Legislature(2011 - 2012)SENATE FINANCE 532

03/13/2012 09:00 AM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 307 SUPPLEMENTAL/CAPITAL/OTHER APPROPRIATIONS TELECONFERENCED
Heard & Held
+ SB 192 OIL AND GAS PRODUCTION TAX RATES TELECONFERENCED
Introduction by Senator Paskvan
<To Continue at 1:00 p.m. 3/13/12>
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                      March 13, 2012                                                                                            
                         9:01 a.m.                                                                                              
                                                                                                                                
                                                                                                                                
9:01:04 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Hoffman called the Senate Finance Committee                                                                            
meeting to order at 9:01 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                                                                                                                  
                                                                                                                                
Senator Joe Paskvan; Jeff Stepp, Staff, Senator Joe                                                                             
Paskvan; Tim Grussendorf, Staff, Senator Lyman Hoffman;                                                                         
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
SB 192    OIL AND GAS PRODUCTION TAX RATES                                                                                      
                                                                                                                                
          SB 192 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
CSHB 307(FIN)                                                                                                                   
         SUPPLEMENTAL/CAPITAL/OTHER APPROPRIATIONS                                                                              
                                                                                                                                
          CSHB 307(FIN) was HEARD and HELD in committee for                                                                     
          further consideration.                                                                                                
                                                                                                                                
CS FOR HOUSE BILL NO. 307(FIN)                                                                                                
                                                                                                                                
     "An  Act  making supplemental  appropriations,  capital                                                                    
     appropriations,  and   other  appropriations;  amending                                                                    
     appropriations;   repealing    appropriations;   making                                                                    
     appropriations to  capitalize funds; and  providing for                                                                    
     an effective date."                                                                                                        
                                                                                                                                
9:01:56 AM                                                                                                                    
                                                                                                                                
TIM GRUSSENDORF,  STAFF, SENATOR LYMAN HOFFMAN,  stated that                                                                    
the   "fast    track   supplemental"   had    been   crafted                                                                    
collaboratively  by  the   Co-Chair's  offices,  Legislative                                                                    
Finance,  and the  administration.  He  noted the  worksheet                                                                    
prepared  by  the  Legislative  Finance  Division  (copy  on                                                                    
file).  He  explained that  the  items  put forward  by  the                                                                    
governor  had been  reviewed and  that all  capital projects                                                                    
had been  had removed and  would be included in  the Capital                                                                    
Budget. He shared that four  capital projects had been added                                                                    
back  into  the budget;  major  maintenance  for the  Bethel                                                                    
campus water  and sewer line  repairs, the  Cordova Hospital                                                                    
roof  repair  and  replacement, the  Anchorage/Chugiak  Fire                                                                    
Hall replacement,  and the Inter-Island Ferry  Authority. Of                                                                    
the four,  two had been at  the request of the  governor. He                                                                    
stated  that operating  budget items  had  been removed  for                                                                    
additional  vetting and  could be  added back  into a  later                                                                    
appropriation  bill. He  shared  that  the Operating  Budget                                                                    
items in need  of additional vetting were:  $3.4 million for                                                                    
Corporation Business  Licensing, $1  million in  Student and                                                                    
School  Achievement,  $250,000  for  Alaska's  Institute  of                                                                    
Technology,  and  $20 million  for  a  University of  Alaska                                                                    
legal settlement.  He reiterated  that none of the items had                                                                    
been officially  excluded entirely,  and would  be discussed                                                                    
in conjunction  with other  appropriation bills.  He relayed                                                                    
that the  funding for the supplemental  included $57 million                                                                    
in  unlimited  general  funds, $1.2  million  in  designated                                                                    
general  funds, $6.4  million in  other funds,  and $7.1  in                                                                    
federal  funds;  totaling  $71,969,800. The  total  was  $36                                                                    
million  less than  had been  proposed by  the governor.  He                                                                    
stated  that all  of the  included items  in the  fast track                                                                    
supplemental had  been approved by and  retained the support                                                                    
of the administration.                                                                                                          
                                                                                                                                
9:06:16 AM                                                                                                                    
                                                                                                                                
Co-Chair Hoffman  noted that Senator McGuire  had joined the                                                                    
committee.                                                                                                                      
                                                                                                                                
9:06:43 AM                                                                                                                    
CSHB 307(FIN)  was HEARD and  HELD in committee  for further                                                                    
consideration.                                                                                                                  
                                                                                                                                
9:06:53 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:09:23 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
SENATE BILL NO. 192                                                                                                           
                                                                                                                                
     "An Act relating to the oil and gas production tax;                                                                        
     and providing for an effective date."                                                                                      
                                                                                                                                
9:09:47 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  noted that the  committee had  received SB                                                                    
192 from  the Senate Resources Committee  for first reading.                                                                    
He  observed  that  the  committee was  in  the  process  of                                                                    
scheduling representatives from  the Parnell Administration,                                                                    
independent  contractor  PFC Energy,  and  the  3 major  oil                                                                    
producers in  the state for  testimony throughout  the week.                                                                    
He indicated the desire to  make the process transparent and                                                                    
understandable for the public,  and that the committee would                                                                    
schedule time  for public testimony  on the  legislation. He                                                                    
warned  that  the  scheduling   specifics  were  subject  to                                                                    
change, but  the general layout  would remain  as previously                                                                    
mentioned.  He  explained  that morning  committee  meetings                                                                    
would  be dedicated  to oil  legislation, leaving  afternoon                                                                    
meetings open for normal finance committee business.                                                                            
                                                                                                                                
SENATOR  JOE   PASKVAN,  introduced  SB  192   and  began  a                                                                    
PowerPoint  presentation  titled "Committee  Substitute  for                                                                    
Senate   Bill  192   (RES)  Oil   and  Gas   Production  Tax                                                                    
Rates"(copy on file).                                                                                                           
                                                                                                                                
Senator  Paskvan  spoke to  slide  2  titled "CSSB  192(RES)                                                                    
Overview." He stated that the  presentation would reveal the                                                                    
following information:                                                                                                          
                                                                                                                                
   · Intro: Alaska is and Owner State                                                                                           
   · Summary of DOR Reports                                                                                                     
   · Lessons Learned                                                                                                            
   · Basic Petroleum Economics                                                                                                  
   · DOR's "Facts To Begin the Conversation"                                                                                    
   · CSSB 192(RES): Rationale and Overview                                                                                      
   · Optimism for Alaska's Future                                                                                               
                                                                                                                                
9:18:25 AM                                                                                                                    
                                                                                                                                
Senator  Paskvan  discussed slide  3  titled  "Alaska is  an                                                                    
Owner  State." He  quoted the  preface from  the book,  "The                                                                    
Taxation  of Petroleum  and  Minerals: Principles,  Problems                                                                    
and Practice:                                                                                                                   
                                                                                                                                
     "There are few areas  of economic policymaking in which                                                                    
     the returns  to good  decisions are so  high -  and the                                                                    
     punishment  of  bad decisions  so  cruel  - as  in  the                                                                    
     management of natural resource wealth."                                                                                    
                                                                                                                                
Senator   Paskvan  highlighted   the  importance   that  the                                                                    
determinations made for the state  pertaining to the oil tax                                                                    
issue were made substantively and not emotionally.                                                                              
                                                                                                                                
9:19:28 AM                                                                                                                    
                                                                                                                                
Senator Paskvan  continued to slide  4 titled "Alaska  is an                                                                    
Owner  State." He  quoted Chapter  4,  Petroleum and  Fiscal                                                                    
Regimes:  Evolution   and  Challenges   (page  89)   of  the                                                                    
previously mentioned book:                                                                                                      
                                                                                                                                
     "The  central objective  in designing  petroleum fiscal                                                                    
     regimes  is easily  stated. It  is to  acquire for  the                                                                    
     state  in  whose  legal   territory  the  resources  in                                                                    
     question lie, a fair share  of the wealth accruing from                                                                    
     the  extraction of  that  resource, whilst  encouraging                                                                    
     investors to  ensure optimal  economic recovery  of the                                                                    
     hydrocarbon resources.  How to achieve this  balance is                                                                    
     a subject of enduring controversy."                                                                                        
                                                                                                                                
Senator Paskvan added that from  an ownership standpoint the                                                                    
state had to consider the receipt  of oil revenues both as a                                                                    
royalty share, and as a production taxing interest owner.                                                                       
                                                                                                                                
9:20:28 AM                                                                                                                    
                                                                                                                                
Senator Paskvan discussed  slides 5 and 6  titled "Alaska is                                                                    
an Owner State." He noted the  quote on slide 5 was from the                                                                    
publication "Fiscal Systems for Hydrocarbons":                                                                                  
                                                                                                                                
     Chapter 5: Designing Efficient Fiscal Systems                                                                              
                                                                                                                                
     Although  the  host  government and  the  investor  may                                                                    
     share  one  common  objective  -  the  desire  for  the                                                                    
     project  to generate  high levels  of  revenue -  their                                                                    
     other objectives are not entirely aligned:                                                                                 
                                                                                                                                
     Host Governments  aim to obtain the  maximum value (not                                                                    
     volume) for their  countries over time in  terms of net                                                                    
     receipts for  treasury. Their goal  is to  maximize the                                                                    
     wealth from  their natural resources  and, at  the same                                                                    
     time,  attract  foreign  investment.  Host  governments                                                                    
     also  have  development and  socioeconomic  objectives,                                                                    
     such  as  job  creation, transfer  of  technology,  and                                                                    
     development of local infrastructure.                                                                                       
                                                                                                                                
9:22:02 AM                                                                                                                    
                                                                                                                                
Senator Paskvan  continued to slide 6,  which quoted "Fiscal                                                                    
Systems for Hydrocarbons":                                                                                                      
                                                                                                                                
     Chapter   5:   Designing   Efficient   Fiscal   Systems                                                                    
     (continued)                                                                                                                
                                                                                                                                
     Oil companies aim to ensure  that the return on capital                                                                    
     is  consistent  with  the   risk  associated  with  the                                                                    
     project  and  with  the  strategic  objectives  of  the                                                                    
     corporation.                                                                                                               
                                                                                                                                
Senator Paskvan  shared that  the friction  between industry                                                                    
and government could be found in  the areas in which the two                                                                    
were not  aligned; where host governments  aimed to maximize                                                                    
revenue and net  receipts to the treasury,  goal of industry                                                                    
was to maximize the rate of return on investment.                                                                               
                                                                                                                                
