal                                                                      
                  capex' than it does new production                                                                            
                  spending                                                                                                      
                                                                                                                                
               · Progressivity can have a major detrimental                                                                     
                  impact on breakeven prices for high-cost                                                                      
                  projects at current oil prices                                                                                
                                                                                                                                
                                                                                                                                
Mr. Kepes noted  that the dark yellow line  suggested that a                                                                    
new  development  under  ACES,  which was  based  on  10,000                                                                    
barrels per day of production  in a 65 million barrel field,                                                                    
broke even at $100 per barrel.                                                                                                  
                                                                                                                                
10:43:38 AM                                                                                                                   
                                                                                                                                
Mr. Kepes discussed the slide  on page 29 titled "options to                                                                    
spur new developments."  He stated that PFC  Energy had laid                                                                    
out three  broad approaches  to encourage  new developments,                                                                    
under  the assumption  that  ACES  had challenges  regarding                                                                    
higher  cost,  new  developments.   He  observed  that  each                                                                    
approach had its advantages and disadvantages.                                                                                  
                                                                                                                                
        · Approach: Uniform lowering of Government Take                                                                         
                                                                                                                                
                · Implementation     Options:    Bracketing,                                                                    
                  Reduced      base     rate,      Increased                                                                    
                  progressivity      thresholds,     Reduced                                                                    
                  progressivity  rates,   and  Progressivity                                                                    
                  caps                                                                                                          
                                                                                                                                
                · Advantages: Does not require increased                                                                        
                  complexity  of the  fiscal structure,  May                                                                    
                  not     present      opportunities     for                                                                    
                  simplification                                                                                                
                                                                                                                                
                · Disadvantages: Incentivizing new high                                                                         
                  cost  resources through this  method alone                                                                    
                  requires  giving  substantial "rent"  back                                                                    
                  to  producers  on   the  mature  producing                                                                    
                  assets                                                                                                        
                                                                                                                                
        · Approach: differentiation between old and new                                                                         
          production                                                                                                            
                                                                                                                                
                  · Implementation  Options:  Allowance  for                                                                    
                  new oil, Switching  in part away  from net                                                                    
                  profits taxation to gross revenue taxation                                                                    
                  to  enable   different   tax   rates   for                                                                    
                  different   production   streams   without                                                                    
                  separate cost accounting and  tax returns,                                                                    
                  and  the  use   of  some   combination  of                                                                    
                  definitions  for   incremental  production                                                                    
                  above  the  base  decline  rate(regulator-                                                                    
                  agreed new programs and new areas)                                                                            
                                                                                                                                
                  · Advantages:      Allows      significant                                                                    
                  reductions in  government take on  new and                                                                    
                  costlier  developments   (including  heavy                                                                    
                  oil  etc.)  without requiring  significant                                                                    
                  reductions on mature and producing assets                                                                     
                                                                                                                                
                  · Disadvantages:            Administrative                                                                    
                     difficulties around definitions of "new                                                                    
                     production"                                                                                                
                                                                                                                                
        · Approach: enhancements to cost progressivity of                                                                       
          ACES                                                                                                                  
                  · Implementation   Options:   Changes   to                                                                    
                    allowable  cost   deduction  or  credits                                                                    
                    mechanism   etc.   to  provide   greater                                                                    
                    "uplift" for high  capital and operating                                                                    
                    costs    while   restricting    negative                                                                    
                    production   tax   in  marginal   cases,                                                                    
                    Enhancement to royalty relief                                                                               
                                                                                                                                
                  · Advantages: Does not require structural                                                                     
                    changes away from ACES                                                                                      
                                                                                                                                
                  · Disadvantages: Increases already high                                                                       
                    complexity  and opacity,  May exacerbate                                                                    
                    problem    of    poor    cost    control                                                                    
                    incentives,   Increases  likelihood   of                                                                    
                    unintended  consequences,   Likely  less                                                                    
                    significant  impact than  new production                                                                    
                    differentiation.                                                                                            
                                                                                                                                
