Legislature(2011 - 2012)SENATE FINANCE 532

03/22/2012 01:00 PM FINANCE

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01:12:02 PM Start
01:12:36 PM SB192
02:06:47 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Presentation by PFC Energy TELECONFERENCED
+ Bills Previously Heard/Scheduled TELECONFERENCED
                      SENATE FINANCE COMMITTEE                                                                                  
                           March 22, 2012                                                                                       
                             1:12 p.m.                                                                                          
1:12:02 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Stedman called the Senate Finance Committee meeting to                                                                 
order at 1:12 p.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                                                                                                                
ALSO PRESENT                                                                                                                  
Janak Mayer, Manager, Upstream and Gas, PFC Energy; Senator Gary                                                                
Stevens; Senator Joe Paskvan; Senator Tom Wagoner; Senator Cathy                                                                
SB 192     OIL AND GAS PRODUCTION TAX RATES:                                                                                    
           SB 192 was HEARD and HELD in committee for further                                                                   
SENATE BILL NO. 192                                                                                                             
"An Act relating to the oil and gas production tax; and                                                                         
providing for an effective date."                                                                                               
1:12:36 PM                                                                                                                    
Co-Chair   Stedman   announced    that   the  presentation    contained                                                         
additional  slides  in  response  to questions   raised at  the earlier                                                         
JANAK  MAYER,   MANAGER,  UPSTREAM   AND  GAS,  PFC  ENERGY,  continued                                                         
with  the  revised   presentation   from  the  earlier  meeting   (March                                                        
22,  2012,  9:11  a.m.)  titled,  "Discussion   Slides:  Alaska   Senate                                                        
Finance Committee," (March 22, 2012)(copy on file).                                                                             
Mr.  Mayer  summarized  the  tax  allowance   analyses  proposed  in  SB                                                        
192,  with  different  variables,   depicted  on  the  slides  on  Pages                                                        
30  to  32.  He   explained  that   the  legislation   provided   a  $10                                                        
allowance  for  new  production  above  the  amount  that  was produced                                                         
the  previous   year.  He  cited  the  slide  on  Page   30,  "CSSB  192                                                        
Including    $10   New   Oil   Allowance    Over   1   Year   (Existing                                                         
Producer)."    Based   on   a  hypothetical    model   of   100,000mb/d                                                         
(thousand  barrels  per  day)  the allowance  had  a negligible   impact                                                        
for the producer.                                                                                                               
Mr.  Mayer  highlighted  slide  31,  "CSSB  192 Including   $20 New  Oil                                                        
Allowance   Over  7 Years   (Existing  Producer)."   He  noted  that  if                                                        
the  allowance  was  raised  to  $20 and  extended  over  7  years,  the                                                        
NPV  (net  present  value)  for  the  producer  rose  slightly  but  the                                                        
high  government  take  remained  mostly   unchanged  (ranging  from  74                                                        
to  79 percent  at  a range  of  $100/bbl.  to $230/bbl.   (dollars  per                                                        
barrel).  He  referenced  the slide  on  Page 32,  "CSSB  192 Including                                                         
$60  New  Oil   Allowance  Over   7  Years  (Existing   Producer)."   He                                                        
remarked  that  when  the  allowance  was  raised  to  $60  the overall                                                         
impact remained minimal.                                                                                                        
Mr.  Mayer   addressed   slide   33,  "CSSB   192  Excluding   New   Oil                                                        
Allowance   (New  Producer)."  In  response   to  a question   that  Co-                                                        
Chair  Hoffman  had  asked  him  in the  previous   meeting  (March  22,                                                        
2012,  9:11a.m.)   he included   the  slides  on  Pages  33 to  36  that                                                        
analyzed   the  impact   of  the  allowance   on   new  producers.   The                                                        
allowance  had  a favorable   impact  at the  $60  level  extended  over                                                        
7 years.  He  cautioned  that  the  hypothetical  model  based  on  such                                                        
a  large field  development   (100,000mb/d)   was  necessary  to  detect                                                        
a  quantifiable  amount  of  incremental   production  for  purposes  of                                                        
analysis.  The  scenario  was  unlikely  to happen  in the  predictable                                                         
future.   Slide  33,  "CSSB  192  Excluding   New  Oil  Allowance   (New                                                        
Producer)"   illustrated   the  data  proposed  in  SB  192  without  an                                                        
allowance    incentive   for   a   new   producer    without   existing                                                         
1:16:05 PM                                                                                                                    
Mr.  Mayer  compared   slide  34,  "CSSB  192  Including   $10  New  Oil                                                        
Allowance  Over  1  Year  (New  Producer,)"  to  the  base data  on  the                                                        
previous  slide.  He  reported  that  the  $10 allowance   applied  over                                                        