9:22:25 AM                                                                                                                    
                                                                                                                                
Senator  Paskvan  discussed  slide  7  titled  "Meeting  the                                                                    
Challenge." He  observed that at  the time of  the formation                                                                    
of Alaska's Constitution it had  been understood that Alaska                                                                    
was, and would  remain, a resource rich  state. Bob Bartlett                                                                    
wrote during the Alaska Constitutional Convention:                                                                              
                                                                                                                                
     "Where such  vast resources  potential exists  one need                                                                    
     not be  clairvoyant to foresee  an influx  of interests                                                                    
     wanting to develop these resources…                                                                                        
                                                                                                                                
     This moment will  be a critical one  in Alaska's future                                                                    
     history.   Development  must   not  be   confused  with                                                                    
     exploitation  at this  time. The  financial welfare  of                                                                    
     the future state and the  well-being of its present and                                                                    
     unborn  citizens depend  upon  the wise  administration                                                                    
     and oversight of these developmental activities.                                                                           
                                                                                                                                
     Two very real dangers are  present. The first, and most                                                                    
     obvious, danger is that of  exploitation under the thin                                                                    
     disguise  of   development.  The  taking   of  Alaska's                                                                    
     mineral  resources  without   leaving  some  reasonable                                                                    
     return for the support  of Alaska governmental services                                                                    
     and the  use of all  the people  of Alaska will  mean a                                                                    
     betrayal in the administration of the people's wealth.                                                                     
                                                                                                                                
     The   second   danger   is  that   outside   interests,                                                                    
     determined to  stifle any  development in  Alaska which                                                                    
     might  compete with  their  activities elsewhere,  will                                                                    
     attempt  to  acquire  great areas  of  Alaska's  public                                                                    
     lands in order NOT to  develop them until such time as,                                                                    
     in  their omnipotence  and the  pursuance of  their own                                                                    
     interests,  they see  fit. If  large areas  of Alaska's                                                                    
     patrimony  are turned  over  to  such corporations  the                                                                    
     people of  Alaska may be  even more the losers  than if                                                                    
     the lands had been exploited." (November 8, 1955)                                                                          
                                                                                                                                
Senator Paskvan relayed that policymakers should be ever                                                                        
vigilant as to the two aforementioned dangers when drafting                                                                     
any fiscal tax system.                                                                                                          
                                                                                                                                
9:27:02 AM                                                                                                                    
                                                                                                                                
Senator  Paskvan  continued  to the  Department  of  Revenue                                                                    
(DOR)  summary reports.  He spoke  to slide  9 titled  "ACES                                                                    
Status  Report: Alaska  Department of  Revenue (January  14,                                                                    
2010)":                                                                                                                         
                                                                                                                                
    Letter from DOR Commissioner Galvin to Gov Parnell:                                                                         
                                                                                                                                
        · "The ACES Status Report evaluates whether ACES is                                                                     
          meeting  its intended  goals of  providing a  fair                                                                    
          share of  revenue to  the state  while encouraging                                                                    
          investment  in new  oil  and  gas exploration  and                                                                    
          development activities."                                                                                              
                                                                                                                                
        · "The status report shows that ACES successfully                                                                       
          allowed  the state  to share  in  the benefits  of                                                                    
          high oil  prices while  accommodating fluctuations                                                                    
          in production costs and  oil prices. ACES adjusted                                                                    
          when oil prices tumbled and kept the oil                                                                              
          operations in Alaska highly profitable relative                                                                       
          to other oil provinces."                                                                                              
                                                                                                                                
        · "Since ACES passed the legislature, overall                                                                           
          spending on  oil and gas  activities on  the North                                                                    
          Slope   has  increased.   However…  it   would  be                                                                    
          premature to attribute the  increased level of oil                                                                    
          company investment to the success of ACES."                                                                           
                                                                                                                                
9:29:02 AM                                                                                                                    
                                                                                                                                
Senator Paskvan discussed slide 10, which provided further                                                                      
information on the 2010 DOR status report:                                                                                      
                                                                                                                                
     Letter  from DOR  Commissioner Galvin  to Gov.  Parnell                                                                    
     (cont):                                                                                                                    
                                                                                                                                
     "Oil taxes are clearly  an important factor in industry                                                                    
     investment  decisions.  However,  it is  misleading  to                                                                    
     isolate their  influence from  other key  factors, such                                                                    
     as  world oil  prices,  geologic  potential, access  to                                                                    
     land,  resources and  markets, costs  if infrastructure                                                                    
     and   support  services,   and  the   legal  regulatory                                                                    
     framework. As  noted in the  report, the true  merit of                                                                    
     Alaska's current  fiscal system can only  be determined                                                                    
     when it  is evaluated  in conjunction with  these other                                                                    
     variables."                                                                                                                
                                                                                                                                
9:29:59 AM                                                                                                                    
                                                                                                                                
Senator Paskvan discussed slide 11 titled "ACES Status                                                                          
Report: Alaska Department of Revenue (January 14, 2010)":                                                                       
                                                                                                                                
     ACES Structure and Tax Rate (page 9-11):                                                                                   
                                                                                                                                
     "AS  with  any  tax,  ACES may  be  evaluated  using  a                                                                    
     variety  of different  metrics, including  'effective,'                                                                    
     'nominal,' and  'marginal' tax rate  comparisons. While                                                                    
     each  of these  can  be helpful  under the  appropriate                                                                    
     circumstances,   each  is   also  subject   to  certain                                                                    
     limitations. It  is important when using  these metrics                                                                    
     to  understand  their  relative   value  and  how  they                                                                    
     reflect upon the objectives of the tax system..."                                                                          
                                                                                                                                
     "The  'marginal  tax  rate' is  the  rate  historically                                                                    
     applied  to each  dollar increase  in oil  price…With a                                                                    
     net based tax  system, this metric shows  a company the                                                                    
     impact  of making  additional investment,  because each                                                                    
     dollar they  invest is  'subsidized' by  the government                                                                    
     based on the  amount of marginal tax  they have avoided                                                                    
     paying on that dollar…For  example, a marginal tax rate                                                                    
     of  up  to  87   percent  initially  sounds  excessive.                                                                    
     However,  at the  same price  level, the  effective tax                                                                    
     rate is less  than 40 percent. The marginal  rate of 87                                                                    
     percent actually  represents that state's  'portion' of                                                                    
     any new investment made at such high prices."                                                                              
                                                                                                                                
                                                                                                                                
Senator Paskvan reiterated the importance that the                                                                              
differences between the tax rates be observed.                                                                                  
                                                                                                                                
9:31:50 AM                                                                                                                    
                                                                                                                                
Senator Paskvan presented slide 12, which provided the                                                                          
conclusion of the report:                                                                                                       
                                                                                                                                
     Conclusion (page 15):                                                                                                      
                                                                                                                                
     "Overall,  the information  reviewed by  the department                                                                    
     indicates that  ACES is performing as  expected when it                                                                    
     was  passed by  the Legislature  in 2007.  The economic                                                                    
     provisions   are  resulting   in  the   revenue  levels                                                                    
     anticipated,  and the  investment incentives  appear to                                                                    
     distribute the  increased tax burden in  a fashion that                                                                    
     continues  to   encourage  reinvestment,   through  the                                                                    
     experience with  the credit  program could  be improved                                                                    
     for   new   explorers.   Challenges   remain   in   the                                                                    
     implementation   by  the   department,  but   they  are                                                                    
     manageable  and the  department is  positioned to  meet                                                                    
     those challenges."                                                                                                         
                                                                                                                                
9:33:00 AM                                                                                                                    
                                                                                                                                
Senator Paskvan discussed slide 13 titled "Production Tax                                                                       
Status Report to the Legislature by DOR (January 18,                                                                            
2011)":                                                                                                                         
                                                                                                                                
     From the Executive Summary (pages 1 -2)                                                                                    
                                                                                                                                
        · Industry Investment - Investment in the form of                                                                       
          capital expenditures has increased  in each of the                                                                    
          four fiscal years since  implementation of the net                                                                    
          profits tax,  however, it is  unclear how  much of                                                                    
          the  capital expenditures  were drilling  or well-                                                                    
          related   and  how   much   were  maintenance   or                                                                    
          facilities-related.                                                                                                   
                                                                                                                                
        · Impact    on    Exploration,   Development,    and                                                                    
          Production -  Exploration has  generally increased                                                                    
          from 2003,  when the  EIC credit  was implemented,                                                                    
          but   has  dropped   off   in  2010.   Development                                                                    
          continues  in  three  relatively new  North  Slope                                                                    
          projects, yet production continues to decline.                                                                        
                                                                                                                                
        · Industry Employment and New Entrants - Industry                                                                       
          employment rose  steadily from 2006  through 2009,                                                                    
          but  dipped  slightly  in   2010.  The  number  of                                                                    
          companies  filing   annual  tax   returns  doubled                                                                    
          between  2006  and  2009, indicating  interest  by                                                                    
          companies that are either new  or returning to the                                                                    
          Alaska oil and gas industry.                                                                                          
                                                                                                                                
9:35:09 AM                                                                                                                    
                                                                                                                                
Senator Paskvan continued to slide 14 titled "Production                                                                        
Tax Status Report to the Legislature by DOR (January 18,                                                                        
2011)":                                                                                                                         
                                                                                                                                
     From the Executive Summary (cont.)                                                                                         
                                                                                                                                
        · Use and Expansion of Tax Credits - The amount of                                                                      
          credits  used has  increased  annually since  2006                                                                    
          and we expect the trend  to continue as new credit                                                                    
          programs  were  added   in  the  2010  legislative                                                                    
          session.                                                                                                              
                                                                                                                                
        · Tax   Administration   and    Compliance   -   The                                                                    
          department continues to  write regulations for the                                                                    
          new  tax system,  and the  first audits  under the                                                                    
          net   profits  tax   have   been  completed.   The                                                                    
          department has, however, been  hampered in its tax                                                                    
          reporting and compliance efforts  by the lack of a                                                                    
          centralized  database  to  house  and  manage  the                                                                    
          large volumes of oil and gas data it receives.                                                                        
                                                                                                                                
