Legislature(2007 - 2008)BUTROVICH 205

11/01/2007 09:00 AM JUDICIARY


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09:05:24 AM Start
09:05:42 AM SB2001
09:08:32 AM Dan Dickinson, Consultant to the Legislative Budget & Audit Committee
09:35:19 AM Steve Porter, Consultant to the Legislative Budget & Audit Committee
10:39:51 AM Marilyn Crockett and Tom Williams, Aoga
11:27:23 AM Jonathan Iversen, Director, Tax Division, Department of Revenue
01:52:37 PM Julie Houle, Section Chief, Resource Evaluation, Division of Oil & Gas, Dnr
06:13:31 PM Public Testimony
08:09:33 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB2001 OIL & GAS TAX AMENDMENTS TELECONFERENCED
Heard & Held
Litigation & Settlement Issues
Information Sharing Between Depts.
Wrap-up: Dept. of Revenue
-- Testimony <Invitation Only> --
-- Public Testimony < 6:00 pm - 8:30 pm>
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE JUDICIARY STANDING COMMITTEE                                                                             
                        November 1, 2007                                                                                        
                           9:05 a.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Hollis French, Chair                                                                                                    
Senator Charlie Huggins, Vice Chair                                                                                             
Senator Bill Wielechowski                                                                                                       
Senator Lesil McGuire                                                                                                           
Senator Gene Therriault                                                                                                         
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Senator Gary Stevens                                                                                                            
Senator Bettye Davis                                                                                                            
Senator Thomas Wagoner                                                                                                          
Senator Lyda Green                                                                                                              
Senator Johnny Ellis                                                                                                            
Senator Joe Thomas                                                                                                              
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                              
SENATE BILL NO. 2001                                                                                                            
'An Act  relating to  the production  tax on oil  and gas  and to                                                               
conservation  surcharges  on oil;  relating  to  the issuance  of                                                               
advisory  bulletins and  the  disclosure  of certain  information                                                               
relating to the  production tax and the  sharing between agencies                                                               
of certain information relating to  the production tax and to oil                                                               
and gas or  gas only leases; amending the State  Personnel Act to                                                               
place in  the exempt service  certain state oil and  gas auditors                                                               
and their immediate supervisors; establishing  an oil and gas tax                                                               
credit  fund and  authorizing payment  from that  fund; providing                                                               
for retroactive  application of certain statutory  and regulatory                                                               
provisions  relating to  the production  tax on  oil and  gas and                                                               
conservation  surcharges on  oil;  making conforming  amendments;                                                               
and providing for an effective date.'                                                                                           
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB2001                                                                                                                  
SHORT TITLE: OIL & GAS TAX AMENDMENTS                                                                                           
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
10/18/07       (S)       READ THE FIRST TIME - REFERRALS                                                                        
10/18/07       (S)       RES, JUD, FIN                                                                                          
10/19/07       (S)       RES AT 9:00 AM BUTROVICH 205                                                                           
10/19/07       (S)       Heard & Held                                                                                           
10/19/07       (S)       MINUTE(RES)                                                                                            
10/20/07       (S)       RES AT 8:00 AM BUTROVICH 205                                                                           
10/20/07       (S)       Heard & Held                                                                                           
10/20/07       (S)       MINUTE(RES)                                                                                            
10/21/07       (S)       RES AT 1:00 PM HOUSE FINANCE 519                                                                       
10/21/07       (S)       Heard & Held                                                                                           
10/21/07       (S)       MINUTE(RES)                                                                                            
10/22/07       (S)       RES AT 11:30 AM BUTROVICH 205                                                                          
10/22/07       (S)       Heard & Held                                                                                           
10/22/07       (S)       MINUTE(RES)                                                                                            
10/23/07       (S)       RES AT 9:00 AM BUTROVICH 205                                                                           
10/23/07       (S)       Heard & Held                                                                                           
10/23/07       (S)       MINUTE(RES)                                                                                            
10/24/07       (S)       RES AT 10:00 AM BUTROVICH 205                                                                          
10/24/07       (S)       Heard & Held                                                                                           
10/24/07       (S)       MINUTE(RES)                                                                                            
10/25/07       (S)       RES AT 10:00 AM BUTROVICH 205                                                                          
10/25/07       (S)       Heard & Held                                                                                           
10/25/07       (S)       MINUTE(RES)                                                                                            
10/26/07       (S)       RES AT 1:30 PM BUTROVICH 205                                                                           
10/26/07       (S)       Heard & Held                                                                                           
10/26/07       (S)       MINUTE(RES)                                                                                            
10/27/07       (S)       RES AT 9:00 AM BUTROVICH 205                                                                           
10/27/07       (S)       Moved CSSB2001(RES) Out of Committee                                                                   
10/27/07       (S)       MINUTE(RES)                                                                                            
10/28/07       (S)       RES AT 0:00 AM BUTROVICH 205                                                                           
10/28/07       (S)       -- MEETING CANCELED --                                                                                 
10/29/07       (S)       RES RPT CS  1NR 6AM   NEW TITLE                                                                        
10/29/07       (S)       NR: GREEN                                                                                              
10/29/07       (S)       AM: HUGGINS, MCGUIRE, STEVENS, STEDMAN,                                                                
                         WIELECHOWSKI, WAGONER                                                                                  
10/29/07       (S)       JUD AT 9:30 AM BUTROVICH 205                                                                           
10/29/07       (S)       Heard & Held                                                                                           
10/29/07       (S)       MINUTE(JUD)                                                                                            
10/30/07       (S)       JUD AT 9:00 AM BUTROVICH 205                                                                           
10/30/07       (S)       Heard & Held                                                                                           
10/30/07       (S)       MINUTE(JUD)                                                                                            
10/31/07       (S)       JUD AT 9:00 AM BUTROVICH 205                                                                           
10/31/07       (S)       Heard & Held                                                                                           
10/31/07       (S)       MINUTE(JUD)                                                                                            
11/01/07       (S)       JUD AT 9:00 AM BUTROVICH 205                                                                           
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
DAN DICKINSON, Consultant                                                                                                       
 to the Legislative Budget & Audit Committee                                                                                    
POSITION STATEMENT:  Testified and answered questions during                                                                  
hearing on SB 2001.                                                                                                             
                                                                                                                                
STEVE PORTER, Consultant                                                                                                        
 to the Legislative Budget & Audit Committee                                                                                    
POSITION STATEMENT:  Testified and answered questions during                                                                  
hearing on SB 2001.                                                                                                             
                                                                                                                                
MARILYN CROCKETT, Executive Director                                                                                            
Alaska Oil and Gas Association (AOGA)                                                                                           
POSITION STATEMENT:  Introduced Tom Williams and answered                                                                     
questions during hearing on SB 2001.                                                                                            
                                                                                                                                
TOM WILLIAMS, Chair                                                                                                             
Alaska Oil and Gas Association Tax Committee                                                                                    
POSITION STATEMENT:  Testified and answered questions during                                                                  
hearing on SB 2001.                                                                                                             
                                                                                                                                
JONATHAN IVERSEN, Director                                                                                                      
Tax Division                                                                                                                    
Department of Revenue                                                                                                           
Anchorage, AK                                                                                                                   
POSITION STATEMENT:  Testified and answered questions during                                                                  
hearing on SB 2001.                                                                                                             
                                                                                                                                
JULIE HOULE, Section Chief                                                                                                      
Resource Evaluation                                                                                                             
Division of Oil & Gas                                                                                                           
Department of Natural Resources                                                                                                 
Anchorage, AK                                                                                                                   
POSITION STATEMENT:  Testified and answered questions during                                                                  
hearing on SB 2001.                                                                                                             
                                                                                                                                
JACKIE STEWART                                                                                                                  
Juneau, AK                                                                                                                      
POSITION STATEMENT:  Testified on SB 2001 during public hearing.                                                              
                                                                                                                                
TIM ARNOLD                                                                                                                      
Juneau, AK                                                                                                                      
POSITION STATEMENT:  Testified on SB 2001 during public hearing.                                                              
                                                                                                                                
DONALD BENSON                                                                                                                   
Matanuska-Susitna Borough                                                                                                       
POSITION STATEMENT:  Testified on SB 2001 during public hearing.                                                              
                                                                                                                                
MARK SHARP                                                                                                                      
Fairbanks, AK                                                                                                                   
POSITION STATEMENT:  Voiced concerns during hearing on SB 2001.                                                               
                                                                                                                                
BUZZ OTIS                                                                                                                       
Great Northwest                                                                                                                 
Fairbanks, AK                                                                                                                   
POSITION STATEMENT:  Testified on SB 2001 during public hearing.                                                              
                                                                                                                                
JERRY McCUTCHEON                                                                                                                
Anchorage, AK                                                                                                                   
POSITION STATEMENT:  Stated concerns during hearing on SB 2001.                                                               
                                                                                                                                
STU GRENIER                                                                                                                     
Anchorage, AK                                                                                                                   
POSITION STATEMENT:  Testified on SB 2001 during public hearing.                                                              
                                                                                                                                
AVES THOMPSON, Executive Director                                                                                               
Alaska Trucking Association                                                                                                     
Anchorage, AK                                                                                                                   
POSITION STATEMENT:  Testified on SB 2001 and PPT issues.                                                                     
                                                                                                                                
JASON BRUNE, Executive Director                                                                                                 
Resource Development Council                                                                                                    
Anchorage, AK                                                                                                                   
POSITION STATEMENT:  Testified on SB 2001 and PPT.                                                                            
                                                                                                                                
JEFFREY KNAUF                                                                                                                   
Girdwood, AK                                                                                                                    
POSITION STATEMENT:  Testified in support of original SB 2001.                                                                
                                                                                                                                
EMILY FORD, Government and External Affairs Manager                                                                             
Anchorage Chamber of Commerce                                                                                                   
Anchorage, AK                                                                                                                   
POSITION STATEMENT:  Testified on SB 2001 and PPT.                                                                            
                                                                                                                                
JIM SYKES                                                                                                                       
Palmer, AK                                                                                                                      
POSITION STATEMENT:  Testified on SB 2001 during public hearing.                                                              
                                                                                                                                
DAWN MENDIAS                                                                                                                    
Chugiak, AK                                                                                                                     
POSITION STATEMENT:  Testified on SB 2001 during public hearing.                                                              
                                                                                                                                
SIG RUTTER                                                                                                                      
POSITION STATEMENT:  Testified on SB 2001 during public hearing.                                                              
                                                                                                                                
MARY AND JIM ODDEN                                                                                                              
Nelchina, AK                                                                                                                    
POSITION STATEMENT:  Testified on SB 2001 via a joint statement                                                               
read by Mary Odden.                                                                                                             
                                                                                                                                
MALCOLM RAY                                                                                                                     
Eagle River, AK                                                                                                                 
POSITION STATEMENT:  Voiced concerns during hearing on SB 2001.                                                               
                                                                                                                                
DANIEL B. WINN                                                                                                                  
Homer, AK                                                                                                                       
POSITION STATEMENT:  Testified on SB 2001 during public hearing.                                                              
                                                                                                                                
KELLY WALTERS                                                                                                                   
POSITION STATEMENT:  Testified on SB 2001 during public hearing.                                                              
                                                                                                                                
PAUL KENDALL                                                                                                                    
POSITION STATEMENT:  Voiced concerns during hearing on SB 2001.                                                               
                                                                                                                                
TOM LAKOSH                                                                                                                      
POSITION STATEMENT:  Voiced concerns during hearing on SB 2001.                                                               
                                                                                                                                
MARSHALL BYRD                                                                                                                   
Anchorage, AK                                                                                                                   
POSITION STATEMENT:  Testified on SB 2001 during public hearing.                                                              
                                                                                                                                
GLORIA DESROCHERS                                                                                                               
Fairbanks, AK                                                                                                                   
POSITION STATEMENT:  Testified on SB 2001 during public hearing.                                                              
                                                                                                                                
JARED HAMLIN                                                                                                                    
POSITION STATEMENT:  Testified on SB 2001 during public hearing.                                                              
                                                                                                                                
BILL WARREN                                                                                                                     
Nikiski, AK                                                                                                                     
POSITION STATEMENT:  Testified on SB 2001 during public hearing.                                                              
                                                                                                                                
JIM ADAMS                                                                                                                       
Nome, AK                                                                                                                        
POSITION STATEMENT:  Testified on SB 2001 during public hearing.                                                              
                                                                                                                                
RANDY SELMAN                                                                                                                    
Wasilla, AK                                                                                                                     
POSITION STATEMENT:  Testified on SB 2001 during public hearing.                                                              
                                                                                                                                
SHANNYN MOORE                                                                                                                   
POSITION STATEMENT:  Testified on SB 2001 during public hearing.                                                              
                                                                                                                                
JOHN RANDALL                                                                                                                    
Wasilla, AK                                                                                                                     
POSITION STATEMENT:  Testified on SB 2001 during public hearing.                                                              
                                                                                                                                
STEVE MORAWITZ                                                                                                                  
Wasilla, AK                                                                                                                     
POSITION STATEMENT:  Testified on SB 2001 during public hearing.                                                              
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR  HOLLIS   FRENCH  called  the  Senate   Judiciary  Standing                                                             
Committee meeting to order at 9:05:24  AM. Present at the call to                                                             
order were  Senators Huggins, McGuire,  Therriault, Wielechowski,                                                               
and  Chair  French. Also  in  attendance  were Senators  Stevens,                                                               
Davis, Wagoner, Green, Ellis, and Thomas.                                                                                       
                                                                                                                                
9:05:42 AM                                                                                                                    
                SB 2001-OIL & GAS TAX AMENDMENTS                                                                            
                                                                                                                                
CHAIR FRENCH  announced the  consideration of  SB 2001.   Members                                                               
would  hear from  the legislative  consultants about  net-versus-                                                               
gross tax systems  and other topics including  their reactions to                                                               
the model presented yesterday by  Rich Ruggiero and Bob George of                                                               
Gaffney Cline  & Associates  (Gaffney Cline).   They'd  also hear                                                               
from  the Alaska  Oil and  Gas Association  (AOGA) on  net versus                                                               
gross.   Then  a few  cleanup  matters relating  to legal  issues                                                               
would be  addressed; these include  the size of  settlements from                                                               
litigation  and royalty  versus  tax.   The administration  might                                                               
provide input about  defining the point of  production; a handout                                                               
was  available.   There  also might  be  testimony about  sharing                                                               
information.  Public testimony was scheduled for the evening.                                                                   
                                                                                                                                
^Dan  Dickinson, Consultant  to  the Legislative  Budget &  Audit                                                               
Committee                                                                                                                       
DAN  DICKINSON,  Consultant to  the  Legislative  Budget &  Audit                                                               
Committee, concurred with yesterday's  testimony about net versus                                                               
gross.   He indicated  Commissioner Galvin  of the  Department of                                                               
Revenue (DOR)  had articulated  a number  of things  clearly, and                                                               
Gaffney  Cline had  laid  out the  reasons a  net  tax is  always                                                               
preferable to a gross tax  when focusing on investment objectives                                                               
and trying to have a degree of progressivity.                                                                                   
                                                                                                                                
MR.  DICKINSON  told members  he'd  always  heard that  the  main                                                               
reason for wanting a gross tax  is because of lack of trust, that                                                               
somehow companies  will find a  way to increase  their deductions                                                               
and  manipulate  it so  the  state  gets  nothing.   He  gave  an                                                               
historical perspective,  saying he'd  spent seven or  eight years                                                               
involved with the  Amerada Hess litigation, which  was related to                                                             
royalty under the net system.                                                                                                   
                                                                                                                                
9:08:32 AM                                                                                                                    
MR. DICKINSON, in  response to Chair French, said  he'd worked as                                                               
a  consultant on  that, building  models  and doing  quantitative                                                               
work, and then as the  liaison between the litigation team headed                                                               
by Wil  Condon and  the settlement team  headed by  Julian Mason.                                                               
He explained that  the Amerada Hess litigation was  filed in June                                                             
1977, within  days of the  first oil going into  the Trans-Alaska                                                               
Pipeline  System (TAPS),  and it  proceeded throughout  the 1970s                                                               
and  1980s.   The  case  was  called  Amerada Hess  because  that                                                             
company  was  listed  first  alphabetically;  when  that  company                                                               
settled in  perhaps 1989,  it became the  Arco case  because Arco                                                             
was listed  next; and when  Arco settled, it became  Amerada Hess                                                             
et. al. because people didn't want to keep changing the title.                                                                
                                                                                                                                
MR. DICKINSON said final settlement  of those issues didn't occur                                                               
until 1996  or perhaps 1997.   Thus there was nearly  20 years of                                                               
litigation about a so-called simple  gross royalty.  Referring to                                                               
a question  from Senator  Wielechowski previously,  he emphasized                                                               
that this wasn't  just fighting about one deduction.   There were                                                               
huge  issues.   For  the first  10  or 15  years,  the big  issue                                                               
related to the value of the oil.                                                                                                
                                                                                                                                