one  year resulted  in  similarly  high  government  take  (ranged  from                                                        
77  to   80  percent   at  oil   prices  ranging   from   $100/bbl.   to                                                        
$230/bbl.)  and  a modest  increase  in  net present  value  (NPV)  with                                                        
the  same  rate  of return   (11%).  He turned   to the  slide  on  Page                                                        
35,  "CSSB  192 Including  $20  New  Oil Allowance   Over  7 Years  (New                                                        
Producer)."   He highlighted   that  a $20  allowance  expanded  over  7                                                        
years  compared   to  the  $10  allowance   for  one  year,   yielded  a                                                        
decrease  in  government  take  [5 percent  decrease  at  $100/bbl.;  72                                                        
percent  from  77  percent],   a significant   increase   in NPV  and  3                                                        
percent  increase   in the  rate  of  return  (14 percent).   He  turned                                                        
to  slide  36;  "CSSB  192  Including  $60  New  Oil  Allowance  Over  7                                                        
Years  (New  Producer),"   which  depicted  a  $60  allowance  extended                                                         
over  7 years.  He  noted  a 4 percent   decrease  (78 percent  reduced                                                         
to  74  percent)  from  the  previous   slide  in  government   take  at                                                        
very  high  oil  prices  of over  $200/bbl.   He concluded   that  under                                                        
the  particular  hypothetical   scenario  modeled;   a new  producer,  a                                                        
large  field  development,  $60  allowance  over  7 years,  and no  base                                                        
decline   in  production,   the  government   take   was  significantly                                                         
reduced.  He  warned  that  the  scenario  was  unlikely  and  that  the                                                        
threshold  for  the allowance   was too  high. He  reiterated  that  the                                                        
later   scenario  was   the  only  circumstance    that  the  allowance                                                         
incentive demonstrated a significant impact.                                                                                    
Co-Chair  Stedman  requested  that  Mr.  Mayer repeat  his  conclusion.                                                         
Mr.  Mayer  responded   that  under   generous  terms;   "incentivizing                                                         
new  investments  by  existing  producers   and new  developments   that                                                        
would  raise  the decline  curve",  the  new oil  incentives  in SB  192                                                        
had  no   impact.   He  reiterated   that   the  sole   scenario   which                                                        
demonstrated   an   impact  on  the   decline  curve   included   a  new                                                        
producer,   no  base   decline   compensation,   and   a  substantially                                                         
increased allowance extended over 7 years.                                                                                      
1:20:14 PM                                                                                                                    
Mr.  Mayer explained   the way  the proposed  tax  holiday  worked.   He                                                        
recapped   that  the  allowance   incentive   in  SB192  established   a                                                        
target  rate  of  production   based  on  last  year's  production   and                                                        
incentivized   incremental   production   above  that  level.   The  tax                                                        
holiday   also  established   a  target   level   set  at  last   year's                                                        
production   level  less  a decline  factor.   The decline   factor  was                                                        
determined   based  on  the  moving  average   of  the  prior  3  year's                                                        
production  and  decline.  He  exemplified  a  scenario  of  a steady  6                                                        
percent  per  year  decline  over the  prior  3 years  production;   the                                                        
current  year's  target   equated  to  last year's   production  less  6                                                        
percent.  The  tax  holiday  provided   an  exclusion  from  production                                                         
tax  of  all  revenue   derived  from  production   that  exceeded   the                                                        
target  level.  He identified   slide 37,"CSSB   192 Excluding  New  Oil                                                        
Allowance   (Existing   Producer)"    that  depicted    the  provisions                                                         
contained   in  SB  192  without  the  new  oil  allowance   as  a  base                                                        
comparison.   He compared  the  data  to the  slide  on Page  38,  "CSSB                                                        
192  Including    Tax  Holiday   Based   on  3  Year   Rolling  Decline                                                         
(Existing  Producer),"   that illustrated   the  tax holiday  analysis.                                                         
He  remarked  that  the  NPV  slightly  increased  and  the  government                                                         
take  did not  change  (74 to  79 percent  at oil  prices  ranging  from                                                        
$100/bbl. to $230/bbl.)                                                                                                         
1:23:02  PM                                                                                                                   
AT EASE                                                                                                                         
1:26:26  PM                                                                                                                   
1:26:32  PM                                                                                                                   
Mr.  Mayer  determined   that   the  tax  holiday  worked   off  of  the                                                        
decline  curve  instead  of  the previous   year's  production  but  was                                                        
only  applicable  for  a single  year.  The  decline  rate  calculation                                                         