        · Conclusions and Recommendations - Based on the                                                                        
          multiple  changes to  the tax  laws over  the past                                                                    
          few  years,  drawing  any conclusion  about  their                                                                    
          effect   on   Alaska's   investment   climate   is                                                                    
          difficult.   However,  what   is  clear   is  that                                                                    
          production continues to  decline. The state should                                                                    
          continue  to  monitor   its  competitiveness  with                                                                    
          other oil  and gas jurisdictions worldwide  and be                                                                    
          prepared to change its tax structure as needed.                                                                       
                                                                                                                                
9:38:05 AM                                                                                                                    
                                                                                                                                
Senator Paskvan discussed slide 15 titled "Production Tax                                                                       
Status Report to the Legislature by DOR (January 18,                                                                            
2011)":                                                                                                                         
                                                                                                                                
     Conclusion and Recommendations (page 14-15):                                                                               
                                                                                                                                
     "A government's  fiscal regime is just  one element for                                                                    
     oil  and  gas  companies   to  consider  when  weighing                                                                    
     options for where to invest.  Many other elements, such                                                                    
     as   resource  risk,   political  risk,   environmental                                                                    
     factors, and availability of  labor and equipment, also                                                                    
     play  a part  in  companies' decisions  about where  to                                                                    
     invest. It is very  difficult to separate these factors                                                                    
     in   order  to   determine  the   extent  to   which  a                                                                    
     government's   fiscal   system  influences   investment                                                                    
     choices.                                                                                                                   
                                                                                                                                
                                                                                                                                
     While it  is untenable  to blame a  tax system  for the                                                                    
     lack of  industry investment,  it is  equally untenable                                                                    
     to  claim  that  the  tax  system  is  the  reason  for                                                                    
     increased  activity  or  investment  occurs.  The  past                                                                    
     three  years have  seen dramatic  swings in  oil prices                                                                    
     from a  high of  $134 per  barrel to a  low of  $38 per                                                                    
     barrel  just  6  months later.  An  economic  recession                                                                    
     stifled investment and business  activity in the United                                                                    
     States  and much  of  the developed  world  for over  a                                                                    
     year.  The economic  activity of  the past  three years                                                                    
     may not have been the  best benchmark by which to judge                                                                    
     the impact of a tax system…                                                                                                
                                                                                                                                
     …State  officials   should  continue  to   monitor  the                                                                    
     state's competitiveness  in oil and  gas opportunities,                                                                    
     and be prepared to modify it as the need arises."                                                                          
                                                                                                                                
Senator Paskvan stressed that in neither the report from                                                                        
DOR directly to Governor Parnell, or directly to the                                                                            
Legislature, did not explicitly state that ACES was broken.                                                                     
                                                                                                                                
9:40:27 AM                                                                                                                    
                                                                                                                                
Senator  Paskvan  directed  attention  to  slide  16,  which                                                                    
illustrated that  the DOR report  on the status of  ACES was                                                                    
released  to  the  legislature  on  January,  18,  2011.  He                                                                    
pointed out  that HB  110 was introduced  on the  House side                                                                    
that same day.  The Senate companion, SB  49, was introduced                                                                    
on  January  19, 2011.  He  felt  that  the timing  for  the                                                                    
reports from DOR and the  introduction of the production tax                                                                    
legislation was significant.                                                                                                    
                                                                                                                                
9:41:10 AM                                                                                                                    
                                                                                                                                
Senator  Paskvan   continued  with  the   "Lessons  Learned"                                                                    
section of the presentation.                                                                                                    
                                                                                                                                
9:41:30 AM                                                                                                                    
                                                                                                                                
Senator  Paskvan spoke  to  slide  18 titled  "Comprehensive                                                                    
Plan  and   Feasibility  Study  by  FAST   Enterprises,  LLC                                                                    
(October, 2012)":                                                                                                               
                                                                                                                                
     Excerpts from the Executive Summary                                                                                        
                                                                                                                                
     The  Alaska   Department  of  Revenue's   Tax  Division                                                                    
     (DOR/TAX)  relies  on  a   patchwork  of  17  automated                                                                    
     systems   and  over   100   manual  "side-systems"   to                                                                    
     administer 22 tax programs.                                                                                                
                                                                                                                                
        · DOR/TAX manages over $3 billion in Oil and Gas                                                                        
          Tax revenue  using an  eclectic mix  of home-grown                                                                    
          side-systems that  include multiple  databases and                                                                    
          unsecured,  unstable  spreadsheets stretched  well                                                                    
          beyond  their  intended   use.  Storing  sensitive                                                                    
          taxpayer  information   in  these   databases  and                                                                    
         spreadsheets poses a high security risk.                                                                               
                                                                                                                                
        · The 17 systems used to administer different taxes                                                                     
          and functions  have been pieced together  over the                                                                    
          past 15  years without  integration or  an overall                                                                    
          architecture.  The systems  do not  scale to  meet                                                                    
          current needs and are  inflexible and difficult to                                                                    
          maintain.  Since the  initial  development of  the                                                                    
          systems,  many  tax  laws  have  changed  and  the                                                                    
          systems have not changed accordingly.                                                                                 
                                                                                                                                
                                                                                                                                
Senator  Paskvan  felt it  was  important  to highlight  the                                                                    
internal   issues   that    state   government   and   state                                                                    
policymakers faced.                                                                                                             
                                                                                                                                
9:43:12 AM                                                                                                                    
                                                                                                                                
Senator Paskvan continued to  slide 19 titled "Comprehensive                                                                    
Plan  and   Feasibility  Study  by  FAST   Enterprises,  LLC                                                                    
(October, 2012)":                                                                                                               
                                                                                                                                
     Excerpts from the Executive Summary (continued)                                                                            
                                                                                                                                
        · DOR/TAX employees spend a higher proportion of                                                                        
          their time compiling,  organizing, and reconciling                                                                    
          data    than    actually   auditing,    examining,                                                                    
          analyzing, forecasting, or managing tax programs.                                                                     
                                                                                                                                
        · The limitations and inflexibility of existing                                                                         
          systems  impose  a  burden on  taxpayers.  Current                                                                    
          reporting    processes    are   inefficient    and                                                                    
          ineffective,  and  create   unnecessary  work  and                                                                    
          cost. As one taxpayer  stated, "the Tax Division's                                                                    
          inefficiency makes  taxpayer interaction  with the                                                                    
          division inefficient."                                                                                                
                                                                                                                                
        · DOR/TAX cannot easily produce reports by the                                                                          
          legislature and  policymakers because  the current                                                                    
          systems  prevent  timely,  complete,  and  correct                                                                    
          extraction of data. Reports  can be inaccurate and                                                                    
          misleading  due to  incorrect and  incomplete data                                                                    
          and human error.                                                                                                      
                                                                                                                                
Senator  Paskvan  stressed  that   the  October  2010  study                                                                    
indicated that  the current tax system  should be approached                                                                    
with a high level of skepticism.                                                                                                
                                                                                                                                
9:45:46 AM                                                                                                                    
                                                                                                                                
Senator  Paskvan spoke  to slide  20  titled "Department  of                                                                    
Revenue Additional Information":                                                                                                
                                                                                                                                
    Single Audit of the State of Alaska (Feb 28, 2011)                                                                          
                                                                                                                                
        · Recommendation: "DOR's commissioner should ensure                                                                   
          staff within  its Tax Division  implement controls                                                                    
          to improve  the auditing of oil  and gas severance                                                                    
          tax revenues."                                                                                                        
                                                                                                                                
        · Legislative     Audit's      Current     Position:                                                                  
          "Significant  control deficiencies  continued over                                                                    
          the  auditing   of  oil  and  gas   severance  tax                                                                    
          revenues  in FY10.  A  loss  of experienced  audit                                                                    
          staff  during FY10  compounded the  struggles that                                                                    
          the audit section was already experiencing."                                                                          
                                                                                                                                
     Decision Following Trial De Novo:  2007, 2008, and 2009                                                                    
     Assessed  Valuations   of  the   Trans-Alaska  Pipeline                                                                    
     System (December 30, 2011)                                                                                                 
                                                                                                                                
        · "The   Department's   Production   Forecasts   and                                                                    
          Reserves Estimates are Unreliable" (page 170)                                                                         
                                                                                                                                
Senator Paskvan believed that the  conclusion handed down by                                                                    
the court should cause policymakers  to consider whether the                                                                    
information  received by  the  department was  fundamentally                                                                    
valid.  He added  that  the court  had  also concluded  that                                                                    
DOR's system was broken and headed in the wrong direction.                                                                      
                                                                                                                                
9:46:45 AM                                                                                                                    
                                                                                                                                
Senator Paskvan  continued to slide 21  titled, "U.S. Energy                                                                    
Tax  Policy (2011)  (Chapter  9) State  Tax  Policy and  Oil                                                                    
Production: The  Role of the  Severance Tax and  Credits for                                                                    
Drilling  Expenses."  He explained  that  chapter  9 of  the                                                                    
publication "U.S.  Energy Tax Policy" addressed  the role of                                                                    
severance tax and credits for drilling expenses:                                                                                
                                                                                                                                
     Introduction                                                                                                               
                                                                                                                                
     "Although  most  energy-producing  states  have  levied                                                                    
     taxes  on  the value  of  oil,  natural gas,  and  coal                                                                    
     production for many years, changes  in these taxes have                                                                    
     become headline news as  state governments grapple with                                                                    
     budget   shortfalls  brought   about  by   the  current                                                                    
     recession.  For  instance,  Alaska  has  increased  the                                                                    
     severance tax  on the value  of its oil  production and                                                                    
     attempted to  simulate future production by  allowing a                                                                    
     credit  against this  tax for  expenditures on  capital                                                                    
     items,   including   drilling   rigs,   infrastructure,                                                                    
     exploration, and facility  expansion (Alaska Department                                                                    
     of Revenue 2008)."                                                                                                         
                                                                                                                                
9:50:50 AM                                                                                                                    
Senator Paskvan explained slide  22 titled "State Tax Policy                                                                    
and  Oil  Production: The  Role  of  the Severance  Tax  and                                                                    
Credits  for Drilling  Expenses"  which presented  questions                                                                    
about the effects of state energy taxes:                                                                                        
                                                                                                                                
        · Do state taxes tilt the time path of energy                                                                           
          production to the present or to the future?                                                                           
                                                                                                                                
        · Do upstream subsidies for exploration and                                                                             
          development  work together  with downstream  taxes                                                                    
          on  production to  influence the  levels and  time                                                                    
         paths of production and tax collections?                                                                               
                                                                                                                                