MR. DICKINSON observed  that now people are  accustomed to having                                                               
a  publicly  reported spot  price,  futures,  NYMEX, and  a  huge                                                               
market in what are called "paper  barrels" that are traded - much                                                               
larger than  the number of  liquid barrels traded.   In addition,                                                               
there are  three reporting-assessment  services to  which someone                                                               
can subscribe,  and many newspapers  publish information.   There                                                               
is constant talk of "the price  of oil."  In the 1980's, however,                                                               
the so-called official  price was typically set  by Saudi Arabia,                                                               
although other  companies had official  prices.  "We  didn't know                                                               
how much  our oil was  worth," he  said, characterizing oil  as a                                                               
barter game, a barter business.                                                                                                 
                                                                                                                                
MR.  DICKINSON  explained  that  companies  have  production  and                                                               
refineries all over the world.   Rather than taking their own oil                                                               
to their  refineries, they get  oil from the  nearest production.                                                               
Thus barrels  get traded, all over  the place.  For  example, one                                                               
tanker from Saudi Arabia contained  oil that had changed hands 27                                                               
times  before it  hit  the Gulf  coast.   There  also were  price                                                               
controls.  He recalled in  1980, under President Carter's "phased                                                               
decontrol," every month  part of a barrel had a  price control on                                                               
it and part  didn't; every month it changed.   It was a nightmare                                                               
to figure out the value.                                                                                                        
                                                                                                                                
9:12:09 AM                                                                                                                    
MR. DICKINSON  continued with the  history, noting Mark  Rich was                                                               
pardoned for  the crime of  buying tankers of controlled  oil and                                                               
selling  it  as  uncontrolled  oil.   The  controlled  price  was                                                               
perhaps $6 or $7, whereas the  decontrolled price was $30.  "Huge                                                               
fights,"  Mr. Dickinson   remarked.    Under   President  Reagan,                                                               
decontrol went away.  But the  windfall profits tax came in, with                                                               
a series of challenges.   For example, Prudhoe Bay was controlled                                                               
under  one  regime and  Kuparuk  under  another.   This  required                                                               
tracing the oil.  A huge panoply of issues focused around price.                                                                
                                                                                                                                
MR. DICKINSON added  that a small group of  DOR auditors grappled                                                               
with that  issue for  15 years;  simultaneously, it  was grappled                                                               
with on  the royalty side.   It never went  all the way  to court                                                               
because  both sides  had fairly  decent arguments.   By  the time                                                               
those cases  settled out,  billions of dollars  had been  paid to                                                               
the state, including interest.                                                                                                  
                                                                                                                                
9:13:42 AM                                                                                                                    
CHAIR FRENCH welcomed Senators Stevens and Davis.                                                                               
                                                                                                                                
SENATOR  THERRIAULT  referred to  the  dispute  over the  royalty                                                               
valuation; he recalled  testimony yesterday that because  it is a                                                               
contractual arrangement, litigation might  take longer.  However,                                                               
what is  being discussed with PPT  - known as both  the petroleum                                                               
production  tax and  the petroleum  profits  tax -  relates to  a                                                               
sovereign entity  carrying on  its duties.   Thus there  is hope,                                                               
though no guarantee,  that the litigation track on  that would be                                                               
less,  because  the  courts   give  the  agencies  administrative                                                               
discretion.                                                                                                                     
                                                                                                                                
MR. DICKINSON responded that he  believes the record would almost                                                               
exactly prove Senator Therriault's point.   Noting he was talking                                                               
about information  in the  public record,  Mr. Dickinson  said if                                                               
one looks at  price control and the "bubble era"  until the price                                                               
crashed  in 1986  - the  first ten  years of  Alaska North  Slope                                                               
(ANS)  production  -  two  cases, involving  BP  and  Arco,  were                                                               
resolved earlier  than Amerada  Hess.  But  for Exxon,  the third                                                             
major  producer, it  took a  couple of  years longer  to finalize                                                               
settlement of the tax issues than for Amerada Hess.                                                                           
                                                                                                                                
MR. DICKINSON added  that said he was being  a little simplistic,                                                               
because Amerada  Hess had TAPS as  the first big issue;  then the                                                             
pricing issue, which dominated that;  and then the tanker issues.                                                               
In conclusion,  however, he agreed it  can go on a  quicker track                                                               
for tax issues.                                                                                                                 
                                                                                                                                
SENATOR  THERRIAULT  surmised  that  instead of  arguing  over  a                                                               
definition  of  price  or  delivery   point,  for  instance,  the                                                               
standard  is whether  the tax  system is  fair or  whether it  is                                                               
applied  in  an  arbitrary  or capricious  manner;  if  not,  the                                                               
decision typically goes with the sovereign entity.                                                                              
                                                                                                                                
9:16:15 AM                                                                                                                    
MR. DICKINSON  replied yes and  no.  If  the statute uses  a term                                                               
like "price"  or "value,"  the question that  arises is  what was                                                               
meant.  Those  words still have to have meaning  brought to them,                                                               
and  the  government  doesn't   automatically  prevail  over  the                                                               
taxpayer.   There is a  question of who  has the burden  of proof                                                               
and so forth.                                                                                                                   
                                                                                                                                
MR. DICKINSON  referred to  Spencer Hosie's  memo, saying  he was                                                               
talking about  how long  one goes  through the  internal process.                                                               
In support of Senator  Therriault's point, Mr. Dickinson recalled                                                               
that Mr. Hosie  had said once something leaves what  was then the                                                               
office of  tax appeals - now  the administrative law judge  - and                                                               
goes to  court, it  is just  like any  other court  dispute, with                                                               
discovery and so  on.  It may not be  like a contractual dispute,                                                               
but the  state is essentially  just another party in  court along                                                               
with the defendant.   The case he'd mentioned  earlier would have                                                               
moved through the internal appeals more quickly.                                                                                
                                                                                                                                
9:18:02 AM                                                                                                                    
SENATOR  WIELECHOWSKI  asked  whether there  are  regulations  in                                                               
effect that deal with write-offs  under the net-profit section in                                                               
the royalty statutes, AS 38.05.180.                                                                                             
                                                                                                                                
MR. DICKINSON affirmed that.                                                                                                    
                                                                                                                                
SENATOR  WIELECHOWSKI asked  where those  regulations are  in the                                                               
Alaska  Administrative Code  (AAC).   He suggested  Mr. Dickinson                                                               
could tell him later.                                                                                                           
                                                                                                                                
MR. DICKINSON said those  regulations are specifically referenced                                                               
in the PPT law as a  standard the state can consider, among other                                                               
things, when writing its regulations for the tax.                                                                               
                                                                                                                                
SENATOR WIELECHOWSKI  explained that he has  been hearing concern                                                               
from  people in  his district  about lease  expenditures as  they                                                               
relate  to the  deductions.   He said  there are  no regulations,                                                               
although regulations were promised last year within 30 days.                                                                    
                                                                                                                                
MR. DICKINSON replied  he wasn't sure it  was physically possible                                                               
to do it in 30 days.  The minimum process is about 120 days.                                                                    
                                                                                                                                
SENATOR  WIELECHOWSKI  recalled  hearing  they'd  be  rolled  out                                                               
within 30 days.                                                                                                                 
                                                                                                                                
9:18:50 AM                                                                                                                    
MR. DICKINSON said there are  regulations in place that deal with                                                               
lease  expenditures,  although they  might  not  deal with  great                                                               
specificity for those portions.   In further response, he said he                                                               
believes those are part of the AAC, fully adopted.                                                                              
                                                                                                                                
SENATOR WIELECHOWSKI  asked whether work currently  is being done                                                               
on new regulations to further define lease expenditures.                                                                        
                                                                                                                                
MR. DICKINSON answered that those  specific concerns were put off                                                               
"for a phase two."  What  is expressed in the current regulations                                                               
may be viewed as more general.                                                                                                  
                                                                                                                                
9:19:49 AM                                                                                                                    
SENATOR  WIELECHOWSKI  explained  that the  concern  relating  to                                                               
lease expenditures  is this  tremendous gray area  of what  is or                                                               
isn't a cost.   He asked about ways to tighten  it in the current                                                               
legislation.  He  asked whether it is possible to  tie either the                                                               
regulations  or  auditing   requirements  to  federal  Securities                                                               
Exchange  Commission (SEC)  and  Internal  Revenue Service  (IRS)                                                               
filings.  Those are much stricter, with heavier penalties.                                                                      
                                                                                                                                
MR.  DICKINSON answered  not  only  is it  possible,  but to  the                                                               
extent it's  feasible, "we've  done that."   Because the  SEC and                                                               
IRS are  federal agencies, what exists  is a negative test.   For                                                               
example, a  company cannot  get a capital  credit unless  it told                                                               
the federal government  it was a capital  investment.  Typically,                                                               
companies  try to  move  things to  the expense  side  to get  an                                                               
immediate write-off; for something  labeled "capital" there is no                                                               
write-off until it  is placed in service, and then  there is a 5-                                                               
or 6- or 10- or 19-year write-off.                                                                                              
                                                                                                                                
MR. DICKINSON  noted a company  looks at its  worldwide expenses.                                                               
The  problem is  how  to parse  Alaska  expenses from  non-Alaska                                                               
expenses, because the  SEC and IRS don't really care.   The large                                                               
companies have  interrelationships in  certain fields  in Alaska,                                                               
and thus they'll  look over their shoulder and  audit expenses of                                                               
the other  companies.   He said  this was one  attempt to  get at                                                               
that  problem.   Clearly,  there are  places  where that  doesn't                                                               
work,  such   as  Badami  and   Milne  Point,  which   are  owned                                                               
100 percent by BP; there is  no second-guessing there, and nobody                                                               
looking over the shoulder.                                                                                                      
                                                                                                                                
MR. DICKINSON  said people  can also  create scenarios,  such as:                                                               
What  if Exxon  agrees to  overpay  in Prudhoe  Bay, meaning  the                                                               
State of Alaska bears  the brunt, and then they get  it back in a                                                               
different field  Exxon operates for  BP?  He  personally believes                                                               
such  behavior  isn't seen  frequently.    Rather, auditors  from                                                               
Exxon  typically look  at  Prudhoe Bay  with  respect to  keeping                                                               
costs down.                                                                                                                     
                                                                                                                                
9:23:32 AM                                                                                                                    
MR.  DICKINSON  suggested what  one  oil  company is  willing  to                                                               
reimburse another company for is  a pretty good standard - though                                                               
not  perfect -  of  how  to capture  the  costs,  looking at  the                                                               
tensions that  exist among these  different companies.   He added                                                               
that when  the department writes  regulations, he isn't  sure how                                                               
much  more specific  it  can get.   He  expressed  hope that  the                                                               
department's list won't be ten  pages long, because some of those                                                               
will  be  vague  and  folks  will  have  to  figure  out  whether                                                               
something is included or not.                                                                                                   
                                                                                                                                
SENATOR  WIELECHOWSKI noted  the  statute  says producers'  lease                                                               
expenditures for a calendar year  include costs.  The question is                                                               
how to  define costs to  be written  off, although there  is some                                                               
guidance  and statutory  reference.   He  said this  is a  highly                                                               
important area, and  he didn't know that the  committee had spent                                                               
enough time  on it.  Potentially.  $1 billion could be  coming to                                                               
the state and yet a company  could claim costs of $800 million to                                                               
write off.                                                                                                                      
                                                                                                                                
9:25:25 AM                                                                                                                    
MR. DICKINSON responded  that the language says costs  have to be                                                               
actual, direct,  ordinary and necessary  - which ties to  the IRS                                                               
filter - costs of exploring  for, developing, or producing oil or                                                               
gas.  In some sense,  it's a broad category, everything necessary                                                               
to find  the oil, get  it out of  the ground,  and get it  into a                                                               
pipeline.   But  it doesn't  include the  kinds of  things people                                                               
have talked about such as lobbying costs, donations, and so on.                                                                 
                                                                                                                                
SENATOR  WIELECHOWSKI replied,  "We've asked  DOR about  that and                                                               
they said, 'Well,  we don't think it is, but  we can't really say                                                               
for sure.'"  He reiterated that it is a big gray area.                                                                          
                                                                                                                                
MR.  DICKINSON  responded that  he  believes  DOR's question  was                                                               
whether those have been included  in the costs the companies have                                                               
filed.   He  indicated  the department  doesn't  know because  it                                                               
hasn't audited  yet.  He  clarified that he'd been  talking about                                                               
whether,  if DOR  found those  things, it  could simply  say they                                                               
weren't allowed.   He opined that appeals  officers and everybody                                                               
who has read  the statute should hold the department  up on that,                                                               
agreeing  it was  inappropriate.   Rather than  what is  or isn't                                                               
included,  he was  saying what  should  or shouldn't  be, and  an                                                               
audit would reveal how closely those two match.                                                                                 
                                                                                                                                
9:27:07 AM                                                                                                                    
CHAIR  FRENCH noted  it is  easy to  measure gross  value at  the                                                               
point of production.   But the new variable, the  new black hole,                                                               
is costs, which  were 100 percent over what was  projected.  What                                                               
if  they're wrong  again?   He said  he didn't  know whether  the                                                               
legislature had the  political will to come back  and tinker with                                                               
the system once again, and a mistake might remain for a decade.                                                                 
                                                                                                                                
MR.  DICKINSON  highlighted  two possible  interpretations  of  a                                                               
100 percent increase in  costs.   One is that  folks got together                                                               
and found invoices they hadn't  found before; such issues will be                                                               
addressed by  the auditors.   The  other is  that as  prices rose                                                               
dramatically, those  who provide things to  oil service companies                                                               
raised prices,  and companies wanting  to get production  on line                                                               
quickly met those  prices; thus the economic  wealth flowing from                                                               
having a  commodity sell for $80  a barrel - when  the investment                                                               
was  made  with  an  expectation  of $30  -  was  distributed  to                                                               
everyone  who  served  that  industry.    He  said  if  the  cost                                                               
structure  has indeed  gone  up, the  state  needs to  understand                                                               
that; it clearly wasn't anticipated previously.                                                                                 
                                                                                                                                
MR.  DICKINSON  added that  the  commissioner  was articulate  in                                                               
pointing  out  that if  there  were  a  gross tax  that  couldn't                                                               
accommodate such  change, possibilities  might be  eliminated for                                                               
development  in  areas that  weren't  anticipated.   Thus  it  is                                                               
important  to distinguish  between costs  rising inappropriately,                                                               
which auditors  can ferret  out, and  rising as  an unanticipated                                                               
consequence of this being a new world, with $90 oil.                                                                            
                                                                                                                                
CHAIR FRENCH asked Mr. Porter to  comment on net versus gross and                                                               
other  aspects of  the tax  system being  contemplated.   Then he                                                               
asked to hear  from Mr. Porter and Mr. Dickinson  about the model                                                               
presented yesterday  by Gaffney  Cline, including  internal rates                                                               
of return (IRRs) on North  Slope production, at least for Kuparuk                                                               
and Prudhoe Bay.                                                                                                                
                                                                                                                                
9:29:55 AM                                                                                                                    
^Steve  Porter,  Consultant to  the  Legislative  Budget &  Audit                                                               
Committee                                                                                                                       
STEVE  PORTER,  Consultant  to the  Legislative  Budget  &  Audit                                                               
Committee,  reinforced what  Mr. Dickinson  had said,  noting PPT                                                               
may have  worked exactly  as it  should have,  but "we  just were                                                               
surprised  by the  numbers."   The companies  can't just  come up                                                               
with $800 million out of the air.   It must be actual costs.  The                                                               
padding will be when they  take actual costs from Houston, Texas,                                                               
or another project  that is marginally related.   The question is                                                               
whether there is a direct relationship.                                                                                         
                                                                                                                                
MR.  PORTER said  he'd  never  seen an  audit  where the  auditor                                                               
didn't  disallow  something.    A percentage  of  items  will  be                                                               
disallowed,   based   on    a   difference   of   interpretation.                                                               
Corporations  are corporations.   They'll  look at  the law.   If                                                               
they  think a  cost  may be  allowed,  they'll put  it  in.   The                                                               
state's  auditors will  then  look  at it  and  may interpret  it                                                               
differently.  This is a common debate.                                                                                          
                                                                                                                                
MR. PORTER  noted each time  a tax is  changed, a level  of legal                                                               
uncertainty is  created, new interpretations  of the law.   It is                                                               
to  be  expected, whether  the  system  is  gross  or net.    The                                                               
responsibility with respect  to this law is to  tighten the range                                                               
of  things over  which there  might be  a difference  of opinion.                                                               
Over the next four or five  years, more certainty will be created                                                               
through regulation and  litigation.  He said it isn't  an area he                                                               
is concerned about because it takes time, money, and process.                                                                   
                                                                                                                                