                                                                                                                                
Mr. Kepes discussed the advantages  of the first approach on                                                                    
the slide  and related  that more complex  fiscal structures                                                                    
are  not  generally  to the  advantage  of  governments.  He                                                                    
furthered that  it was PFC  Energy's global  experience that                                                                    
companies invested  what was needed  in order  to understand                                                                    
the  complexity  of  the  fiscal   terms  that  existed.  He                                                                    
explained that a company generally  had a better capacity to                                                                    
understand and  manage its side  of a complex  fiscal regime                                                                    
than the  government had capacity to  administer the system.                                                                    
He shared that enhancements to  royalty relief, which was an                                                                    
option  under the  third approach,  could be  granted on  an                                                                    
"investment   by   investment   basis"   for   higher   cost                                                                    
developments.                                                                                                                   
                                                                                                                                
10:49:34 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman requested  a definition  of "uplift."  Mr.                                                                    
Kepes  responded  that  uplift  was often  part  of  a  cost                                                                    
recovery or  credits mechanism and  explained that  it meant                                                                    
that a  company received a  higher credit realized  for each                                                                    
$1 of capital  that was spent. He offered that  if a company                                                                    
spent  $2 billion,  an uplift  mechanism on  costs might  be                                                                    
that for  every $1 spent,  the company received  tax credits                                                                    
or advantages  that were  worth $1.20; the  20 cents  on the                                                                    
dollar  is a  uplift.  He  stated that  there  were cost  or                                                                    
capital uplifts  in other fiscal  environments and  that the                                                                    
uplifts were usually part of production sharing mechanisms.                                                                     
                                                                                                                                
Mr.  Mayer  added that  uplift  gave  credits, such  as  the                                                                    
capital  credits under  ACES, as  a mechanism  for making  a                                                                    
fiscal regime more progressive with regards to costs.                                                                           
                                                                                                                                
Mr. Kepes continued  to speak to slide 29.  He discussed the                                                                    
second  disadvantage of  the  third  approach and  clarified                                                                    
that  an  entity was  not  getting  the targeted  impact  of                                                                    
granting credits if it was  unsure what the credits would be                                                                    
used for.  He spoke to  the third disadvantage of  the third                                                                    
approach and related  that it was not good to  have a system                                                                    
that rewarded high  cost operators or operators  who may not                                                                    
be as focused on cost control  as others; a system like this                                                                    
could result in  investments being made that  might not have                                                                    
occurred otherwise.                                                                                                             
                                                                                                                                
10:53:54 AM                                                                                                                   
                                                                                                                                
Senator  McGuire requested  that  amendment  B.7, which  was                                                                    
from the  Senate Recourses Committee,  be included  the next                                                                    
time  PFC  Energy presented  models  to  the committee.  She                                                                    
specified that the amendment would  make the HB 110 approach                                                                    
of  bracketing and  reducing  the  progressivity rate  apply                                                                    
only  to  new  production.  She requested  advice  from  PFC                                                                    
Energy on how to define new production.                                                                                         
                                                                                                                                
Co-Chair Stedman stated  that PFC Energy was going  to do an                                                                    
analysis  on progressivity  and that  bracketing would  be a                                                                    
discussion item. He referenced that  there were at least two                                                                    
amendments in the Senate Resources  Committee and that there                                                                    
were a number of ways  to approach bracketing. He noted that                                                                    
future  presentations would  examine  the  effects of  slope                                                                    
changes, base  tax adjustments,  and triggers.  He furthered                                                                    
that the presentations would not  be in the direction of the                                                                    
bill  in front  of  the committee,  but  that the  committee                                                                    
would  look  at   all  of  the  options.   He  offered  that                                                                    
presentations might cover something  that was already in the                                                                    
bill, something  that was changed,  or might be a  whole new                                                                    
concept. He  added that he  had already met with  PFC Energy                                                                    
regarding the  direction of future discussions  and that "at                                                                    
the end  of the day," the  state needed to make  sure it was                                                                    
counting its  net cash flow. He  referenced earlier comments                                                                    
regarding the  producers' high  level of  sophistication and                                                                    
related the  importance of the  state understanding  its own                                                                    
fiscal regime.                                                                                                                  
                                                                                                                                