        · What are the implications of these for the long-                                                                      
          term  sustainable  use   of  nonrenewable  natural                                                                    
          resources?                                                                                                            
                                                                                                                                
Senator Paskvan noted that the tilt  of taxes to the past or                                                                    
future,  could manipulate  the production  process in  a way                                                                    
that could be detrimental to the state.                                                                                         
                                                                                                                                
9:51:55 AM                                                                                                                    
                                                                                                                                
Senator Paskvan discussed slide  23 titled "State Tax Policy                                                                    
and  Oil  Production: The  Role  of  the Severance  Tax  and                                                                    
Credits for Drilling Expenses":                                                                                                 
                                                                                                                                
     Key Finding #1:                                                                                                            
                                                                                                                                
        · "Oil production is closely linked to the size of                                                                      
          the reserve base and  is relatively insensitive to                                                                    
          changes  in oil  prices.  This  outcome, which  is                                                                    
          broadly  consistent with  experience  in the  U.S.                                                                    
          oil industry over the past  50 years, leads to the                                                                    
          conclusion  that  the  severance  tax  has  little                                                                    
          effect on production levels (p.306)."                                                                                 
                                                                                                                                
9:52:58 AM                                                                                                                    
                                                                                                                                
Senator Paskvan spoke  to slide 24 titled  "State Tax Policy                                                                    
and  Oil  Production: The  Role  of  the Severance  Tax  and                                                                    
Credits for Drilling Expenses":                                                                                                 
                                                                                                                                
     Key Finding #2:                                                                                                            
                                                                                                                                
        · "The simulations suggest that a drilling expense                                                                      
          credit   may  cost   more  than   the  incremental                                                                    
          severance  tax  revenue  obtained,  although  such                                                                    
          credits  may   be  worthwhile  concessions   if  a                                                                    
          state's objective  is to generate  greater support                                                                    
          for increasing the severance tax rate (p.307)."                                                                       
                                                                                                                                
                                                                                                                                
9:54:04 AM                                                                                                                    
                                                                                                                                
Senator Paskvan continued to slide 25 titled "Additional                                                                        
Research":                                                                                                                      
                                                                                                                                
     "Effectiveness of Severance Tax Incentives in the U.S.                                                                     
     Oil Industry" (Mitch Kunce, International Tax and                                                                          
     Public Finance, 2003)                                                                                                      
                                                                                                                                
        · "In general, results show that severance tax rate                                                                     
          cuts  substantially   reduce  state   tax  revenue                                                                    
          collected, but yield moderate  to little change in                                                                    
          oil   drilling  and   production  activity.   This                                                                    
          outcome  suggests that  states should  be wary  of                                                                    
          arguments  asserting  that  large  swings  in  oil                                                                    
          field  activity can  be obtained  from changes  in                                                                    
          severance tax rates."                                                                                                 
                                                                                                                                
Senator Paskvan thought that the finding was an appropriate                                                                     
guiding consideration when discussing changes in the oil                                                                        
tax structure.                                                                                                                  
                                                                                                                                
9:55:24 AM                                                                                                                    
                                                                                                                                
Senator Paskvan spoke to slide 26 titled "Additional                                                                            
Research":                                                                                                                      
                                                                                                                                
     "State Taxation, Exploration, and Production in the                                                                        
     U.S. Oil Industry" (Mitch Kunce et al, Nov 26, 2001)                                                                       
                                                                                                                                
        · "Results of this study suggest that oil                                                                               
          production  is highly  inelastic  with respect  to                                                                    
          changes in production taxes."                                                                                         
                                                                                                                                
9:55:47 AM                                                                                                                    
                                                                                                                                
Senator Paskvan discussed slide 27 titled "Gas and Water                                                                        
Handling Constraints." The slide offered a transition in                                                                        
topic to the issue of gas and water handing constraints:                                                                        
     Gas and Water Handling Constraints                                                                                         
                                                                                                                                
     "While new  oil is  an issue in  maintaining production                                                                    
     levels,  there  are  also issues  at  existing  fields,                                                                    
     where [Dudley]  Platt said facilities expansion  may be                                                                    
     needed. he  said that the  large facilities  are 'maxed                                                                    
     out  on  how  much  gas they  can  handle  and  they're                                                                    
     getting  close to  being maxed  out on  how much  water                                                                    
     they can  handle…If they don't expand  their facilities                                                                    
     to handle that, the oil  production will continue to go                                                                    
     down.'"  ("Alaska   Oil  Forecast  Shaky"   By  Kristen                                                                    
    Nelson, Petroleum News - Week of November 18, 2007)                                                                         
                                                                                                                                
                                                                                                                                
Senator Paskvan believed that the quote spoke to the                                                                            
question of why wells couldn't be easily expanded or dug                                                                        
deeper.                                                                                                                         
                                                                                                                                
9:58:10 AM                                                                                                                    
                                                                                                                                
Senator Paskvan explained slide 28 titled "Gas and Water                                                                        
Handling Constraints":                                                                                                          
                                                                                                                                
     North Slope of Alaska Facility Sharing Study                                                                               
     Prepared   for  Division   of  Oil   and  Gas,   Alaska                                                                    
     Department  of  Natural   Resources  By  Petrotechnical                                                                    
     Resources Alaska, May, 2004.                                                                                               
                                                                                                                                
     "The  North Slope  processing facilities  have specific                                                                    
     design capacity  limits, indicating the amount  of oil,                                                                    
     water and gas which can  be handled by the facility. If                                                                    
     the  handling  capacity  of one  of  these  streams  is                                                                    
     reached  for a  given facility,  it limits  the overall                                                                    
     production  output  from   that  facility.  While  some                                                                    
     facilities  may be  producing below  capacity for  oil,                                                                    
     they are  often limited due to  capacity constraints on                                                                    
     total water production or gas production."                                                                                 
                                                                                                                                
10:00:08 AM                                                                                                                   
                                                                                                                                
Senator Paskvan discussed slide 29 titled "Gas and Water                                                                        
Handling Constraints":                                                                                                          
                                                                                                                                
     1989 Revenue Sources Book                                                                                                  
     Alaska Department of Revenue                                                                                               
                                                                                                                                
     "The vast  majority of Alaska production  will continue                                                                    
     to come  from the  now declining Prudhoe  Bay field…The                                                                    
     decline in  Prudhoe Bay production  is now  expected to                                                                    
     be  much   more  rapid  than  assumed   in  our  Spring                                                                    
     forecast.  This reflects  a more  serious gas  handling                                                                    
     constraint. As more and more  gas is produced with each                                                                    
     barrel  of oil,  the amount  of gas  which must  be re-                                                                    
     injected back into the Prudhoe  Bay field had increased                                                                    
     substantially. Since it is  anticipated that there will                                                                    
     need to  be more production  downtime due to  field and                                                                    
     TAPS  maintenance,  the  gas handling  constraint  will                                                                    
     limit   the  ability   to  keep   average  annual   oil                                                                    
     production  from  falling. Installation  of  additional                                                                    
     gas  handling   equipment,  GHAX1  (gas   handling  and                                                                    
     expansion 1),  is scheduled  to start  late in  1990. A                                                                    
     second  expansion is  in the  planning stages.  Once in                                                                    
     place,  the ability  to re-inject  up to  5.1bcf/day of                                                                    
     gas production  will slow  the rate  of decline  in oil                                                                    
     production."                                                                                                               
                                                                                                                                
10:02:21 AM                                                                                                                   
                                                                                                                                
Senator Paskvan continued to slide 30 titled "Gas and Water                                                                     
Handling Constraints":                                                                                                          
                                                                                                                                
     A  Production Optimization  System for  Western Prudhoe                                                                    
     Bay Field, Alaska                                                                                                          
     By D.A. Barnes, K. Humphrey,  and L. Muellenberg of BPX                                                                    
     America                                                                                                                    
                                                                                                                                
     Paper  prepared for  presentation  at  the 65th  Annual                                                                    
     Technical Conference  and Exhibition of the  Society of                                                                    
     Petroleum Engineers  held in New Orleans,  LA, Sept 23-                                                                    
     26, 1990.                                                                                                                  
                                                                                                                                
     "For  almost a  decade  the Prudhoe  Bay  field on  the                                                                    
     North Slope of Alaska has  produced at a yearly average                                                                    
     offtake rate of  1.5 million stock tank  barrels of oil                                                                    
     per day.  As the  reservoir depletes and  field gas-oil                                                                    
     ratios (GORs)  increase, gas handling  constraints make                                                                    
     it difficult to achieve oil rate targets."                                                                                 
                                                                                                                                
10:03:34 AM                                                                                                                   
                                                                                                                                
Senator Paskvan discussed the slide on page 31 titled "Gas                                                                      
and Water Handling Constraints":                                                                                                
                                                                                                                                
     Prudhoe Bay: Development History and Future Potential                                                                      
     By D.J.  Szabo, BP  Exploration (Alaska) Inc.  and K.O.                                                                    
     Meyers, ARCO Oil and Gas                                                                                                   
                                                                                                                                
     Paper  prepared  for  presentation   at  the  SPE  1993                                                                    
     Western  Regional  Meeting,  Anchorage, AK,  26-28  May                                                                    
     1993.                                                                                                                      
                                                                                                                                
     "Prudhoe Bay is  seen by many as a mature  oil field on                                                                    
     an inevitable and  irreversible decline…The field's oil                                                                    
     production capacity  dropped below 1.5 MMSTB/D  in 1988                                                                    
     *officially* signaling the start  of decline. The onset                                                                    
     of decline was a direct  result of limited gas handling                                                                    
     capacity   as  opposed   to   limited  oil   production                                                                    
     capacity."                                                                                                                 
                                                                                                                                
10:04:52 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:12:39 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
Senator  Paskvan  explained  that  the focus  on  the  water                                                                    
handling constraints was the  result of information gathered                                                                    
about  throughput.   He  believed  that   understanding  the                                                                    
history of the  declining throughput in the  North Slope was                                                                    
necessary  for  public  understanding  of  the  relationship                                                                    
between   engineering  issues,   treatment  facilities   and                                                                    
throughput.                                                                                                                     
                                                                                                                                
10:13:35 AM                                                                                                                   
                                                                                                                                
Senator  Paskvan discussed  slide 32  titled "Gas  and Water                                                                    
Handling Constraints":                                                                                                          
                                                                                                                                