MR. PORTER highlighted a longer-term  need to build a system that                                                               
stands the  test of  time.   In his world,  that means  15 years.                                                               
Whether it's gross  or net, the need is for  a system that works,                                                               
not worrying about  gaming.  He said gaming doesn't  occur.  What                                                               
occurs is  people looking out for  their own best interests.   If                                                               
that occurs, it will happen over  the next four or five years and                                                               
then get tightened down to where it  isn't as big a problem as in                                                               
the past.                                                                                                                       
                                                                                                                                
MR.  PORTER cited  oil and  gas settlements  as an  example where                                                               
there have been  huge fights but a small  differential.  Although                                                               
the present  concerns are  valid, he  emphasized making  sure the                                                               
tax is right.   It will bring in many  billions of dollars, while                                                               
the  fights  will  be  over   millions  of  dollars.    Thus  the                                                               
legislature must recognize the perspective  and get the structure                                                               
right, ensuring  conflict is  minimized after that.   If  this is                                                               
done, legislators will have done their job.                                                                                     
                                                                                                                                
9:35:19 AM                                                                                                                    
CHAIR FRENCH said 15 years strikes  him as about the best one can                                                               
hope for.  In his view,  the last significant change was in 1989,                                                               
and around 2004 it  was time to make a change.   Better late than                                                               
never, he added.                                                                                                                
                                                                                                                                
CHAIR FRENCH welcomed Senator Wagoner.                                                                                          
                                                                                                                                
SENATOR THERRIAULT  remarked that the  desire to achieve  that 10                                                               
to  15   years  -  without   being  able  to   anticipate  price,                                                               
production,  whether it  is heavy  oil, and  so on  - has  really                                                               
factored  into  his  moving  from  gross towards  the  net.    He                                                               
recalled testimony that a highly  workable gross-based system can                                                               
be  perfect  for  today's  scenario with  respect  to  price  and                                                               
production and  yet get out of  balance in a year  or five years.                                                               
Thus it  seems the  net mechanism  is a large  part of  trying to                                                               
achieve 10  or 15 years'  worth of stability, because  the system                                                               
internally corrects for those little  things and hopefully treats                                                               
both  sides  fairly so  stability  can  be  achieved.   He  asked                                                               
whether that is true.                                                                                                           
                                                                                                                                
9:37:00 AM                                                                                                                    
MR. PORTER  answered that when he  came up here, he  was thinking                                                               
about  progressivity,  initially   thinking  perhaps  it  doesn't                                                               
matter whether it is a gross or  net tax.  The more he works with                                                               
the  numbers,  however,  the more  what  Senator  Therriault  was                                                               
talking about  occurs:   The gross  is more  static, and  the net                                                               
allows the tax itself to be  more stable for a longer time period                                                               
before  getting  into a  discontinuity  -  a  lack of  balance  -                                                               
between what the  state and the industry are receiving.   Thus he                                                               
is  now  supportive   of  a  net  system   from  a  progressivity                                                               
standpoint.  It provides the most flexibility.                                                                                  
                                                                                                                                
SENATOR HUGGINS offered  an analogy to football posed  by some of                                                               
his  constituents,  concluding  that  a net  system  allows  some                                                               
dexterity and flexibility  so the team isn't  stuck with whatever                                                               
play was called in the huddle.                                                                                                  
                                                                                                                                
9:38:51 AM                                                                                                                    
SENATOR McGUIRE gave an analogy  of individual property tax based                                                               
on how many  improvements are made to ones' house,  with a higher                                                               
rate unless  improvements are made.   The  flat rate is  like the                                                               
gross-based tax,  paid no matter what.   It is simple,  but there                                                               
is  no   incentive  to  make   improvements.     She  highlighted                                                               
incentivizing  behavior with  carrots and  sticks, saying  hyper-                                                               
progressivity is  fine, since more  is taken when  companies make                                                               
more, but it ought to be based on net.                                                                                          
                                                                                                                                
CHAIR   FRENCH  concurred,   suggesting  important   "sticks"  to                                                               
maintain  are an  aggressive auditing  capability and  aggressive                                                               
penalties.   He cited  the IRS  as an entity  that puts  a little                                                               
fear  into  people's  minds  about  taxes.    He  estimated  that                                                               
worldwide Exxon  makes $100 million  in profits daily.   Required                                                               
is  a penalty  commensurate with  its financial  standing.   When                                                               
looking at  the broad picture, therefore,  the legislature should                                                               
keep  everyone  on  the  straight  and  narrow  through  auditing                                                               
capabilities and penalties.                                                                                                     
                                                                                                                                
SENATOR  WIELECHOWSKI returned  to direct  costs.   He referenced                                                               
AS 43.55.165(b)(1)(A),  Section  57 of  Version  A  of the  bill,                                                               
which read in part:                                                                                                             
                                                                                                                                
     (b) For purposes of (a) of this section,                                                                                   
          (1) direct costs include                                                                                              
               (A) an expenditure, when incurred, to                                                                            
     acquire an item if the  acquisition cost is otherwise a                                                                    
     direct cost,  notwithstanding that the  expenditure may                                                                    
     be required  to be  capitalized rather than  treated as                                                                    
     an expense  for financial accounting or  federal income                                                                    
     tax purposes;                                                                                                              
                                                                                                                                
He expressed concern that this  language allows a capital item to                                                               
be treated as an operating expense.                                                                                             
                                                                                                                                
MR.  DICKINSON explained  that when  a dollar  is spent,  whether                                                               
capital  or operating,  it  is  allowed as  a  deduction.   Under                                                               
current law, 22.5 cents of that  comes out of the state's pocket.                                                               
The  company  immediately  deducts  both  capital  and  operating                                                               
costs.  For  capital costs, then, there is  an additional credit.                                                               
But in that first rank they're treated identically.                                                                             
                                                                                                                                
9:43:34 AM                                                                                                                    
SENATOR  WIELECHOWSKI  asked  about tightening  the  language  to                                                               
define  operating  expenses  as  defined  by  general  accounting                                                               
practices, rather than as costs.                                                                                                
                                                                                                                                
MR. DICKINSON  opined that "we  have a tighter standard."   There                                                               
are generally  accepted accounting  principles and  the "ordinary                                                               
and  necessary" test  used  by  the IRS.    He  said he  believes                                                               
"ordinary  and  necessary"  will  be a  tighter  standard.    But                                                               
there's always a question of whether  to look at book or tax, and                                                               
there are different sets of rules for various things.                                                                           
                                                                                                                                
MR. DICKINSON explained,  "What we opted for, in general  - and I                                                               
think you'll see this in the regulations  as well - is to look at                                                               
the tax  rules and  tax timing,  when that  was available."   The                                                               
generally accepted  accounting standards  won't help  in figuring                                                               
out what's an  Alaskan cost and what isn't,  for example, because                                                               
those  deal with  how a  company reports  its operations  and its                                                               
balance sheet to the rest of the world.                                                                                         
                                                                                                                                
SENATOR WIELECHOWSKI noted  Section 56 of Version A  of the bill,                                                               
page  46, talks  about a  reasonable allowance  for the  calendar                                                               
year as determined under regulations by the department.                                                                         
                                                                                                                                
AN UNIDENTIFIED SPEAKER said it's  Section 19 of Version M, which                                                               
is CSSB 2001(RES); the language is on page 16.  Lines 9-11 read:                                                                
                                                                                                                                
          (2) a reasonable allowance for that calendar                                                                          
     year, as  determined under  regulations adopted  by the                                                                    
     department,  for overhead  expenses  that are  directly                                                                    
     related to exploring for,  developing, or producing, as                                                                    
     applicable, the oil or gas deposits.                                                                                       
                                                                                                                                
SENATOR  WIELECHOWSKI  interpreted  this  to be  defining  it  in                                                               
regulation such that a reasonable  allowance for directly related                                                               
overhead  is 9  percent.   But  it doesn't  say  what a  directly                                                               
related  expenditure is  when it  comes  to overhead.   He  asked                                                               
whether the committee might want to tighten it up.                                                                              
                                                                                                                                
9:46:08 AM                                                                                                                    
MR. DICKINSON  asked whether he  was referring to the  9 percent,                                                               
to the Department of Natural Resources (DNR) regulations.                                                                       
                                                                                                                                
SENATOR WIELECHOWSKI affirmed that.                                                                                             
                                                                                                                                
MR. DICKINSON  said most  of the  rest is  saying, "Here  are the                                                               
direct costs."  He apologized that  he didn't have it in front of                                                               
him.   He said  it is carefully  defined, because  otherwise it's                                                               
not allowed.   When identifying what's allowable,  usually one is                                                               
also defining what's direct.   Typically, everything allowed gets                                                               
that 9  percent markup.  There  isn't really a third  category of                                                               
things that are allowed but not considered direct.                                                                              
                                                                                                                                
9:47:03 AM                                                                                                                    
SENATOR McGUIRE asked whether joint  or common costs are excluded                                                               
currently.  She referred to page  4 of a memo from Spencer Hosie,                                                               
forwarded by Marcia Davis.   Senator McGuire noted the discussion                                                               
was  about potential  complexities  of administering  a net  tax,                                                               
including that,  through time and  evolution, a heavy  audit will                                                               
probably ferret out a lot of  these things.  One concern would be                                                               
inappropriate joint or  common costs that a company  may pass on.                                                               
She asked  whether there is a  way to specify that  a direct cost                                                               
excludes a percentage of those, or some other definition.                                                                       
                                                                                                                                
MR.  DICKINSON agreed  it's possible,  but the  problem would  be                                                               
defining joint  costs, figuring  out how  much is  applicable and                                                               
how much  isn't.  With  respect to  PPT, he said  he'd personally                                                               
spent  a year  and got  to meet  some of  the world's  experts on                                                               
joint costs  because there  was a central  gas facility  that was                                                               
making  things for  production as  well as  for sale.   For  this                                                               
billion-dollar facility,  the largest of  its kind in  the world,                                                               
they'd  had  to   figure  out  whether  each  bolt   or  nut  was                                                               
deductible.   This  is one  reason the  legislature passed  a law                                                               
that said  there is  a circle  drawn around  the North  Slope and                                                               
that all the operations there are deductible.                                                                                   
                                                                                                                                
MR. DICKINSON  surmised an issue might  occur if a company  has a                                                               
strategic initiative  to monetize  heavy gas and  has a  bunch of                                                               
scientists  that  spend  six  months in  Alaska  working  on  the                                                               
project  and have  another demonstration  plant  in Calgary,  for                                                               
instance.   Somebody would have to  figure out how much  of their                                                               
time is Alaskan and how much  isn't.  He'd rather have an auditor                                                               
do that -  with a general prescription  that says it has  to be a                                                               
direct cost  of developing, finding,  or producing - than  to say                                                               
joint costs will be split 50-50.                                                                                                
                                                                                                                                
9:50:11 AM                                                                                                                    
SENATOR  McGUIRE asked  about creating  a rebuttable  presumption                                                               
that  joint or  common costs  are excluded  and it  is up  to the                                                               
company to prove otherwise.  The burden would be on the company.                                                                
                                                                                                                                
MR. DICKINSON said that could be  done, but the issue won't be to                                                               
exclude them.  They won't come  in unless they actually have some                                                               
relationship  to   Alaska;  then  the  question   would  be  what                                                               
percentage applies.   He  opined that it  isn't desirable  to say                                                               
that if  a company decides to  develop heavy oil and  thus spends                                                               
half  its time  looking at  Alaska  and half  looking at  another                                                               
heavy   oil  deposit   elsewhere,  then   Alaska  would   exclude                                                               
100 percent of those costs.                                                                                                     
                                                                                                                                
SENATOR  McGUIRE agreed,  saying that  is a  great analogy.   Any                                                               
company's promotion of developing  heavy oil, even worldwide, may                                                               
ultimately benefit  Alaska.  However,  in the example  where half                                                               
is  in Calgary  and half  in Alaska,  clearly the  state wouldn't                                                               
want to  allow for the  deduction in  Calgary.  She  again asked:                                                               
Given that  the state  doesn't have the  resources -  although it                                                               
will try to  hire more expert auditors - what  about shifting the                                                               
burden of  proof to  the company,  with a  rebuttable presumption                                                               
against joint or common costs?                                                                                                  
                                                                                                                                
9:51:59 AM                                                                                                                    
MR. DICKINSON  reiterated that it  could be done, but  there'd be                                                               
separate fights  about whether something  was a joint  and common                                                               
cost.   There are lots of  debates about the point  at which some                                                               
common  elements  truly become  common  costs,  rather than  just                                                               
corporate  overhead  that  the  state  excludes.    While  seeing                                                               
Senator  McGuire's   point,  he   expressed  concern   about  the                                                               
applicability.  However, the case  just talked about is one where                                                               
it might work.                                                                                                                  
                                                                                                                                
SENATOR  WIELECHOWSKI  referred  to  Section  20  of  Version  M,                                                               
page 17, lines 8-11, which reads in part:                                                                                       
                                                                                                                                
               (B) standards adopted by the Department of                                                                       
     Natural Resources that determine  the costs, other than                                                                    
     items listed in  (e) of this section, that  a lessee is                                                                    
     allowed  to  deduct  from revenue  in  calculating  net                                                                    
     profits    under    a    lease    issued    under    AS                                                                    
     38.05.180(f)(3)(B), (D), or (E).                                                                                           
                                                                                                                                
He asked how "net profits" is defined.                                                                                          
                                                                                                                                
MR.  DICKINSON replied  most  royalties on  the  North Slope  are                                                               
under a  DL-1 lease.   In the 1980s, people  responding precisely                                                               
to  the concerns  mentioned today  had asked  whether gross-based                                                               
royalties are  best; they wanted  to try net royalties.   There'd                                                               
be a  base rate paid, but  also a development account  into which                                                               
all costs would go.  When  a profit was finally made, the company                                                               
would pay  the state some percentage.   The bids on  that went as                                                               
high as 80 percent of those net profits, to his recollection.                                                                   
                                                                                                                                
MR. DICKINSON said  what this language refers to  is the specific                                                               
regulations.   Mentioning Endicott, a  couple of leases  at Milne                                                               
Point, and  some left  at Kuparuk,  he said  at the  maximum he'd                                                               
guess 7-10  percent of oil  production is from leases  defined as                                                               
net profit share leases (NPSLs).                                                                                                
                                                                                                                                
9:54:56 AM                                                                                                                    
SENATOR WIELECHOWSKI asked  whether there is a  definition of net                                                               
profits in the regulations.                                                                                                     
                                                                                                                                
MR.  DICKINSON replied  there is  a  definition of  what the  net                                                               
profit share applies  against.  These regulations  say what costs                                                               
can be put  into the development account.  There  is an important                                                               
reason  why  there  are  only specific  things  mentioned.    For                                                               
example, the time value of money  is recognized in the net profit                                                               
share.    As  money  sits  in  the  development  account,  it  is                                                               
multiplied by  an interest component;  there is a  carrying cost.                                                               
Under  PPT,  it's  explicit  that  financing  costs  are  not  an                                                               
allowable deduction.  Thus it's a little different.                                                                             
                                                                                                                                
MR. DICKINSON  added that how one  looks at the value  of the oil                                                               
or gas  is part of DNR's  regulations; the amount of  profit once                                                               
it reaches  payout has  to do  with those things.   This  is very                                                               
different  from the  standards  in  the tax  statute.   The  four                                                               
sections there focus on cost deductions.                                                                                        
                                                                                                                                
9:56:17 AM                                                                                                                    
CHAIR FRENCH asked whether Mr.  Porter and Mr. Dickinson had been                                                               
able  to  review  the  model  presented  yesterday  afternoon  by                                                               
Gaffney Cline.                                                                                                                  
                                                                                                                                
MR. PORTER replied no.                                                                                                          
                                                                                                                                
MR. DICKINSON  said they'd  requested a copy  and had  heard they                                                               
may  be able  to get  it  soon.   He  offered to  comment on  the                                                               
details after seeing  it, and said they could  comment in general                                                               
now with respect to testimony yesterday.                                                                                        
                                                                                                                                
CHAIR FRENCH  noted this committee  would be forwarding  the bill                                                               
soon, but wanted to get at least a general view.                                                                                
                                                                                                                                
MR.  DICKINSON reminded  members about  two conclusions  drawn by                                                               
the presenters  of the model.   First,  it perhaps make  sense to                                                               
have  steeper  progressivity  to  capture  more  on  the  upside.                                                               
Second, it  may make sense in  this other arena to  have a lower-                                                               
based tax  rate.   He said  it is important  to note  that, under                                                               
current law,  investments are made  with what some call  "30 cent                                                               
dollars."  He went to the board to illustrate.                                                                                  
                                                                                                                                
9:58:55 AM                                                                                                                    
MR. DICKINSON posed a scenario in  which he is a company deciding                                                               
whether to invest a dollar, looking  at the tax year in which the                                                               
investment would be  made.  He could deduct that  dollar from his                                                               
PPT return filed that year, with the deduction at 22.5 percent.                                                                 
                                                                                                                                