was   based  on   a  rolling   average;   as   incremental   production                                                         
increased   the  decline  curve   flattened  out  over   time.  The  tax                                                        
holiday was more difficult to claim again in the future.                                                                        
Mr.  Mayer  discussed   slide  39,  "CSSB  192  Including   Tax Holiday                                                         
Based   on   3   Year   Rolling   Decline   for   7   Years   (Existing                                                         
Producer)."   The graphed  analysis   was based  on  extending  the  tax                                                        
holiday  for  seven years.  He  noted that,  compared  to  the previous                                                         
slide  the   impacts  were   more  significant.   The   government-take                                                         
decreased   by  4  percent   and  the   NPV  and  cash   flow  slightly                                                         
increased.   He   pronounced   that   overall;   the  result   remained                                                         
minimal as an incentive.                                                                                                        
1:29:53  PM                                                                                                                   
AT EASE                                                                                                                         
1:39:08  PM                                                                                                                   
1:39:32  PM                                                                                                                   
Mr.  Mayer   identified   slide  40,   "CSSB  192   Excluding   New  Oil                                                        
Allowance   (New   Producer)"   and   noted   that  the   graphed   data                                                        
depicted   the  effects   of  the  legislation   without   the  new  oil                                                        
allowance   for  a  new  producer   without  existing   production.   He                                                        
compared  the  slide  on  Page 40  with  the  slide  on page  41,  "CSSB                                                        
192  Including  Tax  Holiday  Based  on  3 Year  Rolling   Decline  (New                                                        
Producer),"   the slide  portrayed   the graphed  analysis   of the  tax                                                        
holiday   for  a  new  producer.   He  reported   that  the  government                                                         
take(78   percent  on  $100/bbl.)   and  NPV  remained   unchanged.   He                                                        
discerned  that  the tax  holiday  proposal  improved  one  aspect  over                                                        
an allowance   method,  by basing  the  target threshold   on a decline                                                         
as  opposed   to   the  previous   year's   production.   He  felt   the                                                        
holiday  had  two  shortcomings:   the  tax  holiday   only  lasted  for                                                        
one  year and  the  benefit  applied  to a  single  year  when measured                                                         
against the overall life of the project was nominal.                                                                            
1:41:55 PM                                                                                                                    
Mr.  Mayer  discussed   slide  42,  "CSSB  192  Including   Tax Holiday                                                         
Based  on 3  Year Rolling  Decline  for  7 Years  (New Producer)"   that                                                        
illustrated  the  effects  of the  tax  holiday  extended  over 7  years                                                        
for  a  new  producer.   He  relayed  that  the  after   tax  cash  flow                                                        
analysis  at  $100/bbl.   oil  portrayed  an  increase  in  the  NPV,  a                                                        
one   percent   increase    in  the   rate   of   return   (11   to   12                                                        
percent),and   the government   take decreased  from  78  percent  to 76                                                        
percent.  He remarked that the result was "limited."                                                                            
1:43:08 PM                                                                                                                    
AT EASE                                                                                                                         
1:43:13 PM                                                                                                                    
1:44:00 PM                                                                                                                    
Mr.   Mayer   reviewed   slide   43,   "Differences    in   Incremental                                                         
Production."   The   slide  depicted   a   chart  divided   into   three                                                        
sections  with  various   data that  summarized   the  analyses  of  the                                                        
different  incentive   scenarios  discussed   in the  presentation.   He                                                        
explained  the  middle  section  of  data  titled,  "Incremental."   The                                                        
data  underlay  the  allowance  proposal  in  SB192  that was  based  on                                                        
production   above the  previous  year's   production.  Each  column  of                                                        
numbers  corresponded   to a given  year  sequentially   beginning  with                                                        
2012 and ending in 2020.                                                                                                        
Target Production (prior year) 186 175 177 180 183 187 191 196 201                                                              
Production Above Target           -   2   3   3   4   4   5   5   -                                                             
Percentage Above Target Forecast  0%  1%  1% 2%   2%  3%  3%  3%  3%                                                            
Mr.   Mayer    explained   that    the   target   production    numbers                                                         
represented  the  previous  year's  production.   The production   above                                                        
target  figures  was the  actual  production  that  occurred  above  the                                                        
target  base  line. Depicted   as a percentage,   production  above  the                                                        