     Prudhoe  Bay Field:  Facility  Consolidations Pave  the                                                                    
     Way for an Economic Future                                                                                                 
     By  K.D.  Eager,  BP Exploration;  M.D.  Briscoe,  ARCO                                                                    
     Alaska; R.A. Bolduc, Exxon                                                                                                 
                                                                                                                                
     Paper prepared for presentation  at the 1998 SPE Annual                                                                    
     Technical  Conference   and  Exhibition  held   in  New                                                                    
     Orleans, LA, 27-30 Sept 1998.                                                                                              
                                                                                                                                
     "The  Prudhoe Bay  Field on  Alaska's  North Slope  has                                                                    
     produced for twenty-one years.  Prudhoe's gas and water                                                                    
     production  rates are  at historic  highs, but  the oil                                                                    
     production rate  has declined to less  than one-half of                                                                    
     the  peak rate  achieved  in the  1980s.  As a  result,                                                                    
     significant excess  oil treating capacity  exists, with                                                                    
     water  and  gas   handling  capacity  constraining  the                                                                    
     current oil production rate. The  owners of the Prudhoe                                                                    
     Bay Unit developed a  major facility consolidation plan                                                                    
     in  1997  designed  to   rationalize  this  excess  oil                                                                    
     treating  capacity while  preserving  existing gas  and                                                                    
     water  handling capacity.  The reconfigured  facilities                                                                    
     are expected to provide  sufficient capacity at a lower                                                                    
     cost  to  accommodate  projected  oil,  water  and  gas                                                                    
     production  rates  over  the   remaining  life  of  the                                                                    
     Prudhoe Bay Field."                                                                                                        
                                                                                                                                
10:16:48 AM                                                                                                                   
                                                                                                                                
Senator Paskvan continued to slide 33 titled "Gas and Water                                                                     
Handling Constraints":                                                                                                          
                                                                                                                                
     Prudhoe  Bay Field:  Facility  Consolidations Pave  the                                                                    
     Way for an Economic Future                                                                                                 
     By  K.D.  Eager,  BP Exploration;  M.D.  Briscoe,  ARCO                                                                    
     Alaska; R.A. Bolduc, Exxon                                                                                                 
                                                                                                                                
     Paper prepared for presentation  at the 1998 SPE Annual                                                                    
     Technical  Conference   and  Exhibition  held   in  New                                                                    
     Orleans, LA, 27-30 Sept 1998.                                                                                              
                                                                                                                                
     (Continued)                                                                                                                
                                                                                                                                
     "Oil  production rates  are  projected  to continue  to                                                                    
     decline  in   the  future.  In  developing   the  field                                                                    
     development and  management plans for 2000  and beyond,                                                                    
     the PBU  Working Interest Owners recognize  the need to                                                                    
     reduce lifting  cost commensurate  with the  decline in                                                                    
     oil production  to maintain an  economic assert  for as                                                                    
     long   as   possible.    The   Prudhoe   Bay   Facility                                                                    
     Optimization  Project will  play an  important role  in                                                                    
     achieving reduced lifting costs."                                                                                          
                                                                                                                                
10:17:36 AM                                                                                                                   
                                                                                                                                
Senator Paskvan discussed slide 34 titled "Gas and Water                                                                        
Handling Constraints":                                                                                                          
                                                                                                                                
     Optimization of Production from Mature Fields                                                                              
     By P.  Wang & K.  Aziz of Stanford University  and M.L.                                                                    
     Litvak  of  BP,  USA  17th  World  Petroleum  Congress,                                                                    
     September 1-5, 2002, Rio de Janeiro, Brazil                                                                                
                                                                                                                                
     "Oil production  in the Prudhoe  Bay and  Kuparuk River                                                                    
     fields  is constrained  by the  gas handling  limits of                                                                    
     the surface facilities."                                                                                                   
                                                                                                                                
     2003  Oil  and  Gas   Report  (for  the  period  ending                                                                    
     December 31, 2002)                                                                                                         
     Alaska  Department  of  Natural Resources  (Tom  Irwin,                                                                    
     Commissioner)                                                                                                              
     Division of Oil and Gas (Mark Myers, Director)                                                                             
                                                                                                                                
     "From   the  beginning   of  Prudhoe   Bay  production,                                                                    
     dissolved gas  and water were separated  from the crude                                                                    
     oil  and injected  back into  the reservoir.  Over time                                                                    
     the  reservoir's proportion  of  both gas-and-water  to                                                                    
     oil   increased.   Eventually,   oil   production   was                                                                    
     constrained by the rate at  which the separating plants                                                                    
     could process gas and water."                                                                                              
                                                                                                                                
10:18:52 AM                                                                                                                   
                                                                                                                                
JEFF  STEPP, STAFF,  SENATOR JOE  PASKVAN, interjected  that                                                                    
one of  the key  points to  the "Optimization  of Production                                                                    
from Mature  Fields" article was cost  reduction. He pointed                                                                    
out that the language  was not about "increased" production,                                                                    
but "optimized" production in a  mature field. He offered to                                                                    
provide the complete article to the committee upon request.                                                                     
                                                                                                                                
10:19:52 AM                                                                                                                   
                                                                                                                                
Senator  Paskvan spoke  to slide  35 titled  "Gas and  Water                                                                    
Handling  Constraints."  The  slide detailed  the  following                                                                    
question and answer session:                                                                                                    
                                                                                                                                
     Q: Does  DNR agree that  oil throughput at  Prudhoe Bay                                                                    
     is  constrained by  the ability  of field  operators to                                                                    
     process and re-inject associated natural gas?                                                                              
                                                                                                                                
     A: Yes,  gas processing is a  significant constraint in                                                                    
     Prudhoe  Bay. While  new wells  could  be drilled  with                                                                    
     lower GOR's,  other high GOR  wells have to  be shut-in                                                                    
     because of the gas processing limitation.                                                                                  
                                                                                                                                
     Q: As of the early  1990's, does DNR agree that Prudhoe                                                                    
     Bay was past the point  where well drilling could stave                                                                    
     off a falling oil rate?                                                                                                    
                                                                                                                                
     A: Yes. The Prudhoe Bay  Unit WIO had a very aggressive                                                                    
     drilling  program in  1986-1992. In  addition, a  major                                                                    
     gas  handling expansion  (GHX-1) occurred  in the  late                                                                    
     1980s which  helped stem decline. Significant  delay in                                                                    
     the production plateau would have been difficult.                                                                          
                                                                                                                                
     (Source:  Memo   from  DNR   to  Senator   Paskvan  re:                                                                    
     "Responses  to  the  30 questions  from  September  22,                                                                    
     2011" (January 17, 2012)).                                                                                                 
                                                                                                                                
10:22:03 AM                                                                                                                   
                                                                                                                                
Senator Paskvan  discussed slides  36 - 39  titled "Overview                                                                    
of the Gleason Decision":                                                                                                       
                                                                                                                                
        · Market Structure                                                                                                      
        · The Life of TAPS                                                                                                      
        · Access To Information                                                                                                 
                                                                                                                                
Senator  Paskvan relayed  that the  PowerPoint presented  by                                                                    
Robin  Brena,  as well  as  the  Gleason Decision  had  been                                                                    
included  in  committee  packets  (copy  on  file)[Secretary                                                                    
note:  Both the  Brena presentation  and the  Gleason report                                                                    
can be found  on BASIS and in the SB  192 binders located in                                                                    
the Senate Finance Committee Room].                                                                                             
                                                                                                                                
Senator  Paskvan shared  that  the big  three oil  companies                                                                    
(Exxon, BP, and ConocoPhillips)  had market dominance in the                                                                    
Central North  Slope to the extent  that it was no  longer a                                                                    
free market.  He said  that due  to the  passage of  PPT and                                                                    
ACES the state  had observed an increased  interest of other                                                                    
companies, but that there  were still barriers, particularly                                                                    
in the area of treatment facility access.                                                                                       
                                                                                                                                
10:27:14 AM                                                                                                                   
                                                                                                                                
Mr. Stepp  added that in  2003 the  Murkowski Administration                                                                    
had established the goal of  increasing production 3 percent                                                                    
per year.  The director of  the Division  of Oil and  Gas at                                                                    
the  time,  Mark  Meyers, prepared  a  white  paper  titled,                                                                    
"Meeting  the  Governor's  Goal:   Increasing  Oil  and  Gas                                                                  
Production by Three Percent Per  Year." The paper identified                                                                  
the problem with the market structure on the North Slope:                                                                       
"Mergers and  market concentration  on the North  Slope have                                                                    
created a non-competitive environment  in which three majors                                                                    
have a  near monopoly  that gives  them a  large competitive                                                                    
advantage  in  exploration,   development,  production,  and                                                                    
transportation.  It is  this uneven  playing field  that has                                                                    
raised   the  barrier   to   new   entrants,  from   smaller                                                                    
independents  through large  integrated majors.  As long  as                                                                    
these  majors invested  sufficient  capital for  exploration                                                                    
and   development  activities,   the   State  accepted   the                                                                    
consequences of the oligopoly. Since  the existing majors no                                                                    
longer  are  willing  to   invest  sufficient  resources  on                                                                    
exploration or  development, the State must  look elsewhere.                                                                    
The State  must look beyond  the existing majors to  the new                                                                    
wave of  independents and  remaining majors.  This situation                                                                    
parallels  the  experience  in  other  oil  and  gas  basins                                                                    
worldwide,  several of  which  have  successfully made  this                                                                    
transition."                                                                                                                    
                                                                                                                                
10:29:06 AM                                                                                                                   
                                                                                                                                
Senator Paskvan  addressed slide 38 titled"  Overview of the                                                                    
Gleason  Decision," which  addressed  the life  of TAPS.  He                                                                    
stated  that  one of  the  unanimous  pieces of  information                                                                    
received in  the Senate Resource  Committee was  that fields                                                                    
matured  under  the  concept of  a  "hyperbolic  curve."  He                                                                    
explained that  all of  the Alaska  North Slope  basins were                                                                    
experiencing a  hyperbolic curve  decline and  were entering                                                                    
into  a flattening  period that  would last  many years.  He                                                                    
cited  the Brena  PowerPoint, page  39,  which stressed  the                                                                    
importance  of  examining the  value  of  the reserves;  the                                                                    
current value  of the  reserves was  greater than  any other                                                                    
time in  history. He  said that  at $100  per barrel,  the 7                                                                    
billion barrels  of proven reserves  would result in  a $700                                                                    
billion dollar  profit. He  asserted that  it was  a fiction                                                                    
that TAPS was facing an imminent shutdown.                                                                                      
                                                                                                                                