CHAIR FRENCH  suggested that  the dollar be  for steel  pipe with                                                               
which to drill a well.                                                                                                          
                                                                                                                                
MR. DICKINSON  explained that  when he deducts  it, he  gets back                                                               
22.5 cents;  his tax bill  is lowered that  amount.  If  there is                                                               
5 percent progressivity, the  state pays another 5  cents.  Steel                                                               
is a capital  expense, so he gets a credit,  another 20 cents off                                                               
his tax  bill.   In an  extreme instance, if  he has  been making                                                               
investments   before,    there   are    transitional   investment                                                               
expenditures  (TIE)  credits  available; those  must  be  matched                                                               
dollar for  dollar by new  incremental spending, and since  he is                                                               
spending this  new dollar he  gets 10 percent  additional credit.                                                               
This totals 57.5 cents.  He'd  spend 42.5 cents out of pocket and                                                               
the state would pick up 57.5 cents.                                                                                             
                                                                                                                                
MR. DICKINSON continued  with his illustration.  If  a 35 percent                                                               
federal tax rate is assumed,  not taking into account the ability                                                               
to capitalize  and take depreciation,  the IRS takes  35 percent.                                                               
Before  that,  however, it  allows  deducting  the 57.5  percent,                                                               
giving a 35  cent deduction for the out-of-pocket  portion.  Thus                                                               
the federal government  picks up about 18 cents of  that, and his                                                               
payment drops to roughly 23 cents.                                                                                              
                                                                                                                                
MR.  DICKINSON asked  who is  really  spending that  dollar.   He                                                               
answered that  it's the State  of Alaska, because it's  trying to                                                               
get investment  by spending 57.5  cents; the  federal government,                                                               
which through the deductions is  spending about 18 cents; and the                                                               
company, spending  about 23 cents.   The  company's out-of-pocket                                                               
expense would be fairly small.                                                                                                  
                                                                                                                                
MR. DICKINSON  asked:  Why  wouldn't people want to  invest under                                                               
this  regime?    He  answered  that in  year  two,  there  is  no                                                               
depreciation and no  effect beyond an operating piece.   An extra                                                               
barrel of  oil is  generated, and  of the  profit from  that, the                                                               
state  takes  22.5  percent  and  the  federal  government  takes                                                               
35 percent.   So the company pays  a smaller piece, but  it isn't                                                               
as small a piece as was contributed for the initial investment.                                                                 
                                                                                                                                
MR. DICKINSON concluded that for  dollars being invested, it's as                                                               
if  the  company  is  investing   23-cent  dollars.    Those  get                                                               
recaptured  over  time.     As  that  is   discounted,  when  the                                                               
recapturing occurs, it's  less heavily favored and so  the IRR or                                                               
net  present value  (NPV)  goes  very high  because  of all  this                                                               
upfront support from the state and the federal government.                                                                      
                                                                                                                                
10:04:31 AM                                                                                                                   
SENATOR  THERRIAULT surmised  that the  immediate rebate  of cash                                                               
from  the  state  is  what  really pumps  up  the  company's  NPV                                                               
calculations.   Those  are  hard, real  dollars  returned to  the                                                               
company's  pockets  immediately.    The state's  benefit  is  the                                                               
additional "22.5  take" on  the barrels  that then  get produced,                                                               
year after year, for a number of years.                                                                                         
                                                                                                                                
MR.  DICKINSON  affirmed  that,  saying   it's  22  or  even  the                                                               
additional 5 percent.  As  Mr. Ruggiero pointed out yesterday, if                                                               
the state  has a lower discount  rate than the companies,  it's a                                                               
win-win situation.   The immediate  benefit to the company  is up                                                               
front, where the  discount rate matters most, and  the benefit to                                                               
the state,  to the  company's detriment,  is further  out, "where                                                               
they sort of discount it away and we take full advantage of it."                                                                
                                                                                                                                
10:05:43 AM                                                                                                                   
MR. PORTER added it's not so  much that the company gets a return                                                               
to   its  pockets   immediately,  because   this  is   all  about                                                               
expenditures.  He  said NPV in a layman's world  is how much less                                                               
someone has  to spend  today for  the money  that will  be shared                                                               
tomorrow - the  shared money being the  state's 57.5 percent, the                                                               
federal government's 18 percent,  and the company's 42.5 percent.                                                               
That all has to be put together.   It's nice to have that upfront                                                               
benefit, which  is the benefit of  the net, but as  the tax rises                                                               
the company  gets fewer  dollars per barrel  in those  out years.                                                               
That's the balance.                                                                                                             
                                                                                                                                
SENATOR  THERRIAULT reported  hearing  that the  State of  Alaska                                                               
under PPT  has picked up about  52 percent of the  costs, but its                                                               
revenue share  is only 39  percent; he  has been asked  where the                                                               
fairness is.   Under ACES,  however - the governor's  plan called                                                               
Alaska's  Clear and  Equitable Share  set forth  in the  original                                                               
SB 2001 -  it was pitched  to him  that the rebalancing  is this:                                                               
The  state's share  rises to  44 or  45 percent,  to his  belief,                                                               
while the state's  share of costs comes down.   Thus it's more of                                                               
a match.   He asked  if the  testifiers could verify  those rough                                                               
numbers.                                                                                                                        
                                                                                                                                
MR.  PORTER  replied  he  couldn't testify  directly  as  to  the                                                               
percentages  because he  didn't know  what model  generated them.                                                               
In principle, though,  one can go back to "a  low price world and                                                               
a  high price  world," since  the percentages  change around  the                                                               
world based  on that due to  progressivity.  In a  high oil-price                                                               
world, not  a high  cost world, the  state definitely  wants that                                                               
increased percentage  because it  doesn't hurt  as badly  and the                                                               
state  wants  a  fair  share.     In  a  low  price  world,  that                                                               
progressivity  drops  out and  the  state's  percentage drops  as                                                               
well.   This  is the  desired balance.   It  actually works.   He                                                               
added that in a  high price world, the state wants  to get a fair                                                               
percentage while not hurting more  high-cost environments such as                                                               
West Sak where the desire is to help out; the net allows this.                                                                  
                                                                                                                                
10:08:28 AM                                                                                                                   
MR. DICKINSON  added he'd have  to look  at the numbers,  but the                                                               
effect  Senator  Therriault  had  mentioned  would  be  happening                                                               
directionally.   Under ACES,  in this  example, 20  percent would                                                               
drop out  immediately; a little  bit more  would be picked  up by                                                               
the  federal  government; the  progressivity  might  be a  little                                                               
different; and then, with respect  to the terms of recovery later                                                               
on, the only increase would be 22.5, going up to 25.                                                                            
                                                                                                                                
SENATOR  THERRIAULT  referred  to  the  point  that  the  federal                                                               
government would pick  something up.  He said if  the state drops                                                               
off an  expense, one would normally  think it would shift  to the                                                               
company side.  But only a portion of it does.                                                                                   
                                                                                                                                
AN UNIDENTIFIED SPEAKER affirmed that.                                                                                          
                                                                                                                                
SENATOR THERRIAULT  said a  portion gets  shifted to  the federal                                                               
treasury.    He  surmised  Alaskans  would  agree  that  if  some                                                               
investment costs can be shared  with the federal treasury, that's                                                               
a win-win situation in Alaska for a company and the state.                                                                      
                                                                                                                                
CHAIR FRENCH asked whether the testifiers agreed.                                                                               
                                                                                                                                
MR.  DICKINSON said  it  was absolutely  correct.   It  generally                                                               
would be 35 percent federal sharing.                                                                                            
                                                                                                                                
10:09:50 AM                                                                                                                   
MR.   PORTER  said   he  wanted   to  reinforce   a  piece   that                                                               
Mr. Dickinson had  mentioned as well,  in terms of not  only what                                                               
the model suggested,  but also in coming to  the conclusion, from                                                               
a  practical standpoint,  of making  sure to  keep a  low, stable                                                               
base tax  as well as  a higher progressivity that  better matches                                                               
the economics of projects "on  a broader statement than the other                                                               
way around."   He emphasized  capturing the  progressivity piece,                                                               
but also having a stable tax base.                                                                                              
                                                                                                                                
SENATOR WIELECHOWSKI noted he'd  heard conflicting things about a                                                               
low  base price.   While  understanding how  higher progressivity                                                               
keeps more money  in Alaska, he'd thought a  somewhat higher base                                                               
rate would actually encourage investment  with respect to some of                                                               
the more difficult fields because there is a higher deduction.                                                                  
                                                                                                                                
MR.  PORTER replied  he'd struggled  with that  after hearing  it                                                               
yesterday.   From a  number-crunching standpoint,  he understands                                                               
how one  can get  there.   But if  he were  the taxpayer  and the                                                               
state raised his tax so  there was higher deductibility, it would                                                               
take a dollar out of his pocket and  give it to the state.  On an                                                               
individual,  unique project  basis,  it's possible  to make  that                                                               
happen on  paper.   From a  broad standpoint,  however, he  has a                                                               
hard time  with those  economics.   He surmised  that if  it were                                                               
true on  a broad basis, the  industry would be here  lobbying for                                                               
higher taxes.                                                                                                                   
                                                                                                                                
10:12:18 AM                                                                                                                   
SENATOR  WIELECHOWSKI agreed  it  doesn't  make intuitive  sense.                                                               
But when  the net present values  were shown, for instance,  on a                                                               
35 percent tax  rate with  a higher  progressivity than  ACES, it                                                               
actually had a higher NPV than at a 22 percent tax rate.                                                                        
                                                                                                                                
MR. PORTER  replied NPV isn't  the only determination  of project                                                               
economics.   It's only  one element  that an  oil company  or any                                                               
other taxpayer would use.                                                                                                       
                                                                                                                                
SENATOR WIELECHOWSKI  asked Mr. Dickinson what  experience he had                                                               
with respect to working with oil companies in their boardrooms.                                                                 
                                                                                                                                
MR.   DICKINSON   answered   none.     He   then   said   it   is                                                               
counterintuitive, but he  thinks the notion is that  one can look                                                               
at an  isolated benefit  when the  company makes  the investment,                                                               
but the investment is going to  "peel off barrels" and then it is                                                               
"a detriment  to those  barrels."   Thus there is  a need  to sit                                                               
down and  do the math.   People  have to look  at those too.   If                                                               
people just could  invest with 23-cent dollars, they'd  run to do                                                               
it.  But  the other shoe falls  at some point.  The  desire is to                                                               
find that balance.                                                                                                              
                                                                                                                                
MR. DICKINSON surmised  one lesson to be drawn from  the model is                                                               
that for something like infill drilling  - where the risks are as                                                               
low as  they can  be for  any project  in the  oil industry  - it                                                               
makes sense  to add a  lot of support at  the front end  and then                                                               
capture a larger piece on the outer end.                                                                                        
                                                                                                                                
CHAIR  FRENCH suggested  Mr. Dickinson  could make  a case  for a                                                               
two-tiered  tax  structure:   one  for  Kuparuk and  Prudhoe  Bay                                                               
infill drilling,  the center of  the target, and another  for new                                                               
exploration  that is  away from  existing  infrastructure and  is                                                               
more risky  because of  uncertainty with  respect to  looking for                                                               
new oil.                                                                                                                        
                                                                                                                                
MR. DICKINSON  answered that one  could make the case.   However,                                                               
one could  also make the  case that  judgments can be  made about                                                               
things and how  to do them.  But  one way is to just  look at the                                                               
dollars spent.   He  noted that  earlier he'd  been going  to say                                                               
that under the reviled economic  limit factor (ELF) system, costs                                                               
were recognized.  But there was a proxy created for them.                                                                       
                                                                                                                                
CHAIR FRENCH said it was a mathematical model.                                                                                  
                                                                                                                                
MR. DICKINSON concurred, saying it  was a mathematical model that                                                               
required looking  at field size and  well productivity, believing                                                               
that to be a good way  to measure costs; barrels were excluded so                                                               
people  could recover  their costs.    It worked  in that  people                                                               
didn't want to change it for  many years.  But prices quadrupled.                                                               
Whereas a few  dollars a barrel had been  excluded previously, it                                                               
became $50 or $60.                                                                                                              
                                                                                                                                
MR. DICKINSON added that a proxy  for costs never works.  It gets                                                               
away  from the  basic idea  that  spending -  provided there  are                                                               
controls  to  ensure  it  is   real  spending  on  production  or                                                               
exploration - is the best way to  figure out the tax rate and the                                                               
rate at which investments will be measured.                                                                                     
                                                                                                                                
10:16:14 AM                                                                                                                   
SENATOR THERRIAULT  suggested that  relates to  this idea  of the                                                               
old  severance tax  being  basically  a gross  tax  with the  ELF                                                               
modifier, which couldn't accommodate the  higher price.  When the                                                               
price  spiked  upward,  the system  became  unstable  because  it                                                               
couldn't self-adjust.                                                                                                           
                                                                                                                                
MR.  DICKINSON replied  he  thinks  that is  exactly  right.   It                                                               
couldn't accommodate changes  in technology.  He  noted there was                                                               
an aggregation order that he  signed in January 2005, recognizing                                                               
changes in  the field  that may not  have been  anticipated fully                                                               
when that  structure was  created, and  how that  affected costs.                                                               
He said all  kinds of things can happen that  make the proxies or                                                               
assumptions less valid over time.   He opined that going to a net                                                               
system may not  be perfect over all time, but  goes a lot further                                                               
towards providing  stability because it recognizes  a whole range                                                               
of changes, so long as those  changes are always reflected in the                                                               
costs and investments people are willing to make.                                                                               
                                                                                                                                
SENATOR THERRIAULT  suggested part  of it was  evaluating whether                                                               
it was time to  jump to the new system.  As  the price per barrel                                                               
rose, people realized it wasn't fair  to the state.  But then the                                                               
price would  drop.  Turning  to the  concept of a  two-tiered tax                                                               
system,  he  surmised  that further  exploration  in  the  legacy                                                               
fields is  as close  to low  risk as can  be seen  worldwide with                                                               
respect to drilling and getting extra barrels.                                                                                  
                                                                                                                                
MR.   DICKINSON  said   he  wouldn't   even   categorize  it   as                                                               
exploration.  It's infill drilling.                                                                                             
                                                                                                                                
SENATOR THERRIAULT asked:   Because the expense of  doing that is                                                               
lower, does the  net system already have a bit  of a differential                                                               
tax structure  for legacy  fields, since  with lower  costs there                                                               
are  lower  deductions and  so  the  effective  tax rate  that  a                                                               
company pays for that infill drilling is higher automatically?                                                                  
                                                                                                                                
10:18:43 AM                                                                                                                   
MR.  PORTER  replied  that's  exactly   what  the  Gaffney  Cline                                                               
presentation showed.   He said it's not  perfect, fine-tuned down                                                               
to the penny.  Roughly  speaking, however, with respect to taxing                                                               
cash  flow  generated  from  these   legacy  fields  -  which  he                                                               
characterized as the sweet spot,  with comparatively low overhead                                                               
on  a per-barrel  basis -  they get  taxed a  lot higher  because                                                               
their cash  flow starts  sooner.   If it costs  $20 a  barrel for                                                               
expenses, they'll  start getting taxed  on the cash flow  at that                                                               
point, whereas the West Saks of  the world start at $40.  Calling                                                               
the net an equalizer, he said  Gaffney Cline did an excellent job                                                               
of presenting that ratio, which actually works in a net world.                                                                  
                                                                                                                                
SENATOR THERRIAULT  asked the consultants  to really look  at the                                                               
different components,  the mathematical cells  in the model.   He                                                               
asked  whether, in  general,  there was  any  component from  the                                                               
discussion  yesterday  that  they  felt  was  suspect  or  needed                                                               
proving up.   He noted that even Chair French  had said yesterday                                                               
that the numbers were fairly eye-popping.                                                                                       
                                                                                                                                
MR.  DICKINSON replied  that he  would repeat  the cautions  from                                                               
Gaffney Cline,  the builders of  the model, that this  was taking                                                               
infill drilling  from one project  and someone  else's projection                                                               
of  the barrels,  put  together with  some prices.    He said  it                                                               
wasn't meant  to be a  universal model.   He then  specified that                                                               
his biggest  concern would be  folks drawing  broader conclusions                                                               
from the model than the data might  support.  If DNR is using the                                                               
data and doing  things so these models can go  for more projects,                                                               
he said that's a great analytical tool.                                                                                         
                                                                                                                                
The committee took an at-ease from 10:20:57 AM to 10:37:28 AM.                                                              
                                                                                                                                
CHAIR FRENCH welcomed Marilyn Crockett and Tom Williams of AOGA.                                                                
                                                                                                                                
^Marilyn Crockett and Tom Williams, AOGA                                                                                        
MARILYN  CROCKETT,   Executive  Director,  Alaska  Oil   and  Gas                                                               
Association,  noted  AOGA is  a  trade  association for  the  oil                                                               
industry  in Alaska.    She introduced  Tom  Williams, who  would                                                               
present AOGA's testimony today.                                                                                                 
                                                                                                                                