target  was  very  small.  He  pointed  to  the  figures  in  the  first                                                        
section   of  the  chart  that   considered   the  data  from   the  tax                                                        
holiday proposal.                                                                                                               
3year rolling decline:                                                                                                          
3 year rolling decline rate      6% 4% 1% -1% -2% -2% -2% -3% -1%                                                               
Target Production                175 169 175 182 186 190 195 201 202                                                            
Production Above Target           -   8   5   1   1   0   0   0   -                                                             
Percentage Above Target Forecast  0%  5%  3%  0%  0% 0%  0%  0%   0%                                                            
Mr.  Mayer compared  the  tax  holiday  data to  the incremental   data.                                                        
He  delineated  that  the  target  production   was  mostly  lower  than                                                        
the  allowance   scenario.  The  production   above  the  target   rates                                                        
was  higher for  the first  three  years  and lower  in the  out  years.                                                        
The  3 year  rolling decline  rate  was  6 percent  the first  year  and                                                        
decreased  each  year  to  negative  rates  by  2015.  The  tax holiday                                                         
benefit  was  quickly  lost because  production   increased  above  that                                                        
target  level  and the  decline  rate  was  based on  a rolling  3  year                                                        
average.   The  decline  curve  flattened   out.  He  felt  that  as  an                                                        
incentive,   the  consequence   was  problematic.   He  turned   to  the                                                        
last  section  of the  graph.  He  noted that  the  data  represented  a                                                        
different alternative.                                                                                                          
Decline above fixed forecast:                                                                                                   
Target Production           175  165  155  145  137  128  121  113  107                                                         
Production Above Target     -     13   25   38  50   62   75   87   88                                                          
Percentage Above Target     0%    8%  16%   26% 37%  49%  62%  77%  82%                                                         
Mr.  Mayer  explained   that  the proposal   set  the  decline  rate  at                                                        
the   current   year's   production    based   on   the   prior   year's                                                        
production   and  decline.   The  decline   curve  was  set  in   future                                                        
years  based  on the  same  rate calculated   from  the base  year.  The                                                        
decline   rate   represented   in   the   data   was  6   percent.   The                                                        
incremental   new   production   accumulated    above   the  6  percent                                                         
decline  grew  substantially  more  each  year.  He felt  the incentive                                                         
for   new   production    based   on   a  fixed   forecast    was   more                                                        
Co-Chair  Stedman   deduced  that  the  fixed  forecast  decline   curve                                                        
was  parabolic  and  would  flatten  out  to  100 percent   after  2020.                                                        
All  of  the  production  after  2020  would  be  considered   new.  Mr.                                                        
Mayer  confirmed   that over  time,  more  and  more  production   would                                                        
actually  be  "new."  He exemplified  the  current  production  decline                                                         
at  6  percent.  Without   significant   new  investment,  the  decline                                                         
will  continue.  The  target  production  line  in  the fixed  forecast                                                         
data  reflected  a 6  percent  decline  over years.  If  production  was                                                        
incentivized   above   that  rate   then  the  "new"   production   over                                                        
years  becomes   more  of  the  base  production.   He  opined  that  an                                                        
incentive   must  apply   over  a  long  time   period  to  offset   the                                                        
investment  costs  over  a new  projects  life  cycle  if  the goal  was                                                        
to lower government take to stimulate new production.                                                                           
1:50:14 PM                                                                                                                    
Co-Chair    Stedman   noted    that   one   of   the   challenges    was                                                        
determining  when  the  parabolic  curve  flattened  out.  He mentioned                                                         
oil  production  forecasts   that predicted   a flattened   out decline                                                         
cure  over time  instead  of a  precipitous  drop  in the  near future.                                                         
He  wondered  how  to  reconcile  the  flattened   decline  possibility                                                         
with  a  fixed  forecast  model.  Mr.  Mayer  felt  that  method  had  a                                                        
lot  of   strengths.   He  noted  that   one  difficulty   was   how  to                                                        
accurately    predict   the   decline    curve.   The   challenge    was                                                        
determining  the  decline  rate  and how  to best  calculate  it,  i.e.,                                                        
exponential  or  hyperbolic.  He  shared  that in  some  fiscal regimes                                                         
the  fixed decline  forecast   method was  used  in production  sharing                                                         
contracts.   The  contracted  fiscal   terms  were  negotiated  between                                                         
the  producer   and  government.   Determining   the  base  decline   to                                                        