10:31:34 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman  clarified that  a shut-down did  not infer                                                                    
to  a mechanical  shut down,  but rather  the amount  of oil                                                                    
remaining  in  the  basin  that  would  not  come  down  the                                                                    
pipeline.                                                                                                                       
                                                                                                                                
10:31:39 AM                                                                                                                   
                                                                                                                                
Senator Paskvan stated that  the Gleason Decision determined                                                                    
the  estimated  life  of  the   proven  reserves  that  were                                                                    
technically, economically  and legally deliverable  into the                                                                    
TAPS system. He stated that  the decision was a conservative                                                                    
one;  based  only on  proven  oil  reserves as  required  by                                                                    
statute. The decision did not  include conventional oil (not                                                                    
yet  discovered),  heavy  oil, shale  oil,  ANWAR,  National                                                                    
Petroleum  Reserve-Alaska (NPRA),  Chukchi or  Beaufort, and                                                                    
Point Thomson. He reiterated  that the Gleason determination                                                                    
of  7 to  8  billion  barrels of  proven  reserves was  very                                                                    
conservative.   He  expressed   concern  that   inconsistent                                                                    
information  had  come  from DNR,  AOGC,  and  internal  oil                                                                    
industry  sources. While  industry information  was publicly                                                                    
available, it  was unreliable. He  noted that the  court had                                                                    
been forced to sopeana industry  to gain access to documents                                                                    
concerning  proven reserves  and production  forecasting. He                                                                    
discussed the  issue of  low flow studies.  He cited  a 2005                                                                    
JTG study  that indicated  that production  would eventually                                                                    
slow down to  135,000 barrels per day (page 65  of the BRENA                                                                    
Report.)  He shared  that the  determination  made by  Judge                                                                    
Gleason was  that the  TAPS system  would stay  in operation                                                                    
through 2065. He  cited pages 56 and 57 of  the BRENA Report                                                                    
which contained  a graph that  addressed that as  oil prices                                                                    
increased,  the  concept  of  economically  recoverable  oil                                                                    
increased;  every  10 dollar  increase  in  the price  of  a                                                                    
barrel  of crude  resulted in  a  5.5 year  increase in  the                                                                    
economic life of the TAPS structure.                                                                                            
                                                                                                                                
10:36:57 AM                                                                                                                   
                                                                                                                                
Senator Paskvan  discussed slide 39 titled  "Overview of the                                                                    
Gleason Decision: Access To  Information." He reiterated the                                                                    
challenge   of   gathering  substantive   information   from                                                                    
industry without a sopeana.                                                                                                     
                                                                                                                                
10:37:43 AM                                                                                                                   
                                                                                                                                
Senator Paskvan  explained slide  41 titled  "Expanded Basic                                                                    
Petroleum Economics: Course Level - Basic":                                                                                     
                                                                                                                                
About the Course:                                                                                                               
                                                                                                                                
     · Could you answer the following three questions for                                                                       
        your next project:                                                                                                      
                                                                                                                                
        9What will it cost?                                                                                                    
        9What is it worth?                                                                                                     
        9Will it earn sufficient profit?                                                                                       
                                                                                                                                
     ·  Before  undertaking  any  project,  these  questions                                                                    
        should be answered.                                                                                                     
                                                                                                                                
He  believed   that  the   legislature  was   consistent  in                                                                    
examining the  first question, but that  all three questions                                                                    
should  be  examined  in order  to  create  a  comprehensive                                                                    
fiscal system.                                                                                                                  
                                                                                                                                
10:39:28 AM                                                                                                                   
                                                                                                                                
Senator Paskvan discussed slide 42 titled "Example":                                                                            
                                                                                                                                
        · Estimates of drilling cost per well range from                                                                        
          $132,907  in  Kansas,  where   wells  tend  to  be                                                                    
          shallow,  to  $3,881,600   in  Alaska,  where  the                                                                    
          drilling experience is  very different as compared                                                                    
          to the lower 48 states.                                                                                               
        · Marginal reserve additions from drilling range                                                                        
          from 11,051 barrels per well in Kansas to 177,067                                                                     
          barrels per well in Alaska.                                                                                           
        · Thus, while drilling a well in Alaska is markedly                                                                     
          more expensive than Kansas, Alaska experiences a                                                                      
          greater payoff from these more costly exploration                                                                     
          and development efforts.                                                                                              
                                                                                                                                
He said that while the drilling costs in Alaska were more                                                                       
expensive, but yielded a higher return.                                                                                         
                                                                                                                                
10:40:14 AM                                                                                                                   
                                                                                                                                
Senator Paskvan spoke to slide 43 titled "Will it earn                                                                          
sufficient profit?" He discussed what the split between the                                                                     
state, the federal government, and investors:                                                                                   
                                                                                                                                
     "Oil  Industry  Profitability  in Alaska  1969  through                                                                    
     1987"                                                                                                                      
                                                                                                                                
     The oil  industry received  an estimated  $42.6 billion                                                                    
     in   profit   from    production   and   transportation                                                                    
     activities  in  Alaska  from 1969  through  1987…Alaska                                                                    
     North Slope (ANS)  production contributed $29.1 billion                                                                    
     to   profit,  with   $27.8  billion   of  this   amount                                                                    
     attributable   to   Prudhoe   Bay  and   $1.3   billion                                                                    
     attributable to  Kaparuk. TAPS provided  $12.4 billion.                                                                    
     Production in  Alaska other  than ANS  production added                                                                    
     $1.1 billion in profit.                                                                                                    
                                                                                                                                
     Shares.  The $42.6  billion  in  after-tax profit  that                                                                    
     accrued to  the oil industry compares  to $29.3 billion                                                                    
     in  State   of  Alaska   receipts  from   oil  industry                                                                    
     activities during this period.  During the same period,                                                                    
     Federal  government receipts  were  $25.8 billion  from                                                                    
     these activities (page I and II).                                                                                          
                                                                                                                                
     (Source:  "Oil Industry  Profitability  in Alaska  1969                                                                    
     through 1987," Prepared for  the Department of Revenue,                                                                    
     State  of  Alaska,   by  Edward  Deakin,  Distinguished                                                                    
     Enterprise   Professor  and   Director,  Institute   of                                                                    
     Petroleum Accounting, University  of North Texas, March                                                                    
     15, 1989.)                                                                                                                 
                                                                                                                                
10:41:29 AM                                                                                                                   
                                                                                                                                
Senator  Paskvan discussed  slide  44 titled  "Will it  earn                                                                    
sufficient  profit?"  He  stated   that  in  1989  a  report                                                                    
concluded that  production profits  do not stop  at Alaska's                                                                    
boundaries:                                                                                                                     
                                                                                                                                
     "Oil  Industry  Profitability  in Alaska  1969  through                                                                    
     1987"                                                                                                                      
                                                                                                                                
     Additional Benefits of ANS Oil                                                                                             
                                                                                                                                
     ANS Producers  receive profits from Alaska  Oil outside                                                                    
     of Alaska  which provides  and additional  bonus beyond                                                                    
     what it  would cost  if they  had to  purchase imported                                                                    
     oil.  An   additional  profit  of   approximately  $0.7                                                                    
     billion went to the  producers through the operation of                                                                    
     the  U.S. Department  of Energy  crude oil  entitlement                                                                    
     program.  Producers  are  believed to  earn  additional                                                                    
     profit  through  the  refining of  ANS  crude  because,                                                                    
     among  other  things,  they have  access  to  a  secure                                                                    
     source  of crude  oil. If  they  did not  have the  ANS                                                                    
     crude, it would be necessary  for them to acquire crude                                                                    
     from foreign sources.                                                                                                      
                                                                                                                                
     Others estimate  that profits on tanker  operations and                                                                    
     the  trans-Panama  shipment  activities  added  between                                                                    
     $.25  and   $1.00  profit  per  barrel   of  ANS  crude                                                                    
     produced.  These  additional  profits would  have  been                                                                    
     received  on  the  nearly  6  billion  barrels  of  ANS                                                                    
     production.  These added  profits are  not included  on                                                                    
     the  $42.6  billion of  total  oil  industry profit  on                                                                    
     Alaska covered in this report (page 13).                                                                                   
     These downstream profit issues  are beyond the scope of                                                                    
     this  project.  They  do indicate,  however,  that  the                                                                    
     producer's economic  benefits of Alaska  oil production                                                                    
     extended   beyond  the   profit  obtained   within  the                                                                    
     boundaries of the State of Alaska (p.T-70).                                                                                
                                                                                                                                
     (Source:  "Oil Industry  Profitability  in Alaska  1969                                                                    
     through 1987," Prepared for  the Department of Revenue,                                                                    
     State  of  Alaska,   by  Edward  Deakin,  Distinguished                                                                    
     Enterprise   Professor  and   Director,  Institute   of                                                                    
     Petroleum Accounting, University  of North Texas, March                                                                    
     15, 1989.)                                                                                                                 
                                                                                                                                
10:42:19 AM                                                                                                                   
                                                                                                                                
Senator Paskvan continued to slide 45 titled "Will it earn                                                                      
sufficient profit?" The slide discussed the hourly profit                                                                       
rate:                                                                                                                           
                                                                                                                                
     "Oil  Industry  Profitability  in Alaska  1969  through                                                                    
     1987"                                                                                                                      
                                                                                                                                
     Hourly Profit Rate                                                                                                         
                                                                                                                                
     "Looking at  these profits as an  hourly earning number                                                                    
     may bring  the amounts into better  perspective. After-                                                                    
     tax profits  have been earned  by the producers  at the                                                                    
     rate of  $463,144 per hour,  twenty-four hours  per day                                                                    
     for each  day of  the first ten  and one-half  years of                                                                    
     ANS Production (page 19)."                                                                                                 
                                                                                                                                
     (Source:  "Oil Industry  Profitability  in Alaska  1969                                                                    
     through 1987," Prepared for  the Department of Revenue,                                                                    
     State  of  Alaska,   by  Edward  Deakin,  Distinguished                                                                    
     Enterprise   Professor  and   Director,  Institute   of                                                                    
     Petroleum Accounting, University  of North Texas, March                                                                    
     15, 1989.)                                                                                                                 
                                                                                                                                