TOM  WILLIAMS,   Chair,  Alaska  Oil  and   Gas  Association  Tax                                                               
Committee, specified  that he is  senior royalty and  tax counsel                                                               
for BP Exploration  (Alaska) Inc. and a  former tax administrator                                                               
with DOR,  but was speaking as  chair of the AOGA  Tax Committee.                                                               
He began by  addressing a question asked by  Senator McGuire with                                                               
respect to a  presumption.  He read the first  two sentences from                                                               
existing AS  43.05.245, relating to assessment  and collection of                                                               
tax:                                                                                                                            
                                                                                                                                
     If  a  taxpayer  fails  to  file  a  return  or  report                                                                    
     required by this  title in the time required  by law or                                                                    
     regulation,  or   makes  an  erroneous   or  fraudulent                                                                    
     return,  the department  shall  proceed  to assess  the                                                                    
     license fees,  tax, penalties, or  interest and  make a                                                                    
     return from information that  it obtains. An assessment                                                                    
     or a return subscribed  by the department in accordance                                                                    
     with this section is presumed  sufficient for all legal                                                                    
     purposes.                                                                                                                  
                                                                                                                                
MR. WILLIAMS said "erroneous" is  the operative word in the first                                                               
sentence.   If auditors went  in and looked at  something, unless                                                               
they were  convinced the expenditure was  appropriate, they could                                                               
disallow  it  and the  disallowance  would  be presumed  correct.                                                               
That's also why  a jeopardy assessment that DOR can  do is such a                                                               
powerful tool.   Then  there is  a categorical  disallowance, and                                                               
the  taxpayer has  the burden  of  showing everything,  including                                                               
even  the parts  the taxpayer  had satisfied  the auditor  about.                                                               
This is existing  law.  So there is a  presumption of correctness                                                               
with the auditor.                                                                                                               
                                                                                                                                
10:39:51 AM                                                                                                                   
MR. WILLIAMS  turned to  his testimony.   He explained  that AOGA                                                               
takes  "gross" as  referring to  a production  tax levied  on the                                                               
gross  value  at  the  point  of  production  as  defined  in  AS                                                               
43.55.900(12).   The prior  ELF-based tax was  such a  gross tax.                                                               
Furthermore, AOGA take "net" to  refer to a production tax levied                                                               
on the  value that  remains after  subtracting the  operating and                                                               
capital costs of  the oil and gas operation from  the gross value                                                               
at the point of production.                                                                                                     
                                                                                                                                
MR. WILLIAMS  said the present  PPT is an  example of a  net tax,                                                               
with the  lease expenditures,  as defined in  Section 165  of the                                                               
statutes, being  the costs deducted  from the gross value  to get                                                               
this taxable  production-tax value.  Or  the production-tax value                                                               
under PPT  is equivalent to a  value at the rock  face, where the                                                               
oil flows into the well and is severed from the reservoir.                                                                      
                                                                                                                                
MR. WILLIAMS  suggested the fundamental question  with respect to                                                               
gross versus net isn't about  which tax can generate more revenue                                                               
for the  state.  If one  tax generates "x" dollars,  it is always                                                               
possible to find  a rate for the other tax  that generates a like                                                               
amount.   Instead, the question  is how realistic  the production                                                               
tax should to be in terms of its  effects on the real world.  Oil                                                               
and  gas aren't  renewable.   No  new oil  or gas  is created  to                                                               
replace what's being taken out  of the ground.  Consequently, the                                                               
more  that is  removed from  a reservoir  and produced,  the more                                                               
difficult and expensive it becomes  to produce the next barrel of                                                               
oil or cubic foot of gas from what remains.                                                                                     
                                                                                                                                
MR. WILLIAMS highlighted the huge  resources of viscous and heavy                                                               
oil known to  exist on the North Slope.   Because of the physical                                                               
characteristics of the  oil itself and the  reservoirs where it's                                                               
found, the oil is physically  difficult to produce, starting with                                                               
the first  barrel.  Viscous  oil -  which flows more  slowly than                                                               
conventional oil  but can still  be pushed through the  rock into                                                               
the wells  by injecting water  - is  primarily found in  the West                                                               
Sak  formation.   The West  Sak rock  is crumbly;  a lot  of fine                                                               
particles of rock  are entrained in the oil as  it flows into the                                                               
well and then turns  into an oily sludge.  This  sludge has to be                                                               
removed from  the oil  at the  surface.  It  must be  handled and                                                               
disposed of  with great  care, since it  is a  hazardous material                                                               
for purposes of healthy, safety, and environmental laws.                                                                        
                                                                                                                                
MR.  WILLIAMS described  heavy  oil  as too  thick  to be  pushed                                                               
through the  reservoir rock by water  injection.  It is  found in                                                               
the Ugnu formation  not far below the permafrost.   One promising                                                               
technology for producing this oil  involves getting the reservoir                                                               
rock to  flow like a stream  of sand into the  well, carrying the                                                               
oil with it, and then separating out the oil at the surface.                                                                    
                                                                                                                                
10:43:14 AM                                                                                                                   
MR.  WILLIAMS  pointed out  that  the  same health,  safety,  and                                                               
environmental  issues  for  hazardous   materials  apply  to  the                                                               
handling and  disposal of this  sand, which translates  into high                                                               
production costs, even as production starts.                                                                                    
                                                                                                                                
CHAIR FRENCH asked if West Sak oil is lighter than Ugnu oil.                                                                    
                                                                                                                                
MR. WILLIAMS  affirmed that.   Continuing, he  said if  the state                                                               
didn't want  to take  such factors  into consideration,  it might                                                               
levy  a flat  tax of  "x" cents  a barrel  over a  thousand cubic                                                               
feet.  Simple  to administer and forecast, it  would resemble the                                                               
gross  tax discussed.   But  the discussion  here is  about gross                                                               
versus net.                                                                                                                     
                                                                                                                                
MR.  WILLIAMS showed  a graph  illustrating production  economics                                                               
for a  hypothetical conventional oil  field, with a tax  on gross                                                               
value.   Five bars depicted  the economics  of the field  in five                                                               
stages of  its life.   Also depicted were the  state's one-eighth                                                               
royalty  on the  gross value;  a  flat gross  tax; and  operating                                                               
costs  for  the  field,  which  rise with  time  as  the  oil  is                                                               
depleted.   In the middle was  an area representing what  is left                                                               
for the producer - in this case, the net operating margin.                                                                      
                                                                                                                                
10:46:42 AM                                                                                                                   
CHAIR FRENCH said members recognize  that expenses generally rise                                                               
over time.   He asked,  however, whether the tiny  expenses shown                                                               
at  the  beginning of  the  illustration  take into  account  the                                                               
enormous  upfront capital  costs of  getting to  this stage.   He                                                               
then surmised it is from the first day of production forward.                                                                   
                                                                                                                                
MR. WILLIAMS  affirmed the  latter, saying the  point is  that it                                                               
starts  off with  those  costs.   This  is  shown in  percentages                                                               
because it holds true no matter  what price is assumed.  It shows                                                               
that costs  rise over time  and consume increasingly more  of the                                                               
value of  the oil.   A  field will continue  to produce  until it                                                               
starts losing money  on a cash-flow basis.  This  is barring some                                                               
catastrophic event such as what  happened in 1933 when a refinery                                                               
next  to the  Katalla  field, Alaska's  first  oil field,  burned                                                               
down,  eliminating the  way to  turn that  oil into  the kerosene                                                               
needed by miners; the field was never used again.                                                                               
                                                                                                                                
MR.  WILLIAMS  continued  with the  gross-tax  graph,  showing  a                                                               
section  that depicted  a  loss.   Up to  that  point, wealth  is                                                               
created by  producing the oil  and gas.   Beyond that,  wealth is                                                               
destroyed by continuing  to operate.  He said  given the enormous                                                               
challenge that Alaska  faces from the decline in  North Slope oil                                                               
production, one  great concern is  the effect on investment  as a                                                               
field's  operating  margin  is increasingly  squeezed  by  rising                                                               
production costs per barrel.                                                                                                    
                                                                                                                                
MR. WILLIAMS said while the  actual operating margin for the rest                                                               
of the field  isn't usually a significant factor  in the economic                                                               
analysis for new  investment, the graph can  illustrate a general                                                               
deterioration in  the quality of  new investments available  as a                                                               
field ages.   For instance, drilling 100 or so  infill wells last                                                               
year added about 70,000 barrels  a day to North Slope production.                                                               
But drilling  100 such wells  next year  might only add  60,000 a                                                               
day; the year after that, it might be only 50,000.                                                                              
                                                                                                                                
10:50:09 AM                                                                                                                   
MR.  WILLIAMS continued  with the  gross-tax graph.   He  said as                                                               
margins  of  incremental  investments become  squeezed,  as  that                                                               
quality  deteriorates, fewer  and fewer  investment opportunities                                                               
remain  that  are  economically  viable.    If  all  North  Slope                                                               
investment  opportunities  in  a  company's  portfolio  resembled                                                               
Bar 1 in the graph, the company  would likely go forward with all                                                               
the investments it  could; it illustrates a  situation not unlike                                                               
Prudhoe Bay when  it first came into production and  ramped up to                                                               
1.5  million   barrels  a  day.     As  the   opportunities  look                                                               
increasingly like  Bar 2,  a company still  would take  most, but                                                               
not all, of  the investments; the cash might not  be available to                                                               
invest in them all.                                                                                                             
                                                                                                                                
MR. WILLIAMS said as the  portfolio begins to resemble Bar 3, the                                                               
company clearly  would start having fewer  and fewer commercially                                                               
viable opportunities; the  margin would start to  be one-third to                                                               
one-quarter  of  the  value  that   the  barrel  represents,  and                                                               
although some still would pencil out  - because of the time value                                                               
of money,  for instance  - there'd  increasingly be  numbers such                                                               
that this  timing effect  wouldn't be  enough.   If opportunities                                                               
look  like Bar 4,  with  a thin  margin,  perhaps no  investments                                                               
would be made.   And certainly the company  wouldn't be investing                                                               
if they look like Bar 5.                                                                                                        
                                                                                                                                
MR. WILLIAMS  contrasted this with  what happens when the  tax is                                                               
on net  value, like PPT.   He showed  a graph depicting  the same                                                               
hypothetical field  and five stages  of rising  production costs.                                                               
For this  net tax, by  design it starts  out with Bar  1 equaling                                                               
the gross tax  on the first graph.   But as the  field ages, each                                                               
bar on this new graph has a smaller tax segment.                                                                                
                                                                                                                                
MR. WILLIAMS noted even in Bar 5,  a very late stage in a field's                                                               
life, there  is a  positive operating margin.   All  other things                                                               
being equal, a net tax  allows production to continue longer than                                                               
it  would  under  a  gross   tax.    Furthermore,  if  investment                                                               
opportunities resemble Bar 1, a  company would likely try to make                                                               
as many investments  as it can.  Each succeeding  stage is better                                                               
than in  the earlier graph  because of  the greater margins.   If                                                               
there  is  a better  portfolio  of  opportunities, a  company  is                                                               
likely to make  more investments at each stage of  a field's life                                                               
than under a gross tax, he concluded.                                                                                           
                                                                                                                                
10:54:02 AM                                                                                                                   
CHAIR FRENCH asked  whether the illustration holds  the price and                                                               
volume the same across the years.                                                                                               
                                                                                                                                
MR. WILLIAMS  replied that because it's  using percentages rather                                                               
than dollar  amounts, the point  holds true regardless  of price.                                                               
As fields are depleted, they  reach these various stages in their                                                               
lives regardless of what the price is.   It will only be a matter                                                               
of how long it  takes.  In further response, he  said if there is                                                               
a long-term, sustained high level in  the value of oil or gas, it                                                               
tends  to  reset  the  clock  back with  respect  to  the  graph.                                                               
Conversely, a sustained period of  low prices tends to accelerate                                                               
it forward.                                                                                                                     
                                                                                                                                
CHAIR FRENCH asked if it could go from Bar 1 to Bar 5 in a year.                                                                
                                                                                                                                
MR. WILLIAMS said hopefully not, but in theory, yes.                                                                            
                                                                                                                                
10:55:26 AM                                                                                                                   
SENATOR THERRIAULT  surmised the change  in price might  move the                                                               
margin back one bar for a year  or two, until the costs caught up                                                               
and squeezed the margin.                                                                                                        
                                                                                                                                
MR. WILLIAMS affirmed  that, but didn't know whether  it would be                                                               
a year  or two or a  longer period of  time.  It would  depend on                                                               
the economics talked  about by Mr. Dickinson.   A sudden increase                                                               
in demand  because of high  oil prices might accelerate  the rise                                                               
in  the price  of  goods  faster than  normal.    But it  doesn't                                                               
necessarily happen; it depends on  how fast the oil price changes                                                               
and so forth.                                                                                                                   
                                                                                                                                
MR.  WILLIAMS closed  by indicating  the decline  of North  Slope                                                               
production is  the greatest challenge  facing Alaskans.   He said                                                               
the only  way to slow  the decline and  soften its impacts  is to                                                               
make investments to  produce more oil.  As shown,  a net tax will                                                               
result in  more investments than  a gross tax will,  other things                                                               
being equal.   That's the reality  Alaska faces.  This  isn't the                                                               
first  legislature to  grapple with  this  reality, and  probably                                                               
won't be the  last.  All the  industry can do in  this process is                                                               
to explain  what the  real-world effects promise  to be  from tax                                                               
policies.  The policy choices are up to the legislature.                                                                        
                                                                                                                                
MR. WILLIAMS  said whatever is  chosen, the industry  will comply                                                               
and continue  to do  business in Alaska,  striving to  unlock the                                                               
great  potential Alaska  still has.   But  it is  known that  one                                                               
choice will  allow the industry to  do more than the  other will,                                                               
between gross  and net.   He expressed hope that  the legislature                                                               
will choose the better one.                                                                                                     
                                                                                                                                
10:57:50 AM                                                                                                                   
SENATOR THERRIAULT  noted a net  system self-corrects and  so on.                                                               
He  recalled yesterday's  presentation by  Gaffney Cline  and the                                                               
modeling of  this system, including  the slowing of  the decline,                                                               
acknowledging that  the bulk of  the known resource on  the North                                                               
Slope is  in those  legacy fields, and  modeling the  numbers for                                                               
squeezing out  the additional  heavy and viscous  oil.   He asked                                                               
Mr. Williams whether  he had any  criticism of the  numbers shown                                                               
yesterday with respect to such a net system.                                                                                    
                                                                                                                                
MR. WILLIAMS  replied AOGA  hasn't yet reached  a position  to be                                                               
able to answer  that.  He offered  to try to respond  in a timely                                                               
manner for this committee.  He  noted members could ask him about                                                               
what  was going  on  in  the 1970s  and  1980s,  the time  period                                                               
Mr. Dickinson  had discussed;  he'd  had to  work  with that  and                                                               
could  provide  some historical  facts.    As for  testifying  in                                                               
response  to Gaffney  Cline's  presentation,  however, he'd  been                                                               
preparing his testimony at the time  and thus wouldn't be able to                                                               
comment personally either.                                                                                                      
                                                                                                                                
10:59:42 AM                                                                                                                   
CHAIR FRENCH  said he appreciated  the late-breaking  nature, but                                                               
it is  the same  for the  legislature, which  needs to  produce a                                                               
bill  within 30  days.   The  information shown  yesterday was  a                                                               
revelation  for many.    It was  like peeling  the  skin off  the                                                               
claims heard about  relative risk and investment needs.   For him                                                               
at  least, it  showed what  the  rate of  return is,  and it  was                                                               
stunning.  He suggested before too  long it will be time for AOGA                                                               
and other  industry representatives to tell  legislators what, if                                                               
anything, was wrong with those numbers  and why a higher tax rate                                                               
doesn't fairly compensate the state  and still allow for enormous                                                               
rates of  return for  companies, at  least in  the center  of the                                                               
target  - the  70 percent  range  that is  represented by  infill                                                               
drilling in the legacy fields, Prudhoe Bay and Kuparuk.                                                                         
                                                                                                                                
MR. WILLIAMS replied  that in terms of  specific numbers, they're                                                               
as good as the  assumptions that went in behind them.   He had no                                                               
idea whether  those assumptions were explicitly  shared yesterday                                                               
or would  become available.   But AOGA's  comments would be  of a                                                               
qualitative nature, rather than quantitative.                                                                                   
                                                                                                                                
CHAIR FRENCH  responded that he has  a disk with the  model on it                                                               
and a  disk has been given  to BP to analyze.   Furthermore, he'd                                                               
been  encouraging the  administration  to put  the  model on  the                                                               
Internet so  every Alaskan can  look at  it and twirl  the knobs.                                                               
If  there  is a  profits-based  tax,  then  the State  of  Alaska                                                               
becomes a  partner, at  some level paying  the industry  back for                                                               
the  investments it's  making.   The price  of that,  to him,  is                                                               
openness:   "We see your  numbers, you see  ours."  That  way, it                                                               
will be known that the parties are being fair to one another.                                                                   
                                                                                                                                