establish   a   new   production   threshold   proved    difficult   and                                                        
complicated during the negotiation process.                                                                                     
1:53:05 PM                                                                                                                    
Co-Chair   Stedman   asked  if  the   fixed  forecast   model  required                                                         
separate    decline   curves   for   the    major   producers   working                                                         
different   fields.   Mr.  Mayer  replied   that   the  logistics   were                                                        
difficult   to  resolve.   He  hypothesized   that   a  single  decline                                                         
curve  would  provide   a substantial   incentive   to all,  even  if  a                                                        
little  lopsided  to  some.  A more  tailored  decline  curve  for  each                                                        
producer   was  better   but  exceptionally   complex   to  administer.                                                         
Additional   definitions   of  new  production  could   be included   to                                                        
augment  using  a single  decline  curve;  either  production  from  new                                                        
areas  or new  production  from  a planned  development   approved  by a                                                        
regulator.   He  remarked   that  production    above  a  base  decline                                                         
curve was only one way to measure new production.                                                                               
Co-Chair  Stedman  pointed  out  that if  the state  did  implement  two                                                        
different    tax   structures,    one   for   current    and   one   for                                                        
incremental   production,    a  lot  of  the   incremental   production                                                         
would  fall  under  an  incremental  tax  structure.   He  wondered  how                                                        
the  state  could develop  a  tax  structure  that  worked  in 2012  but                                                        
was  applicable   in the  future,   without  creating   a system   where                                                        
most  production  was  applied  to the "more  lenient"  tax  code.   Mr.                                                        
Mayer   contended    that   if  the   decline   curve   was   carefully                                                         
structured  then  any  incremental  production  classified   as new  was                                                        
actually new production and the policy was successful.                                                                          
Senator  McGuire  asked  Mr. Mayer  to  share his  experiences  working                                                         
with  other  jurisdictions   that  used  the  fixed  decline  rate.  She                                                        
queried  whether   he had  worked   with  any governments   who  had  to                                                        
set  a fixed  decline  base rate  or defined  new  production  in  other                                                        
ways.  Mr.  Mayer  replied  that  a  number  of  governments   used  the                                                        
approach  of  incentivizing  production   above a  base rate.  He  noted                                                        
service   contracts  in  Iraq  that   provided  monetary   compensation                                                         
for  incremental   barrels  above  an  existing  base  or  decline  rate                                                        
in  established  oil  fields.  Specifically,   PFC  Energy  worked  with                                                        
Bahrain    to   negotiate    an   appropriate    decline   curve    with                                                        
producers.     Negotiating    precise     terms    under    contractual                                                         
arrangement  was  much  more difficult   than in  a tax  royalty  regime                                                        
where the terms were set by the legislature.                                                                                    
1:58:20 PM                                                                                                                    
Senator   McGuire  inquired   about  the  outcome   of  the  negotiated                                                         
contracts.   She wondered   if more  production  over  time  "migrated"                                                         
into  the  "new  production"   stream.   Mr.  Mayer  felt  there  was  a                                                        
better  way  to  understand  the  result.  He  hypothesized   a decline                                                         
curve  rate   established   at  6 percent   in  a  scenario   where  new                                                        
production   above  the  base  was  continually   produced   each  year.                                                        
Progressively   more  of  the  production   base  over   time  would  be                                                        
taxed  at  the  preferential   rate  and  less  at  the  base  rate.  He                                                        
emphasized   that   outcome   was   precisely   how   the   system   was                                                        
designed   to  work.   The  new  production   was   a  "result   of  the                                                        
success  of  the  policy  by  stimulating   production   above  the  six                                                        
percent decline rate."                                                                                                          
Senator   McGuire  mentioned   the  idea  of  the  state  defining   new                                                        
development   by approving   planned  development   that qualified   for                                                        
favorable  tax  terms  and asked  Mr. Mayer  to  relate  his experience                                                         
with  alternate  definitions   of new  production.   Mr.  Mayer replied                                                         
that  he  could  not recall  "concrete"   examples  to  share  with  the                                                        
Mr.  Mayer   continued   with   the  presentation.    He  compared   the                                                        
slides   on  Page   44,   "CSSB  192   Excluding   New   Oil  Allowance                                                         
(Existing   Producer),"    which   applied   the   data   from  SB   192                                                        