10:42:43 AM                                                                                                                   
                                                                                                                                
Senator Paskvan discussed slide 46 titled "Will it earn                                                                         
sufficient profit", which contained a letter from the Chief                                                                     
Executive of BP:                                                                                                                
                                                                                                                                
     Lord John Browne, Chief Executive, BP                                                                                      
     Address to shareholders (April 15, 2004)                                                                                   
     "In periods of high oil prices  such as the one we find                                                                    
     ourselves  in today,  the  group generates  significant                                                                    
     "Excess free  cash flow' after capital  expenditure and                                                                    
     dividends.  Rather  than  using  this  cash  to  reduce                                                                    
     debt…we are  committing to  return…100 percent  of this                                                                    
     excess free cash  flow to our investors for  as long as                                                                    
     oil prices remain above $20  a barrel, all other things                                                                    
     being appropriate (Sarah Takes on Big Oil, page 16)."                                                                      
                                                                                                                                
10:43:56 AM                                                                                                                   
                                                                                                                                
Senator Paskvan continued  to slide 47 titled  "Will it earn                                                                    
sufficient profit?" He  noted that the slide  harkened to an                                                                    
earlier slide discussing the harvest  mode analysis that had                                                                    
risen out of the 1997 plan:                                                                                                     
                                                                                                                                
     "Alaska's  role  in  BP's portfolio  is  to  provide  a                                                                    
     stable  production base  and cash  flow to  fuel growth                                                                    
     elsewhere in  the business while improving  margins and                                                                    
     returns."                                                                                                                  
                                                                                                                                
Senator  Paskvan  pointed  out  to the  committee  that  the                                                                    
information on  the slide was  consistent with  the analysis                                                                    
of Pedro Van  Meurs. He believed that  the statements should                                                                    
be viewed pragmatically. He continued with the slide:                                                                           
                                                                                                                                
     Sidenote:                                                                                                                  
                                                                                                                                
     "Over the past three years  the TAPS Owners and Alyeska                                                                    
     have studied a number  of potential business efficiency                                                                    
     opportunities…Preliminary   engineering  studies   have                                                                    
     also confirmed  electrifying and automating all  4 pump                                                                    
     stations will allow Alyeska to  eliminate over 285 full                                                                    
     time positions, many of those  in field locations where                                                                    
     wage and  locations premiums are very  high. Currently,                                                                    
     remote crews  at these pump stations  require expensive                                                                    
     catering,  transportation  and   other  costly  support                                                                    
     service    systems.    Eliminating   these    positions                                                                    
     translates   to    an   annualized    expense   savings                                                                    
     improvement of over $41mm gross  (+16mm net BP) by 2007                                                                    
     over APSC 2003 Base O&M."                                                                                                  
                                                                                                                                
     (Source: BP,  Alaska Business Unit,  Mid-Stream Alaska,                                                                    
     Trans-Alaska  Pipeline  Pump  Station  Electrification,                                                                    
     2004, Page 13)                                                                                                             
                                                                                                                                
10:46:02 AM                                                                                                                   
Mr.  Stepp  pointed  out  that  both  the  Senate  Resources                                                                    
Committee and the Senate Finance  Committee would be subject                                                                    
to  a  series   of  bar  graphs,  but   indicated  that  the                                                                    
statistical  graphs  did  not  tell  the  whole  story.  For                                                                    
example,  when  the  committee   saw  graphs  pertaining  to                                                                    
unemployment levels  on the  North Slope  decisions designed                                                                    
to increase  business efficiency, such  as the one  found on                                                                    
slide 47, were not represented and needed to be considered.                                                                     
                                                                                                                                
10:47:30 AM                                                                                                                   
                                                                                                                                
Senator Paskvan  continued with  his presentation  and spoke                                                                    
to slide  48 titled  "Will it  earn sufficient  profit?" The                                                                    
slide was  intended to provide perspective  on profits under                                                                    
ACES:                                                                                                                           
                                                                                                                                
     Gene Therriault,                                                                                                           
     Senior  Policy  Advisor  on  In-State  Energy,  Parnell                                                                    
     Administration                                                                                                             
     Email Correspondence, August 2, 2010                                                                                       
                                                                                                                                
     "Major  producers  like   ConocoPhillips  and  BP  have                                                                    
     reported strong  profits from their  Alaskan operations                                                                    
     under   the  ACES   system.  For   example,  in   2009,                                                                    
     ConocoPhillips'  Alaska   activity  accounted   for  12                                                                    
     percent of  its worldwide production but  29 percent of                                                                    
     its corporate profits. In addition,  the August 1, 2010                                                                    
     edition   of    Petroleum   News    recently   detailed                                                                    
     ConocoPhillips  current  year  earnings  and  concluded                                                                    
     that   "ConocoPhillips'   exploration  and   production                                                                    
     activities  continue to  be more  profitable in  Alaska                                                                    
     than across the Lover 48.'"                                                                                                
                                                                                                                                
Senator  Paskvan   reiterated  that  at  the   time  of  the                                                                    
correspondence there  was nothing to indicate  that ACES was                                                                    
"broken."                                                                                                                       
                                                                                                                                
10:48:31 AM                                                                                                                   
                                                                                                                                
Senator  Paskvan discussed  slide  49 titled  "Will it  earn                                                                    
sufficient  profit?" The  slide highlighted  the correlation                                                                    
between the  BP Prudhoe  Bay Royalty  Trust and  the profits                                                                    
from the operation on the central North Slope:                                                                                  
                                                                                                                                
BP Prudhoe Bay Royalty Trust (BPT)                                                                                              
                                                                                                                                
     "In the  past 10 years,  BPT has earned a  total return                                                                    
     of  2,246 percent.  A $5,000  investment just  10 years                                                                    
     ago would  be worth $117,400  right now…To give  you an                                                                    
     idea of  how strong  a return  that is,  integrated oil                                                                    
     giant  Chevron  returned  231 percent  over  that  same                                                                    
     period.  That would  have turned  $5,000 into  $16,550.                                                                    
     Not bad, but  nowhere near what BP  Prudhoe Bay Royalty                                                                    
     Trust did."                                                                                                                
                                                                                                                                
     "And  those  royalties are  on  top  of capital  gains.                                                                    
     BPT's share  price gained 667  percent during  the past                                                                    
     10 years  thanks to rising oil  prices, while Chevron's                                                                    
     stock price went up only 137 percent."                                                                                     
                                                                                                                                
     "The thing  is, BPT not  only beat Chevron…it  beat out                                                                    
     just  about  every  major oil  company  over  the  same                                                                    
     period. And that's  only part of the  equation. Go back                                                                    
     a few more  years, and the major oil  and gas companies                                                                    
     aren't even in BPT's league."                                                                                              
                                                                                                                                
     "BPT  has  generated  total returns  of  5,089  percent                                                                    
     since 1990  -- beating the  "big" names in the  oil and                                                                    
     gas industry. Chevron…Exxon…Shell…you name it."                                                                            
                                                                                                                                
     (Source:  Seeking   Alpha  website,  "BP   Prudhoe  Bay                                                                    
     Royalty  Trust: Why  Worry about  This High  Yielder?,"                                                                    
     January 25, 2102)                                                                                                          
                                                                                                                                
10:49:32 AM                                                                                                                   
                                                                                                                                
Senator  McGuire  highlighted  that  the  perspective  being                                                                    
presented to the committee was  that of Senator Paskvan. She                                                                    
felt  that there  were  other  reliable documents  available                                                                    
that would provide fodder for  a counter position. She noted                                                                    
that that  same website attributed  to slide 49  also stated                                                                    
that the BPT  was a short term,  overvalued opportunity. She                                                                    
believed that  a presentation could be  put together showing                                                                    
a  different perspective,  yet using  the same  website. She                                                                    
noted that  some industry experts  believed that ACES  was a                                                                    
highly penalizing tax regime.                                                                                                   
                                                                                                                                
Co-Chair  Stedman reminded  the  committee  that there  were                                                                    
many  available websites,  providing  many  opinions on  the                                                                    
issue  of  traded  securities. He  believed  that  the  fact                                                                    
remained that the value of the BPT had increased over time.                                                                     
                                                                                                                                
10:51:49 AM                                                                                                                   
Senator  McGuire agreed.  She suggested  that offering  many                                                                    
opinions  for discussion  could be  helpful. She  hoped that                                                                    
more opinions, dialogue and facts  could be brought into the                                                                    
committee for  future discussions. She stressed  that it was                                                                    
the work of the committee  to determine the right tax regime                                                                    
based on a variety of factor and opinions.                                                                                      
                                                                                                                                
Co-Chair Stedman pointed out the  presentation was the first                                                                    
of  many. He  thought  that  some of  the  issues raised  in                                                                    
resources might not  surface in finance. He said  that if it                                                                    
could  be reasonable  concluded that  there were  sufficient                                                                    
resources in the Arctic to  facilitate the operation of TAPS                                                                    
beyond the  next 20  years; the  committee would  work under                                                                    
that  assumption. He  asserted that  the committee  would be                                                                    
diligent in  providing factual  information for  the purpose                                                                    
of discussion at the table,  and for the public. He strongly                                                                    
railed against delivering misinformation to the public.                                                                         
                                                                                                                                
10:53:46 AM                                                                                                                   
                                                                                                                                
Senator McGuire  reiterated that the senator  was laying out                                                                    
one perspective  that did not  reflect the consensus  of the                                                                    
committee as a whole.                                                                                                           
                                                                                                                                
Co-Chair Stedman  declared that  the documents  currently at                                                                    
the table had  been presented in resources and  were part of                                                                    
the public domain. He regarded  that each member held strong                                                                    
opinions  on  the matter.  He  believed  that the  documents                                                                    
before the committee provided useful, factual information.                                                                      
                                                                                                                                
10:51:38 AM                                                                                                                   
                                                                                                                                
Senator  Paskvan explained  slide  50 titled  "Will it  earn                                                                    
sufficient  profit?," which  provided  a chart  illustrating                                                                    
how BPT had trounced the major players in the oil industry.                                                                     
                                                                                                                                
Senator Paskvan continued to slide  52 titled "Department Of                                                                    
Revenue's Facts to Begin the Conversation":                                                                                     
                                                                                                                                