SENATOR WIELECHOWSKI  agreed as a  policy maker, saying  if there                                                               
is a criticism to that model, he  wants to hear it.  To him, that                                                               
model   was   extremely   compelling  -   seeing   that   capital                                                               
expenditures (CAPEX)  and operating expenditures (OPEX)  could be                                                               
increased 200 percent at a  15 percent discount rate, there could                                                               
be  a  30 percent  tax  rate  and  0.5 progressivity,  and  still                                                               
there'd be  rates of  return in  the 50 percent  region.   If the                                                               
model is wrong, he wants to  know, because that model will factor                                                               
heavily in  his decision  about what  to do  with respect  to the                                                               
valuation rate.                                                                                                                 
                                                                                                                                
MS. CROCKETT  replied AOGA would be  happy to look at  the model.                                                               
Although they'd  not been present  yesterday and didn't  have the                                                               
benefit  of the  slides, there  is a  hard copy  available.   She                                                               
requested  a disk  as  well, to  ensure all  AOGA  members get  a                                                               
chance to look  at not only the numbers that  can be tweaked with                                                               
the  "knobs," but  also the  structure of  the model  itself, the                                                               
mathematical  equations, evaluating  whether the  risk factor  is                                                               
part of this consideration, how the  heavy oil plays into it, and                                                               
so on, which she surmised were discussed yesterday.                                                                             
                                                                                                                                
11:03:24 AM                                                                                                                   
SENATOR  HUGGINS announced  the  Senate  Finance Committee  would                                                               
like to hear AOGA's ongoing analysis or any critiques.                                                                          
                                                                                                                                
SENATOR THERRIAULT  recalled that  some numbers around  which the                                                               
model was built  came from part of AOGA's testimony.   He said he                                                               
believes the  state and the  legislative consultants  are pulling                                                               
information from all  different sources.  He  agreed with Senator                                                               
Wielechowski that  the information will shape  people's opinions,                                                               
if  not here,  then certainly  in the  Senate Finance  Committee.                                                               
Given  that  AOGA  is  a  "consensus  organization,"  legislators                                                               
certainly want to hear from them.                                                                                               
                                                                                                                                
SENATOR THERRIAULT noted the model  specifically talked about the                                                               
legacy  fields.    He recalled  he'd  asked  questions  yesterday                                                               
relating to the belief that those  are where most of the value is                                                               
and the  desire to ensure that  whatever is set works  both there                                                               
and  for  the satellite  fields  and  those beyond  the  existing                                                               
infrastructure.                                                                                                                 
                                                                                                                                
MR. WILLIAMS  replied he doesn't  know what the model  said about                                                               
legacy fields, but  there are different kinds  of investment that                                                               
have  been  described,  including  the  renewal  investment,  the                                                               
infill drilling  investment, and the  heavy oil investment.   The                                                               
bulk  of the  heavy  oil  is under  what  are  defined as  legacy                                                               
fields.  He surmised that  was covered yesterday, but didn't know                                                               
whether it was "one size fits all," for example.                                                                                
                                                                                                                                
11:05:39 AM                                                                                                                   
SENATOR McGUIRE  said she thinks  AOGA ends up being  the perfect                                                               
organization to  put this into  perspective for  the legislature.                                                               
New  entrants,   heavy  into  exploration,  have   one  position.                                                               
Operators  of the  legacy fields  have  a different  perspective.                                                               
And AOGA  houses all those  opinions.  Even  if it occurs  in the                                                               
Senate Finance Committee, she'll  be highly interested in hearing                                                               
from AOGA.                                                                                                                      
                                                                                                                                
SENATOR McGUIRE emphasized  not wanting to put  anything in place                                                               
that will impair development; it may  not be "one size fits all,"                                                               
a  concern  that   has  been  discussed.    There   also  is  the                                                               
perspective that it's too complicated  to do two separate systems                                                               
of taxation.   She suggested the need for more  detail, since the                                                               
committee is looking more towards the  net system and how it will                                                               
impact  development   for  future   generations  and   with  each                                                               
individual type  of industry.  She  opined that AOGA is  the best                                                               
entity to  do this, since  it would  be better than  hearing from                                                               
individual companies that might be biased.                                                                                      
                                                                                                                                
MS.  CROCKETT said  AOGA is  happy to  answer any  questions they                                                               
can, within  the constraints of a  trade association organization                                                               
for which  antitrust provisions prevent talking  about costs, for                                                               
example.   They don't  talk about sales,  price, or  costs within                                                               
the  confines of  the association.   But  that doesn't  mean AOGA                                                               
can't -  at a higher  level, without  getting into that  level of                                                               
detail -  pass some  judgment and provide  some counsel  based on                                                               
their  perspective and  on the  industry's perspective  regarding                                                               
the proposals before the committee today.                                                                                       
                                                                                                                                
SENATOR THERRIAULT  surmised AOGA,  as a  consensus organization,                                                               
has  come to  a  consensus on  the ads  shown  around the  state.                                                               
Characterizing  the legacy  fields  as the  goose  that lays  the                                                               
golden egg  for the  state and  industry in  Alaska, he  said the                                                               
claim is  that what is  being contemplated will kill  that goose.                                                               
However, people who've  worked in the industry  have put together                                                               
models showing:   1)  it isn't  close to  the tipping  point with                                                               
regard to that  production and 2) the rates of  return, even with                                                               
what is anticipated  and talked about, are such  that any company                                                               
would decide to invest the next  dollar to produce new barrels of                                                               
oil.   Suggesting the claims  in the  ads therefore might  not be                                                               
true  or might  not  befall the  state,  Senator Therriault  said                                                               
hearing some comment in reply would be useful.                                                                                  
                                                                                                                                
11:09:31 AM                                                                                                                   
MS. CROCKETT  replied that a number  of ads are being  run and so                                                               
there may  be some  confusion about which  ones AOGA  is running.                                                               
That  aside,  the  focus of  AOGA's  advertising  or  educational                                                               
campaign has been  to make folks aware that the  top issue facing                                                               
Alaska  today is  a decline  in  production.   Setting aside  the                                                               
fiscal  regime,  Alaskans need  to  pay  attention right  now  to                                                               
stemming that decline.                                                                                                          
                                                                                                                                
MS.  CROCKETT  again  noted  she  hadn't  seen  the  presentation                                                               
yesterday and couldn't  respond.  But with respect  to the fields                                                               
just mentioned, she  said for the easy barrels,  clearly the bulk                                                               
of  new production  that  will  save the  industry  from a  steep                                                               
decline is in those fields.   The different kinds of new oil that                                                               
will  come on  are all  critical.   She cited  exploration; heavy                                                               
oil; bringing  new fields on  line; and production  from existing                                                               
fields, which  will provide most  of that production in  the near                                                               
term.  She said that's been the focus of AOGA's message.                                                                        
                                                                                                                                
11:10:50 AM                                                                                                                   
CHAIR  FRENCH wrapped  up  by  saying that,  to  him, that's  the                                                               
beauty of  the model.   It  was looking  exactly at  those legacy                                                               
fields  and the  infill drilling  that will  produce the  biggest                                                               
bang for  the buck  over the foreseeable  future.   The committee                                                               
was  very excited  and  interested in  seeing  what was  revealed                                                               
yesterday.   He  agreed with  Senator Huggins'  earlier statement                                                               
that AOGA will be facing more questions about it in the future.                                                                 
                                                                                                                                
The committee took an at-ease from 11:11:25 AM to 11:24:54 AM.                                                              
                                                                                                                                
CHAIR FRENCH welcomed Senator Green.                                                                                            
                                                                                                                                
CHAIR  FRENCH  noted  the committee  would  address  two  topics:                                                               
1) how  litigation under  a tax  system  differs from  litigation                                                               
under a royalty  system, and 2) information sharing.   He invited                                                               
Mr. Iversen to give his presentation.                                                                                           
                                                                                                                                
^Jonathan Iversen, Director, Tax Division, Department of Revenue                                                                
JONATHAN IVERSEN, Director, Tax  Division, Department of Revenue,                                                               
began  with some  history, noting  the state  has operated  under                                                               
varying parameters  over time.   Now it is entirely  different in                                                               
terms of  what the  state knows  and its  standards, both  in the                                                               
market  and  in  statute  and  regulation;  this  contrasts  with                                                               
standards in the late 1970s,  when production started ramping up,                                                               
and  the 1980s  and  then  the 1990s,  when  some settlements  of                                                               
really big cases happened.                                                                                                      
                                                                                                                                
MR. IVERSEN  elaborated, saying  it's a  different world  than in                                                               
the  late 1970s  and early  1980s,  when the  state was  entering                                                               
entirely  new royalty  and tax  territory.   The  state lacked  a                                                               
substantial  body  of  case  law and  regulations.    Of  primary                                                               
importance  was  that  it lacked  objective  measures  of  value.                                                               
These  were new  issues,  and  it was  a  gray,  murky area  with                                                               
respect to production  companies as well as the  State of Alaska.                                                               
The lack of objective measures  of value perhaps had the greatest                                                               
impact.  There wasn't a defined market or price set for ANS oil.                                                                
                                                                                                                                
11:27:23 AM                                                                                                                   
CHAIR  FRENCH suggested  this is  hard for  the public  to grasp,                                                               
since people  are used  to seeing  the price of  a barrel  of oil                                                               
published daily  in the  newspaper, for instance.   He  asked why                                                               
oil prices weren't as quantifiable previously.                                                                                  
                                                                                                                                
MR. IVERSEN noted  he isn't an oil markets expert.   He surmised,                                                               
however,  that  because  there   wasn't  an  established  market,                                                               
particularly  for  ANS oil,  what  caused  much of  the  conflict                                                               
between taxpayers and  the state was this:  It  required using an                                                               
established  area such  as West  Texas intermediate  oil or  some                                                               
other regular market  value; doing a regression  analysis or some                                                               
other  analysis or  else  using a  "market  basket" of  different                                                               
types of  crude oils with  known markets from different  parts of                                                               
the country or  the world; and then imputing a  value for ANS oil                                                               
based on that.   There weren't a lot of sales of  ANS oil.  There                                                               
weren't established  contracts.  And there  wasn't an established                                                               
pattern of how much the oil would go for.                                                                                       
                                                                                                                                
MR.  IVERSEN continued,  saying  when Platts  came  out with  its                                                               
index in  the mid-1980s,  setting an ANS  spot price,  it changed                                                               
the  world.    In  times of  high  production,  with  2.2 million                                                               
barrels running  down the pipeline  annually, a variation  of one                                                               
cent  or  five  cents a  barrel  in  the  value  of oil  makes  a                                                               
tremendous difference.   This is a  huge risk area for  the state                                                               
and for those paying tax and royalty.                                                                                           
                                                                                                                                
11:29:10 AM                                                                                                                   
SENATOR THERRIAULT  referred to  Mr. Iversen's remark  that there                                                               
weren't a  lot of sales at  the time.  He  gave his understanding                                                               
that oil  was being  shipped and going  to market,  but companies                                                               
were  selling the  oil to  themselves.   There  weren't many  at-                                                               
arm's-length  sales to  determine  the true  market  price.   The                                                               
sales  price couldn't  be  used  because if  a  Sohio tanker  was                                                               
taking it down for sale to  a Sohio refinery, for example, people                                                               
questioned whether to trust that price as the true price.                                                                       
                                                                                                                                
MR.  IVERSEN replied  that was  an astute  clarification.   There                                                               
weren't a lot of third-party  contracts for setting market value.                                                               
Because  of  not  having established  values  or  an  established                                                               
regulatory  framework,  there   were  aggressive  assessments  by                                                               
auditors who were protecting the  state's interests.  That is the                                                               
auditor's job.   Where there  was a  lot of gray  area, sometimes                                                               
the auditors  pushed to the  edges of  that gray area  to benefit                                                               
the state, to represent the state in those transactions.                                                                        
                                                                                                                                
MR. IVERSEN said,  furthermore, the state was entering  an era of                                                               
digging into  taxpayer records.  Taxpayers  weren't accustomed to                                                               
that,   and  there   was  some   reticence   to  provide   needed                                                               
information.   Thus  there were  aggressive,  so-called blue  sky                                                               
audits that resulted in an imputation of tax liability.                                                                         
                                                                                                                                
MR. IVERSEN elaborated, noting from  there a process would begin.                                                               
Some  cases  involved  tremendous  dollar  amounts;  those  would                                                               
linger for  decades or  a decade  and a half  and then  settle at                                                               
some  point.    The  litigation   costs  had  to  be  considered,                                                               
particularly  for   the  enormous   cases.    These   gray  areas                                                               
eventually  reached   "some  sort  of  strong   framework."    In                                                               
addition, many  times the  strong issues for  the state  would be                                                               
settled first.                                                                                                                  
                                                                                                                                
MR. IVERSEN added that historically,  with respect to discussions                                                               
or  rumors  about low  settlement  values  such as  values  below                                                               
50 percent, that might be just for  issues that were weak for the                                                               
state to  begin with.  The  auditors did their best  to represent                                                               
the state's interests, and as  they went through a learning curve                                                               
and  pulled through  the issues  that are  strong for  the state,                                                               
those would be at higher settlement values.                                                                                     
                                                                                                                                
MR.  IVERSEN pointed  out  that royalty  cases  suffered some  of                                                               
those same  issues, but  there was  an additional  impact because                                                               
royalty is  based on a contract,  a lease agreement.   Thus there                                                               
have  been contractual  interpretation  issues  that are  another                                                               
step away from  regulations and statutes.  He  offered to address                                                               
that in a couple of minutes.                                                                                                    
                                                                                                                                
MR. IVERSEN  reiterated that  the world  has changed  since then.                                                               
In the mid-1980s Platts came out  with its reporting for ANS oil,                                                               
and  there were  more defined  regulations.   The state  also has                                                               
gained  respect  from pushing  back  all  those years  and  being                                                               
aggressive  in  its  audits.   Furthermore,  the  state  and  the                                                               
taxpayers understand  where they  need to be,  so there  isn't as                                                               
much gray area between the two positions.                                                                                       
                                                                                                                                
11:33:19 AM                                                                                                                   
SENATOR WIELECHOWSKI  asked how  much has been  recovered through                                                               
the audits.                                                                                                                     
                                                                                                                                
MR. IVERSEN said  he didn't have that figure.   This morning he'd                                                               
consulted with  the Department of  Law (DOL), which  doesn't keep                                                               
statistics  comparing the  settlement  amount  with the  original                                                               
claim.   What ends up  happening is that during  these assessment                                                               
periods  after  an  auditor makes  an  assessment,  the  taxpayer                                                               
submits  additional   documentary  evidence   substantiating  the                                                               
claim.  There is an allowance for corrections through that.                                                                     
                                                                                                                                
SENATOR  WIELECHOWSKI  explained that  he'd  asked  because of  a                                                               
statement  made previously.   The  discussion had  been about  an                                                               
overall amount of billions of dollars  and that by going to a net                                                               
system, perhaps  there'll be arguments over  millions of dollars.                                                               
He asked  Mr. Iversen whether  that's reasonable, judging  by his                                                               
experience,  or whether  audit disputes  may involve  hundreds of                                                               
millions of dollars.                                                                                                            
                                                                                                                                
MR. IVERSEN said that is a  good point.  Compared with historical                                                               
numbers, risk  in terms  of dollars  is substantially  lower now.                                                               
When a dispute is  based on the value of oil -  the basis for all                                                               
the  calculations  in  a  gross   tax  system  -  and  there  are                                                               
transportation costs and  other costs to get  to that gross-value                                                               
point  of production,  it's a  much  bigger impact,  particularly                                                               
when looking  at millions  of barrels being  pushed through.   By                                                               
comparison, for  the downstream portion there'll  always be areas                                                               
of disagreement.                                                                                                                
                                                                                                                                
MR.  IVERSEN added  that historically,  the department  has taken                                                               
one position and the taxpayers  another; it's the nature of doing                                                               
business.   But the major issues  are defined.  There  is clarity                                                               
now  with respect  to  the  major downstream  cost  issues.   The                                                               
upstream  issues aren't  as global  or significant  monetarily as                                                               
these enormous cases that began in  the 1970s and 1980s.  Now the                                                               
state will be  looking at more discrete cost  issues.  Therefore,                                                               
dollar for dollar on the issues, it will be a smaller amount.                                                                   
                                                                                                                                