excluding   the  new  oil  allowance   in  a large   field  development                                                         
(100,000  mb/d)  as  a base  comparison   with  the slide  on  page  45,                                                        
"CSSB   192  Including   20%  Gross   Revenue  Allowance   Above   Fixed                                                        
Decline   Rate  (Existing   Producer)".    The  slide   depicted   a  20                                                        
percent  gross  revenue  allowance   above a  6 percent   fixed decline                                                         
rate.  He  pointed  out  that  the  project  economics  and  government                                                         
take  changed  considerably.  The  government-take   decreased  from  79                                                        
percent  to 75  percent  at $230/bbl.  oil  and  from 74  percent  to 69                                                        
percent   at   $100/bbl.    The  NPV   significantly    increased    for                                                        
producers.   He highlighted   the  projected   results  from  the  slide                                                        
on  Page  46,   "CSSB  192  Including   40%  Gross   Revenue  Allowance                                                         
Above   Fixed  Decline   Rate  (Existing   Producer)."   He  noted   the                                                        
graphed  data  illustrated   a further  reduction   in government   take                                                        
to  65 percent  at  $100/bbl  and  70  percent  at  $230/bbl  prices  of                                                        
oil.  He commented  that  he  introduced  the fixed  decline  incentive                                                         
to the committee as an alternative for further consideration.                                                                   
2:03:09 PM                                                                                                                    
Mr. Mayer concluded with slide 47:                                                                                              
      Conclusions - New Oil Allowance:                                                                                          
           Even  under  highly  aggressive  assumptions   regarding  the                                                        
           potential   for  a  new-source   development   for   a  given                                                        
           company,   the  impact   of  CSSB192's   $10  allowance   for                                                        
           "new oil" is almost undetectable                                                                                     
           •By   increasing   the  time   horizon   and  value   of  the                                                        
           allowance,   it  is  possible  to  increase   the  impact  to                                                        
           the   point  at   which   it  becomes   noticeable   in   the                                                        
           specific    hypothetical    case   of   a   100    mb/d   new                                                        
           development for an existing producer.                                                                                
           •This,  however,   is  a highly   unlikely  scenario.   Under                                                        
           any   foreseeable    scenario,   regardless    of   rate   or                                                        
           duration,  it  is unlikely  to  have  any impact  because  it                                                        
           does  not incentivize   new  production  above  the existing                                                         
           decline,   only   volumes   incremental   to   prior   years'                                                        
           •Senate  Resources   Amendment  B2  instead  proposed  a  tax                                                        
           holiday  based  on  production   above  a  target  rate,  set                                                        
           based   on  the  rolling   average   decline  rate   for  the                                                        
           prior 3 years.                                                                                                       
           •While   the  decline-curve   approach  is  a  sounder   one,                                                        
           the  impact  of  this  proposal   is  also  highly  limited,                                                         
           for two reasons                                                                                                      
                 •The allowance applies each year only to                                                                       
                 production that year which exceeds the target                                                                  
                 •After  a   few  years   of  production   growth,   the                                                        
                 incentive   no  longer  applies   to  new  production,                                                         
                 due  to  changes   in  the   rolling-average   decline                                                         
           •An allowance based on a set decline-curve, based at a                                                               
           particular point in time, has a significantly greater                                                                
           impact than either of the other forms of allowance.                                                                  
           •Determining the appropriate decline basis to use                                                                    
           could pose difficulties.                                                                                             
           •The  decline  curve  concept  could  also  be  complemented                                                         
           with  other  incremental  production   definitions,  such  as                                                        
           production    from    new   areas,    and    from   approved                                                         
           development plans                                                                                                    
He determined that a more favorable incentive system based on                                                                   
new production was one that spanned the life cycle of a new                                                                     
2:06:47 PM                                                                                                                    
The meeting was adjourned at 2:06 PM.                                                                                           

Document Name Date/Time Subjects
SB 192 032212 Revised PFC Presentation Meyers.pdf SFIN 3/22/2012 1:00:00 PM
SB 192