   · Oil Prices Began to Climb to All-Time Highs Starting                                                                       
     Mid-2000s                                                                                                                  
   · TAPS Throughput Continues Steady Decline                                                                                   
   · Other Oil Producing Regions Enjoying Production and                                                                        
     Employment Booms                                                                                                           
   · Competition is High - Many Other Areas To Invest                                                                           
     Around the World                                                                                                           
                                                                                                                                
     (Source:  Senate  Resources   Committee  (February  10,                                                                    
     2012))                                                                                                                     
                                                                                                                                
10:55:38 AM                                                                                                                   
                                                                                                                                
Senator Paskvan discussed slide 53 titled "Oil Prices Began                                                                     
to Climb to All-Time Highs Starting Mid-2000s":                                                                                 
                                                                                                                                
     Chapter  7:  Evaluating  fiscal  regimes  for  resource                                                                    
     projects: An example from oil development                                                                                  
                                                                                                                                
     "The unprecedented  rise in the  internationally traded                                                                    
     prices  of  crude  oil   and  natural  gas  (petroleum)                                                                    
     between 2003 and  2008, and the sudden  fall after July                                                                    
     of 2008, have concentrated  attention once again on how                                                                    
     petroleum  revenues are  shared between  owners of  the                                                                    
     resource in  the ground  (usually governments)  and the                                                                    
     companies that extract the petroleum (page 187)."                                                                          
                                                                                                                                
     (Source:  The  Taxation   of  Petroleum  and  Minerals:                                                                    
     Principles, Problems and Practice)                                                                                         
                                                                                                                                
10:56:38 AM                                                                                                                   
                                                                                                                                
Senator Paskvan addressed slide 54, which spoke to fiscal                                                                       
regimes in a volatile oil price era:                                                                                            
                                                                                                                                
     Fiscal  Regimes  in  a Volatile  Oil  Price  Era:  What                                                                    
     Options  Exist  for  Balancing   the  Interest  of  the                                                                    
     Resource Country and Investor Company?                                                                                     
     By   Humphrey  Onyeukwu,   SPE,   Centre  for   Energy,                                                                    
     Petroleum,  Mineral  Law   and  Policy,  University  of                                                                    
     Dundee                                                                                                                     
                                                                                                                                
     Paper presented  at the  CPS/SPE International  Oil and                                                                    
     Gas Conference, Beijing, China, June 2010                                                                                  
                                                                                                                                
     "The challenge of  a fiscal policy in  a volatile price                                                                    
     oil era  is ensuring a  high share of value  is secured                                                                    
     for  the  Government.  At the  same  time,  the  fiscal                                                                    
     policy strives  to encourage  the exploration  of these                                                                    
     valuable  resources  without   harming  the  commercial                                                                    
     interest  of   the  oil  companies.   Price  volatility                                                                    
     fundamentally  alters   the  sharing  formula;   it  is                                                                    
     therefore  imperative  for  a  correct  balance  to  be                                                                    
     achieved between the competing  state interests and the                                                                    
     oil  companies. The  question  becomes how  equilibrium                                                                    
     can be  achieved in a  petroleum fiscal  system design,                                                                    
     which guarantees a suitable  government take and avoids                                                                    
     the negative  effect of instability  and re-negotiation                                                                    
     of fiscal terms."                                                                                                          
                                                                                                                                
10:57:49 AM                                                                                                                   
                                                                                                                                
Senator Paskvan spoke to slide 55 titled "TAPS Throughput                                                                       
Continues Steady Decline":                                                                                                      
                                                                                                                                
     Revenue Source Book (October, 1988)                                                                                        
     Alaska Department of Revenue                                                                                               
                                                                                                                                
     "It  is important  to emphasize  that  the North  Slope                                                                    
     producers, while  not agreeing on the  exact date, have                                                                    
     concluded that North Slope  production will commence to                                                                    
     decline in either FY89 or FY90."                                                                                           
                                                                                                                                
10:58:22 AM                                                                                                                   
                                                                                                                                
Senator Paskvan discussed slide 56 titled "TAPS Throughput                                                                      
Continues Steady Decline":                                                                                                      
                                                                                                                                
     Revenue Source Book (Fall 1989)                                                                                            
     Alaska Department of Revenue                                                                                               
                                                                                                                                
     "The fall  in oil production means  that the inevitable                                                                    
     decline  in  the huge  Prudhoe  Bay  field had  started                                                                    
     sooner  than we  predicted…This  forecast assumes  that                                                                    
     production from the Prudhoe Bay  field will continue to                                                                    
     fall  steadily, and  will drop  to less  than half  its                                                                    
     present level in less than 10 years."                                                                                      
                                                                                                                                
     "Some  observers  may  believe  that  exploration  will                                                                    
     discover  another  Prudhoe  Bay.  Prudhoe  Bay  is  the                                                                    
     largest oil field in North  America, and finding such a                                                                    
     'supergiant' is extremely rare."                                                                                           
                                                                                                                                
     "The State of  Alaska is standing on  a precipice. Only                                                                    
     a combination of budget  cuts, more efficient programs,                                                                    
     and new  revenues will keep  that State from  falling a                                                                    
     long way..."                                                                                                               
                                                                                                                                
     "The decline  in production for  the Prudhoe  Bay field                                                                    
     is a  central issue  for Alaska…The decline  in Prudhoe                                                                    
     Bay production  is now expected  to be much  more rapid                                                                    
     than assumed in our Spring forecast."                                                                                      
Senator Paskvan recommended that the committee should look                                                                      
to the value of the state's resources and not only the                                                                          
rates of decline.                                                                                                               
                                                                                                                                
10:59:57 AM                                                                                                                   
                                                                                                                                
Senator Paskvan continued to slide 57:                                                                                          
                                                                                                                                
     Revenue Sources Book (Spring 1992)                                                                                         
     Alaska Department of Revenue                                                                                               
                                                                                                                                
     "The  long-term revenue  outlook  is  dominated by  the                                                                    
     depletion of petroleum reserves  of the Prudhoe Bay oil                                                                    
     field…Despite the start of  the irreversible decline at                                                                    
     the Prudhoe  Bay field this year,  continued success in                                                                    
     reservoir management in all  fields will hold statewide                                                                    
     production decline throughout fiscal  year 1995 to less                                                                    
     than 9 percent total (3 percent per year)."                                                                                
                                                                                                                                
11:00:28 AM                                                                                                                   
                                                                                                                                
Senator Paskvan addressed slide 58:                                                                                             
                                                                                                                                
     Revenue Sources Book (Spring 1994)                                                                                         
     Alaska Department of Revenue                                                                                               
                                                                                                                                
     "The Prudhoe  Bay field, which accounts  for two-thirds                                                                    
     of  Alaska  statewide  production, is  in  irreversible                                                                    
     decline."                                                                                                                  
                                                                                                                                
Senator Paskvan noted that DOR has been aware of the                                                                            
production decline for well over a decade.                                                                                      
                                                                                                                                
11:00:39 AM                                                                                                                   
                                                                                                                                
Senator Paskvan spoke to slide 59:                                                                                              
                                                                                                                                
     With Prudhoe Bay in Decline, What's Next for Alaska?                                                                       
     By   James  M.   Davis  (Senior   Vice  President   for                                                                    
     Exploration  and Land)  &  Jerry  R. Pollock  (Manager,                                                                    
     Prudhoe Bay Engineering) of ARCO Alaska, Inc.                                                                              
                                                                                                                                
     Oil and Gas Journal, August 3, 1992                                                                                        
                                                                                                                                
     "By any  definition, Prudhoe Bay is  declining and will                                                                    
     continue to decline…"                                                                                                      
                                                                                                                                
     "To  accountants,  Prudhoe  decline began  during  1998                                                                    
     when the field  was no longer able to  make its maximum                                                                    
     allowable  rate   of  1.5  million   b/d  of   oil.  To                                                                    
     engineers, the decline began long before that…                                                                             
                                                                                                                                
     "Unfortunately, adding  more wells  can't keep  the oil                                                                    
     production  rate up  forever.  We're  already past  the                                                                    
     point where drilling can stave  off a falling oil rate.                                                                    
     Oil reserves are finite…."                                                                                                 
                                                                                                                                
     "As the field matures,  the production facilities reach                                                                    
     their maximum  capacities to handle produced  water and                                                                    
     gas.  Wells  with  falling  oil  rates  and  increasing                                                                    
     produced  water and  gas volumes  have  to be  shut-in.                                                                    
     Total field production drops."                                                                                             
                                                                                                                                
Senator Paskvan stressed that the decline was an                                                                                
engineering issue.                                                                                                              
                                                                                                                                
Co-Chair Stedman interjected that due to time constraints                                                                       
the presentation would be continued during the afternoon                                                                        
meeting.                                                                                                                        
                                                                                                                                
SB 192 was HEARD and HELD in committee for further                                                                              
consideration.                                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
11:02:54 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 11:02 AM.                                                                                          

Document Name Date/Time Subjects
CS for SB 192_Sponsor Statement.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_ACES Status Report Letter to Gov Parnell_January 14_2010.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB 192(RES)_Sectional Summary.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_ACES Status Report_January 14_2010.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB 192_Slide Presentation_SEN FIN_03-13-2012.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_BP Doc re Cash Cow_2004.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_BRENA_2012-02-06 FINAL.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_DNR_Open For Business Ad.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_DOR Oil and Gas Tax Report_01-18-2011.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_Effectiveness of Severance Tax Incentives in the US Oil Industry.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_FAST Study.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_Gas and Water Handling Constraints On Alaska's North Slope.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_Gleason Decision_12-30-11.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_North Slope of Alaska Facility Sharing Study (2004).pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_Oil Industry Profitability in Alaska - 1969 through 1987.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_Revenue Source Book re ANS Production Decline (1988-1994).pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_SOA Single Audit re DOR for the FY Ended June 30 2009.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_State Tax Policy and Oil Production.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_State Taxation Exporation and Production in the US Oil Industry.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_Therriault Email re ANS profitability_09-10-2010.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_Trends_Alaskas Oil Industry_Sept_2008.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_US Senate Testimony by Kevin Banks_05-10-2012.pdf SFIN 3/13/2012 9:00:00 AM
SB 192
CSSB192_Back-Up_With Prudhoe Bay in Decline What's Next for Alaska_Oil and Gas Journal_09-03-1992.pdf SFIN 3/13/2012 9:00:00 AM
SB 192