11:36:06 AM                                                                                                                   
MR. IVERSEN  returned to his  presentation, saying now  there are                                                               
more objective  market measures;  there are credible  markets for                                                               
ANS crude;  the state  knows what  the third-party  contracts are                                                               
saying; and  there isn't a  need to  assert so aggressively  in a                                                               
gray area,  since the gray  area is  much smaller.   This narrows                                                               
the room  for dispute.  Now  most cases settle in  DOR unless the                                                               
department is  just wrong; if  that happens, it  acknowledges the                                                               
mistake.  Unless there's an  actual mistake, most cases settle at                                                               
80-100 percent, a much higher settlement number than previously.                                                                
                                                                                                                                
CHAIR  FRENCH asked  whether that  is for  audits of  tax matters                                                               
between DOR and the oil industry.                                                                                               
                                                                                                                                
MR. IVERSEN affirmed that.                                                                                                      
                                                                                                                                
CHAIR  FRENCH explained  that a  lot of  folks come  to him  with                                                               
concerns  about a  net  system, worried  there'll  be fights  for                                                               
years and  the state  will end  up settling for  10 cents  on the                                                               
dollar.   He gave his  understanding that Mr. Iversen  was saying                                                               
his  experience over  the last  few years,  however, is  that the                                                               
settlements are between 80 cents and full value on the dollar.                                                                  
                                                                                                                                
MR. IVERSEN concurred.                                                                                                          
                                                                                                                                
SENATOR  WIELECHOWSKI  noted another  concern  he  hears is  that                                                               
arguments have been  over one item, the tariff  rate, whereas now                                                               
there'll  be hundreds  or  thousands of  items.   Although  there                                                               
might not be  one large number, DOR potentially  will get flooded                                                               
with  various  issues.    He   asked  Mr.  Iversen  whether  he'd                                                               
considered that and whether DOR  has the auditors required, since                                                               
the  number  of auditors  isn't  increasing  a tremendous  amount                                                               
under this legislation.                                                                                                         
                                                                                                                                
11:38:08 AM                                                                                                                   
MR. IVERSEN answered  they've thought about those  pieces.  There                                                               
certainly will be  areas of dispute for upstream  costs under PPT                                                               
and ACES.   But what exists  is a much more  established realm of                                                               
authority,  even  for  upstream  costs.   Internal  Revenue  Code                                                               
standards are referenced  by statute; there are  net profit share                                                               
regulations;  joint billings  and audits  are already  being done                                                               
between unit operators and working  interest owners; and a lot of                                                               
what's  happening   upstream  boils   down  to   accounting,  not                                                               
necessarily  the  vagaries  of  the market,  where  there's  just                                                               
simply not  an input  they need  to make  the tax  calculation in                                                               
term of how much a barrel goes for.                                                                                             
                                                                                                                                
MR. IVERSEN further replied, with  respect to auditors, that they                                                               
hadn't   expressly   asked   for  additional   positions.      He                                                               
acknowledged the need  to have the crew fully manned  in order to                                                               
administer this tax.  Right now,  they're down 6 positions out of                                                               
18,  including  the  specialist position  and  audit  supervisor.                                                               
That  is  the issue  they're  trying  to  hit  with some  of  the                                                               
statutory requests for the exempt positions.                                                                                    
                                                                                                                                
SENATOR  WIELECHOWSKI  recalled  that  from  data  he  has  seen,                                                               
recruitment  was   opened  October  12,   four applications  were                                                               
received,  and then  recruitment was  closed the  day before  the                                                               
special  session  started.   He  asked  why.   He  also  recalled                                                               
there'd  been another  area where  there was  a pending  hire and                                                               
then recruitment was closed the day before the special session.                                                                 
                                                                                                                                
11:40:21 AM                                                                                                                   
MR.  IVERSEN  replied  he  didn't  know  which  instance  Senator                                                               
Wielechowski was referring  to with respect to  the pending hire,                                                               
but he  was aware  of some  applications for  the Auditor  III or                                                               
flex  positions.    Recruitment  closed because  of  the  special                                                               
session, since those were positions  the department had looked at                                                               
and was submitting for exempt treatment.   Out of fairness to the                                                               
applicants, to  the department, and  to the state,  they'd wanted                                                               
to  ensure  it  was  clear and  aboveboard.    They've  recruited                                                               
rigorously, certainly  for as long  as he  has been on  board and                                                               
well  before that,  spending more  than  $100,000.   It has  been                                                               
spotty, however.   There  are very  good-quality folks  on board,                                                               
but there isn't a full crew.  They're down one-third.                                                                           
                                                                                                                                
CHAIR  FRENCH segued  from the  complexity of  legal disputes  to                                                               
their duration.   He asked  why legal  disputes won't last  for a                                                               
decade under a net tax system.                                                                                                  
                                                                                                                                
MR. IVERSEN  replied that  he had  a couple  of answers.   First,                                                               
whereas the  ANS royalty litigation  spanned decades, in  the tax                                                               
realm  now the  cases  move fairly  quickly.   There  is a  well-                                                               
established  administrative process.   An  audit is  done, and  a                                                               
taxpayer  that doesn't  like the  audit  can appeal  and have  an                                                               
informal conference in the department.   If the taxpayer is still                                                               
dissatisfied  after  that  step, having  submitted  evidence  and                                                               
information for  DOR to make  a decision,  the case moves  out of                                                               
DOR to the Office of  Administrative Hearings for presentation to                                                               
an administrative law judge.  Then it can go to court.                                                                          
                                                                                                                                
MR. IVERSEN explained  that although it still takes  time to work                                                               
through  the  system,  the  state  doesn't  have  to  go  through                                                               
numerous motions  for summary judgment  and huge,  deep discovery                                                               
requests in  gray, muddy areas  for a  typical case.   Of course,                                                               
some  cases have  areas  of  dispute that  need  to  be taken  to                                                               
superior  court  and  require  time.     But  there  has  been  a                                                               
fundamental change in the standards  compared with the historical                                                               
situation  of litigation  spanning decades.   The  standards have                                                               
changed and the world has changed.                                                                                              
                                                                                                                                
11:44:15 AM                                                                                                                   
MR. IVERSEN referred to a  memorandum from Spencer Hosie that had                                                               
been provided to the committee.                                                                                                 
                                                                                                                                
CHAIR FRENCH requested a summary for  the public.  He opined that                                                               
Mr. Hosie  has  a fair  amount  of  credibility  in the  area  of                                                               
litigation and willingness  to take on the industry.   He said he                                                               
was heartened to see Mr. Hosie's  estimate of how long litigation                                                               
would take, given that he believed  Mr. Hosie had every reason to                                                               
push it to the high side.                                                                                                       
                                                                                                                                
MR.  IVERSEN  summarized  that   in  his  memorandum,  Mr.  Hosie                                                               
compares   what  happened   with  the   ANS  royalty   litigation                                                               
Mr. Iversen had  referenced earlier.   It was filed by  the state                                                               
in 1977.   The oil phase was  resolved in 1992, and  the gas case                                                               
was  resolved in  1995.   That's a  long case.   There  were some                                                               
reasons, as Mr. Hosie points out.                                                                                               
                                                                                                                                
MR. IVERSEN said,  first, the state wasn't acting  as a sovereign                                                               
in  that case.    As a  taxing  authority, the  state  acts as  a                                                               
sovereign.  Then,  however, the state was acting as  a party to a                                                               
commercial contract; this  put it into a realm  of litigation, as                                                               
for any  breach-of-contract claim where there  isn't authority to                                                               
serve  and  enforce  subpoenas.   He  told  members,  "We've  got                                                               
express statutory  authority to do  that."  He indicated  now the                                                               
state's  regulations  are  clear  and   can  be  relied  upon  in                                                               
expediting dispute resolution.  In  a civil lawsuit, by contrast,                                                               
ongoing discovery can take a lot of time and money.                                                                             
                                                                                                                                
MR.  IVERSEN  noted, second,  the  ANS  royalty case  involved  a                                                               
number of  matters of first  impression, which he'd  touched upon                                                               
before.   Those were issues  of valuation,  transportation costs,                                                               
and so  on.  They  relate to contract interpretation  because the                                                               
royalty suit is based on contract.                                                                                              
                                                                                                                                
MR. IVERSEN  said, third, there was  an issue of market  value in                                                               
order to establish that.  The  state had to track every barrel of                                                               
ANS  oil  produced  to  its  market  destination,  an  incredibly                                                               
weighty undertaking.   Fourth, rather  than having a  tax dispute                                                               
between a  taxpayer and  that state,  the ANS  royalty litigation                                                               
involved  all  the  ANS  producers.   Thus  there  were  multiple                                                               
opponents,  different angles  on the  same issues,  and different                                                               
issues.   In such a  case the difficulty, complexity,  and length                                                               
of  time multiply  exponentially.   During  that litigation,  the                                                               
state approached the  industry as a whole.  This  was a matter of                                                               
first impression; the state was breaking new ground.                                                                            
                                                                                                                                
MR.  IVERSEN turned  to the  tax.   He noted  Mr. Hosie  writes -                                                               
which Mr.  Iversen agreed with  - that  it isn't royalty  and the                                                               
state is  acting as  a sovereign.   The basic  rules will  be set                                                               
forth  in  statute.    Mr.  Iversen said  this  goes  to  Senator                                                               
Wielechowski's earlier  question.   The disputes  will be  on the                                                               
margin.   They won't  be based on  the fundamental  principles of                                                               
what's going on.  For instance,  it will be a question of whether                                                               
a cost is properly classified as  a capital expense as opposed to                                                               
an operating expense,  or that it isn't a direct  cost but should                                                               
be overhead.                                                                                                                    
                                                                                                                                
MR.  IVERSEN  said because  a  tax  dispute is  confidential  and                                                               
taxpayer information  is confidential, it also  narrowly confines                                                               
this  to a  single-taxpayer dispute.   This  is unless,  for some                                                               
reason, the taxpayers want to  get together on an issue; however,                                                               
Mr. Iversen didn't know  of such an issue, since  they don't like                                                               
to share each other's confidential information.                                                                                 
                                                                                                                                
11:48:30 AM                                                                                                                   
SENATOR  McGUIRE  asked   why  the  state  chose   to  waive  its                                                               
sovereignty  in  the  1970s  when it  entered  into  those  lease                                                               
agreements.                                                                                                                     
                                                                                                                                
MR.  IVERSEN replied  he  didn't know  specifically.   A  royalty                                                               
dispute in the  United States typically is  a contractual matter;                                                               
the terms are negotiated.   Historically, those royalties started                                                               
out  at one-eighth,  whereas now  much higher  royalty rates  are                                                               
seen nationwide, depending on how hot the prospect is.                                                                          
                                                                                                                                
SENATOR THERRIAULT  surmised it wasn't necessarily  a decision to                                                               
waive sovereignty.   Rather, a  lease is a  contractual document.                                                               
There isn't any sovereignty involved.                                                                                           
                                                                                                                                
SENATOR McGUIRE said  she gets the lease idea, but  wants to know                                                               
what went  into the decision  making, since other  nations choose                                                               
to exert their sovereignty.                                                                                                     
                                                                                                                                
CHAIR  FRENCH  remarked that  it's  fascinating  as a  matter  of                                                               
historical  perspective.     His  misperception,  as   he'd  said                                                               
yesterday, was  that a royalty is  the most powerful taking.   He                                                               
said  it seems  funny  that  it would  be  resolved  as an  equal                                                               
partner with the  person from whom it's being  taken, rather than                                                               
as a king reaching down to his subject.                                                                                         
                                                                                                                                
SENATOR THERRIAULT  suggested it isn't  a reaching out.   Rather,                                                               
that  royalty   share  is  agreed  upon   through  a  contractual                                                               
arrangement, not through the exercise of sovereign power.                                                                       
                                                                                                                                
11:50:51 AM                                                                                                                   
MR.  IVERSEN added  that  the royalty  contract  is a  negotiated                                                               
deal, more  so with  private landowners.   There  isn't a  lot of                                                               
private royalty  in Alaska, but  in Texas, Oklahoma,  and Wyoming                                                               
one sees  a lot more  negotiated deals.   That's where  the terms                                                               
start to vary.  Although it  is an "historic creature," he didn't                                                               
know when  it was decided  to take it  as a landowner  or royalty                                                               
owner, rather than a sovereign taxing entity.                                                                                   
                                                                                                                                
MR.  IVERSEN closed  by saying  while DOR  is open  to discussing                                                               
settlements with taxpayers on issues  where there may be doubt as                                                               
to the  state's position - for  example, if DOR perhaps  has been                                                               
too  aggressive with  respect to  an item  - it  always considers                                                               
that litigation  is time consuming  and expensive.   However, the                                                               
state never enters into settlement lightly.                                                                                     
                                                                                                                                
11:52:32 AM                                                                                                                   
SENATOR THERRIAULT  referred to CSSB 2001(RES), Version  M of the                                                               
bill,  page 15,   which  rewrites  AS  43.55.165(a).     He  drew                                                               
attention to  language beginning on  line 30 that reads  in part,                                                               
"allowed by the department by  regulation", as well as lines 9-10                                                               
on the  following page,  which reads in  part, "(2)  a reasonable                                                               
allowance   for  that   calendar   year,   as  determined   under                                                               
regulations adopted by the department".                                                                                         
                                                                                                                                
SENATOR  THERRIAULT asked:   Since  the beginning  of AS  43 says                                                               
DOR,  as most  departments, has  a general  granting of  power to                                                               
write regulations,  why does this bill  specifically include this                                                               
language twice?   And why isn't the language  at least consistent                                                               
between the two sections?                                                                                                       
                                                                                                                                
MR.  IVERSEN  replied that  this  is  to completely  clarify  it.                                                               
Although  DOR   has  general   authority  to   draft  regulations                                                               
implementing the tax  and interpreting it, the desire  is to make                                                               
it  abundantly  clear  that  for   purposes  of  allowable  lease                                                               
expenditures, DOR  intends to affirmatively  set forth  - through                                                               
regulation - what costs are  allowed, thus narrowing the room for                                                               
dispute and for gray areas.  By  contrast, PPT has a gray area of                                                               
allowable items but  specific exclusions.  The intent  here is to                                                               
maintain   the    specific   exclusions   and    then   delineate                                                               
affirmatively, by  regulation, what is  included.  To  the extent                                                               
that   the  language   may  differ,   he  said   this  particular                                                               
affirmative regulation would be toward lease expenditures.                                                                      
                                                                                                                                
11:55:10 AM                                                                                                                   
SENATOR  THERRIAULT  again  asked  why  the  terminology  differs                                                               
between the two pages.                                                                                                          
                                                                                                                                
MR. IVERSEN  noted the two places  are Section 43.55.165(a)(1)(B)                                                               
and (a)(2),  which talks about  overhead.  Overhead  is addressed                                                               
separately.    It is  a  formatting  change  as  well.   In  PPT,                                                               
overhead was  allowed as  sort of a  separate category:   "direct                                                               
costs  shall include  overhead."    Typically, however,  overhead                                                               
isn't considered  a direct cost.   So that has been  moved.  This                                                               
would be a  separate regulation and has  already been promulgated                                                               
for overhead itself.  This is to clarify that.                                                                                  
                                                                                                                                
MR.  IVERSEN  added  that  there   are  direct  costs  and  lease                                                               
expenditures,  and then,  as seen  here, the  difference lies  in                                                               
subsection (a)(1)(B)(iii), page 16, lines 7-8:                                                                                  
                                                                                                                                
          (iii) the costs must be direct costs of exploring                                                                     
     for, developing,  or producing,  as applicable,  oil or                                                                    
     gas deposits; and                                                                                                          
                                                                                                                                
He said  one qualification for  lease expenditures is  that costs                                                               
must be direct costs of  exploring for, developing, or producing.                                                               
This  gets into  "direct cost  land," and  then it  is recognized                                                               
that overhead  isn't a  direct cost.   The overhead  allowance is                                                               
discussed starting on line 9 of that same page.                                                                                 
                                                                                                                                
11:57:17 AM                                                                                                                   
SENATOR THERRIAULT reiterated that  having such language inserted                                                               
like  this is  a  little  unusual.   He  referred to  subsections                                                               
(a)(1)(B)(i), (ii), and (iii) on page 16, which read:                                                                           
                                                                                                                                
          (i) the costs must be incurred upstream of the                                                                        
     point of production of oil and gas;                                                                                        
          (ii) the costs must be ordinary and necessary                                                                         
     costs of  exploring for,  developing, or  producing, as                                                                    
     applicable, oil or gas                                                                                                     
     deposits; and                                                                                                              
          (iii) the costs must be direct costs of exploring                                                                     
     for, developing,  or producing,  as applicable,  oil or                                                                    
     gas deposits; and                                                                                                          
                                                                                                                                
He  asked  whether  inclusion  of this  language  may  empower  a                                                               
commissioner  sometime   in  the   future  to  just   change  the                                                               
regulations and  perhaps start  dropping things  off the  list or                                                               
changing it so that it no longer  matches up with the policy.  He                                                               
noted this  gives a policy  direction, with  DOR to work  out the                                                               
details.     This  might   be  fine  now,   while  there   is  an                                                               
understanding, but  what about  in the future?   What  power does                                                               
that language give to a future commissioner?                                                                                    
                                                                                                                                