10:56:23 AM                                                                                                                   
                                                                                                                                
Senator Thomas  asked for  a clarification  on slide  28. He                                                                    
referenced  the  "renewal  capex"   on  the  slide  and  the                                                                    
increased exploration activity  that was currently occurring                                                                    
on the North Slope. He queried  what the likelihood was of a                                                                    
sophisticated  oil company  making significant  investments,                                                                    
without  understanding the  existing tax  system in  Alaska.                                                                    
Mr. Kepes requested a clarification of the question.                                                                            
                                                                                                                                
Senator  Thomas  inquired  why Alaska  would  see  increased                                                                    
activity  from companies  that  had opportunities  elsewhere                                                                    
around  the  world. He  furthered  that  some companies  had                                                                    
claimed  that they  did not  fully  understand Alaska's  tax                                                                    
system at the  time, but that companies  had still purchased                                                                    
or  leased large  tracks of  land and  had made  significant                                                                    
investments;  he inquired  if this  scenario seemed  likely.                                                                    
Mr. Kepes  offered that  there were one  or two  cases where                                                                    
companies   were  not   fully   aware   of  the   commercial                                                                    
arrangements  that  were  required to  commercially  develop                                                                    
reserves, at  the time they  took the  exploration licenses.                                                                    
He opined  that the  exploration tax credits  and incentives                                                                    
for  exploration  within  ACES  make  it  "appear  to  be  a                                                                    
reasonably  attractive  proposition."  He  stated  that  the                                                                    
comments on  slide 28 were  not offered with respect  to the                                                                    
exploration  activities that  Senator  Thomas was  referring                                                                    
to.  He  noted that  companies  had  been attracted  to  the                                                                    
incentives for exploration activity  under ACES. He observed                                                                    
that if an explorer made  a 65 million barrel discovery, the                                                                    
challenge  to  the company  became  how  it would  tie  that                                                                    
production into existing  infrastructure and what commercial                                                                    
arrangements needed  to be made  with the  existing operator                                                                    
of  the evacuation  infrastructure; furthermore,  commercial                                                                    
arrangements  like this  could  be an  unknown  in terms  of                                                                    
costs  and  could  be less  attractive  than  more  apparent                                                                    
aspects.  He  furthered  that  it   could  be  difficult  to                                                                    
calculate  commercial development  costs  during an  initial                                                                    
exploration decision  and offered  that these  unknown costs                                                                    
could  change  a  65  million barrel  success  into  a  sub-                                                                    
marginal economic investment. He  pointed out that the major                                                                    
and  independent  oil  companies  had  different  investment                                                                    
criteria and that they might  take different types risks. He                                                                    
offered that it was possible  that a company would invest in                                                                    
a project  that offered a  lower return because  it believed                                                                    
that subsequent  opportunities would be more  profitable. He                                                                    
concluded  that  a company  not  understanding  what it  was                                                                    
getting into can  and does happen. However,  in reference to                                                                    
the  situation that  Senator Thomas  had inquired  about, he                                                                    
opined that  the companies had  less of an  understanding of                                                                    
what it took to be  commercial success versus an exploration                                                                    
success because of the "access to infrastructure issue."                                                                        
                                                                                                                                
SB  192  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
11:02:32 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 11:02 AM.                                                                                          
                                                                                                                                

Document Name Date/Time Subjects
SB 192 031512 PFC Energy Presentation.pdf SFIN 3/15/2012 9:00:00 AM
SB 192