MR.  IVERSEN  replied that  he  anticipates  over time  DOR  will                                                               
change regulations  as the department  learns about  the process.                                                               
But  under   all  circumstances  DOR  must   obey  the  statutory                                                               
directives.    These directives  -  with  the exception  of  this                                                               
provision about  "setting forth  affirmatively by  regulations" -                                                               
are the same as in PPT.  In  terms of having a dramatic change as                                                               
far  as what  is or  isn't allowed,  nothing like  that is  being                                                               
done.  There still must be compliance with the statute.                                                                         
                                                                                                                                
MR. IVERSEN  pointed out a  further delineation in Section  20 of                                                               
CSSB 2001(RES)  as to what  direct costs include.   This language                                                               
is in  PPT, the current law,  but has been moved  as a conforming                                                               
change.   Page  16, starting  at  line 30, talks  about what  the                                                               
department  has  to consider  in  determining  whether costs  are                                                               
allowable  lease expenditures.   Looked  at are  typical industry                                                               
practices and  standards in the  state that determine  the costs,                                                               
other  than the  exclusions that  will be  allowed, and  also the                                                               
standards adopted by DNR for its  NPSL leases.  These items shall                                                               
be considered among other factors.                                                                                              
                                                                                                                                
MR. IVERSEN also  noted that direct costs  include some reference                                                               
to the Internal  Revenue Code for what is being  done for federal                                                               
income  tax purposes;  that is  on page  16.   And there  is some                                                               
other  guidance,  that activity  doesn't  need  to be  physically                                                               
located on or  near the actual premises of the  lease or property                                                               
necessarily, as long as it still is a direct cost.                                                                              
                                                                                                                                
MR. IVERSEN  concluded by saying  there is  substantial statutory                                                               
guidance as  to what DOR can  or cannot do.   If at some  point a                                                               
commissioner set forth regulations  outside the statutory bounds,                                                               
the regulatory  process would have  to be approved by  the Office                                                               
of  the  Attorney  General  and  the  lieutenant  governor.    If                                                               
something  were out  of  line,  it would  be  challenged and  the                                                               
regulation would be declared illegal.                                                                                           
                                                                                                                                
12:01:04 PM                                                                                                                   
SENATOR  WIELECHOWSKI  noted  the  law currently  says  costs  of                                                               
arbitration, litigation,  or other dispute  resolution activities                                                               
are  not lease  expenditures.   He  asked  whether that  includes                                                               
auditing costs.   For example, if  DOR has audited a  company and                                                               
the company  then uses  its own auditors,  can those  expenses be                                                               
written off?                                                                                                                    
                                                                                                                                
MR. IVERSEN  answered that to  some extent, those sorts  of costs                                                               
will  be  overhead.   Overhead  includes  advertising,  lobbying,                                                               
litigation at a  corporate level, auditing at  a corporate level,                                                               
and so  on.  Overhead is  set in statute as  an allowance related                                                               
to  direct  costs.   By  regulation,  DOR  sets forth  what  that                                                               
allowance is.   So  the actual amount  spent on  overhead doesn't                                                               
affect what the  company is allowed to deduct as  overhead.  What                                                               
matters  is what  the  company spends  on  direct costs,  because                                                               
overhead is only a percentage of that.                                                                                          
                                                                                                                                
SENATOR WIELECHOWSKI  asked whether a  company can write  off the                                                               
ads being run on television  right now, for instance, or lobbying                                                               
costs.                                                                                                                          
                                                                                                                                
MR.  IVERSEN  replied  no.     He  clarified  that  the  overhead                                                               
allowance is a percentage of both  direct and indirect costs.  It                                                               
doesn't  matter  how  much  is spent  for  items  like  lobbying,                                                               
advertising, health club fees, and so on.                                                                                       
                                                                                                                                
SENATOR  WIELECHOWSKI asked  whether those  items he'd  mentioned                                                               
could be included in a company's overhead.                                                                                      
                                                                                                                                
MR.  IVERSEN answered  that  what a  company  does for  corporate                                                               
bookkeeping purposes has  no bearing on what the  state allows as                                                               
a deduction for overhead.                                                                                                       
                                                                                                                                
12:03:27 PM                                                                                                                   
CHAIR  FRENCH  requested  a  ballpark  figure  for  the  overhead                                                               
allowance.                                                                                                                      
                                                                                                                                
MR. IVERSEN replied  in the typical case it will  be 3 percent of                                                               
direct costs for exploration, development,  and operations in the                                                               
state,  plus  9  percent  of   indirect  costs  for  exploration,                                                               
development,  and production  in the  state.   For production  of                                                               
hydrocarbons,  it's narrow.   Lobbying  expenses and  advertising                                                               
aren't  costs  associated   with  exploration,  development,  and                                                               
production of  hydrocarbons.  In response  to Senator Therriault,                                                               
he provided a brief example.                                                                                                    
                                                                                                                                
SENATOR  WIELECHOWSKI   asked  whether  DOR  audits   direct  and                                                               
indirect costs.                                                                                                                 
                                                                                                                                
MR. IVERSEN affirmed that.                                                                                                      
                                                                                                                                
SENATOR  WIELECHOWSKI  surmised   DOR  hasn't  seen  advertising,                                                               
lobbying, or public relations costs included.                                                                                   
                                                                                                                                
MR. IVERSEN  replied he  hasn't, but DOR  hasn't done  any audits                                                               
yet under PPT.   The department would be looking  for those sorts                                                               
of things certainly.                                                                                                            
                                                                                                                                
SENATOR WIELECHOWSKI surmised those would be disallowed.                                                                        
                                                                                                                                
MR.  IVERSEN affirmed  that, saying  overhead is  an area  DOR is                                                               
always watching for.                                                                                                            
                                                                                                                                
The committee took an at-ease from 12:05:59 PM to 1:31:37 PM.                                                               
                                                                                                                                
CHAIR FRENCH turned attention to information sharing.                                                                           
                                                                                                                                
MR.  IVERSEN  referred  to  CSSB  2001(RES),  Version  M,  noting                                                               
information sharing appears in two  separate sections.  The first                                                               
covers information  from DNR to  DOR and  the second from  DOR to                                                               
DNR.   These provisions clarify that  DOR can share with  DNR tax                                                               
returns, reports, and  other documents filed under  AS 43.55, the                                                               
production  tax  statutes.    The first  provision  is  found  on                                                               
page 3, Section 1, new paragraph (12).                                                                                          
                                                                                                                                
CHAIR  FRENCH  asked what  the  situation  has been  between  the                                                               
departments until now.                                                                                                          
                                                                                                                                
MR. IVERSEN replied that  several statutes govern confidentiality                                                               
for each  department.  The  agencies have been  extremely guarded                                                               
because  of   that  confidentiality   and  the   severe  criminal                                                               
penalties for disclosure of  taxpayer information, in particular,                                                               
as well  as a  lot of  concerns relating  to DNR  and proprietary                                                               
information.  The  lack of clarity has led to  an artificial wall                                                               
between  the  agencies  in  terms  of  what  can  and  cannot  be                                                               
transmitted.  When  this bill was being  developed, for instance,                                                               
it  became apparent  that this  can  pose some  real problems  in                                                               
terms of smart policy making.                                                                                                   
                                                                                                                                
MR. IVERSEN elaborated, saying when  a certain amount of taxpayer                                                               
information  cannot   be  shared  with   the  resource-management                                                               
agency,  and likewise  a  certain  amount of  resource-management                                                               
information cannot be  shared with the taxing authority  on a tax                                                               
related to resources,  it creates some real problems.   These are                                                               
seen through the modeling and some  of the visual aids put forth.                                                               
There is  a certain  amount of information  about the  impacts on                                                               
certain  fields, for  example;  the background  and modeling  for                                                               
that  are  driven  by  DNR  because  it  involves  resource-based                                                               
information.   Certain  confidentiality  restrictions apply  with                                                               
respect  to  taxes  as  well,  and  DNR  folks  cannot  get  that                                                               
information.                                                                                                                    
                                                                                                                                
MR. IVERSEN explained  that what is sought  with this legislation                                                               
is  to be  able  to share  that information  so  both agencies  -                                                               
pursuant to their respective functions -  can be smart, can be up                                                               
to  speed,  and  can  be  good  regulators  in  their  respective                                                               
capacities without  being hamstrung  by the inability  to receive                                                               
information  that  is  necessary  for a  regulatory  call  or  to                                                               
fulfill statutory obligations.                                                                                                  
                                                                                                                                
CHAIR FRENCH  returned to page  3, observing that  paragraph (12)                                                               
appears to be  a directive to the commissioner of  DNR which says                                                               
the  director shall,  on  request  - which  he  surmised means  a                                                               
request from DOR  - furnish records, files,  or other information                                                               
related to  the administration  of AS 35.05.180.   He  asked what                                                               
that statute refers to.                                                                                                         
                                                                                                                                
MR.  IVERSEN replied  that  is  oil and  gas  leasing.   In  that                                                               
context, it's leasing, unitization, and those issues.                                                                           
                                                                                                                                
CHAIR  FRENCH continued  reading  from  paragraph (12),  provided                                                               
below:                                                                                                                          
                                                                                                                                
          (12) on request, furnish records, files, and                                                                          
     other information  related to the administration  of AS                                                                    
     38.05.180  to  the Department  of  Revenue  for use  in                                                                    
     forecasting  state revenue  under  or administering  AS                                                                    
     43.55, whether  or not those records,  files, and other                                                                    
     information are required to  be kept confidential under                                                                    
     (8) of this subsection; in  the case of records, files,                                                                    
     or other  information required to be  kept confidential                                                                    
     under  (8)  of  this   subsection,  the  Department  of                                                                    
     Revenue  shall maintain  the  confidentiality that  the                                                                    
     Department of  Natural Resources is required  to extend                                                                    
     to records,  files, and other information  under (8) of                                                                    
     this subsection                                                                                                            
                                                                                                                                
He noted AS 43.55 is the tax statute.                                                                                           
                                                                                                                                
MR. IVERSEN specified that it's production tax.                                                                                 
                                                                                                                                
CHAIR  FRENCH summarized  by saying  if DNR  is supposed  to keep                                                               
something confidential,  DOR also will.   But it's allowed  to be                                                               
transmitted from one to the other without restriction.                                                                          
                                                                                                                                
MR. IVERSEN  concurred.  He said  this is based upon  the premise                                                               
that   both  agencies   have  been   dealing  with   confidential                                                               
information, have  protocols, and  are very  concerned -  each in                                                               
its  respective realm  - about  confidential  information.   That                                                               
overall  umbrella  of  confidentiality  would  still  exist,  but                                                               
between the two agencies there would be passage of information.                                                                 
                                                                                                                                
1:37:15 PM                                                                                                                    
SENATOR THERRIAULT  recalled recent testimony about  concern that                                                               
the two  departments perform different  functions for  the state.                                                               
Whereas  DOR collects  revenue, DNR  negotiates to  get the  land                                                               
into production.  With respect  to sharing of information, it was                                                               
alleged  that  DNR  would  go  to   DOR  and  get  all  kinds  of                                                               
information on companies' future plans  and thus DNR could tailor                                                               
or change the  acreage leasing and so on, to  take advantage.  He                                                               
asked  whether  Mr.  Iversen  had heard  this  concern  in  other                                                               
committees and whether there is some protection against it.                                                                     
                                                                                                                                
MR.  IVERSEN  answered  that  he  hadn't  heard  that  particular                                                               
concern.    But  there  has  been concern  that  DOR  would  pass                                                               
information  on oil  pricing to  DNR for  use in  royalty-in-kind                                                               
(RIK) sales and purchases.  He  said that's kind of a red herring                                                               
because DOR isn't  asking for actual price  information.  Rather,                                                               
DOR is  looking for cost  information, including  forecasted cost                                                               
information, in order  to do more accurate  forecasts and improve                                                               
its audit functions.                                                                                                            
                                                                                                                                
MR. IVERSEN  highlighted another  aspect:  There's  a competitive                                                               
market already  for buying  and selling oil.   The  companies are                                                               
sharing that same information with  other working interest owners                                                               
who are, in turn, buying and selling  oil on the market.  Thus he                                                               
opined that  the concern with respect  to DNR, at least  in terms                                                               
of RIK,  is a non-issue.   He  added that DOR  doesn't anticipate                                                               
abuse of the  information.  The goal here is  for each department                                                               
to  be  educated  to  the extent  necessary  for  performing  its                                                               
duties.   If  some knowledge  will help  DNR make  a decision  on                                                               
unitization that  is appropriate for  the state, then  this would                                                               
further that goal.                                                                                                              
                                                                                                                                
SENATOR THERRIAULT  asked if there is  language Mr. Iversen could                                                               
identify that limits the information DOR can request.                                                                           
                                                                                                                                
MR.  IVERSEN  replied that  for  the  purposes of  DNR  providing                                                               
information to  DOR, it has  to be  for use in  forecasting state                                                               
revenue under AS  43.55 or administering AS 43.55.   That, in and                                                               
of itself, is  a restriction.  It has to  be for those legitimate                                                               
purposes, rather than rooting around  for income tax information,                                                               
for example.                                                                                                                    
                                                                                                                                
1:41:06 PM                                                                                                                    
SENATOR THERRIAULT  explained that  he wants  to be  sensitive to                                                               
the  fact that  the state  needs  information but  not more  than                                                               
necessary, such as  bank records.  He asked  whether this changes                                                               
the dynamics of the negotiation.                                                                                                
                                                                                                                                
MR.  IVERSEN  suggested it  might  help  to  jump to  the  second                                                               
section, which is Section 12 in CSSB 2001(RES), Version M.                                                                      
                                                                                                                                
CHAIR FRENCH noted this relates  to DOR's reciprocal requirements                                                               
and abilities.  He asked Mr. Iversen to describe those.                                                                         
                                                                                                                                
MR. IVERSEN read from Section 12, which states:                                                                                 
                                                                                                                                
     * Sec. 12. AS 43.05.230(h) is amended to read:                                                                           
          (h) The commissioner shall, upon request, furnish                                                                     
     to the  Department of Natural  Resources copies  of tax                                                                    
     returns,  reports,  and  other  documents  filed  under                                                                
     AS 43.55 or  AS 43.65, and the  Department of Revenue's                                                                
     determinations  and  workpapers under  those  chapters.                                                                
     The Department of Natural  Resources shall maintain the                                                                    
     confidentiality  that  the  Department  of  Revenue  is                                                                    
     required to extend to  the returns, reports, documents,                                                                    
     determinations,   and  workpapers   furnished  to   the                                                                    
     Department of Natural Resources under this subsection.                                                                     
                                                                                                                                
MR.  IVERSEN reiterated  that  AS 43.55  is  the production  tax.                                                               
Here it's  being limited  to matters  filed under  the production                                                               
tax statutes.   That then  links with DNR and  its administration                                                               
of oil  and gas  properties in  the state.   Also,  AS 43.65, the                                                               
mining license tax, currently is in statute.                                                                                    
                                                                                                                                
MR.  IVERSEN  pointed out  that  the  new language  "under  those                                                               
chapters" on line 10 was  inserted in the committee substitute in                                                               
lieu  of, to  his belief,  what was  in the  original ACES  bill,                                                               
"AS 43.55  or  AS 43.65".    He  surmised  it  doesn't  make  any                                                               
difference   substantively,  but   is  different   language  that                                                               
prevents having  to cite  the statutes again.   He  indicated the                                                               
reciprocal  confidentiality requirement  in  the  latter half  of                                                               
Section 12  is what  Chair French referenced  a few  minutes ago.                                                               
He summarized by saying there are limits.                                                                                       
                                                                                                                                
1:43:15 PM                                                                                                                    
SENATOR HUGGINS recalled that one  major limitation on exchanging                                                               
information seemed personality-driven, rather than statutory.                                                                   
                                                                                                                                
MR. IVERSEN replied  it's a bit of both.   The ultimate basis for                                                               
the confidentiality  is statute-driven.   Folks  in DOR  are very                                                               
wary  of the  penalties imposed  by statute.   But  because there                                                               
isn't  a bright  line for  information that  can be  shared, they                                                               
don't  want  to  get  into  a   gray  area.    That's  where  the                                                               
personalities  come in.   There  may have  been some  issues with                                                               
that in the past, with the two agencies perhaps being at odds.                                                                  
                                                                                                                                
MR. IVERSEN  said although  DOR is  trying to  work cooperatively                                                               
now,  the agencies'  natural cautions  that  have developed  over                                                               
time are  part of the issue  here.  Without the  clarity, it will                                                               
be difficult  to get around.   With penalties like those  DOR has                                                               
to deal  with, unless there is  clarity it is a  very, very, fine                                                               
line, and they  don't like to get  too close to it.   In response                                                               
to Senator  Huggins, he  said there  are no  additional penalties                                                               
under ACES with regard to these particular provisions.                                                                          
                                                                                                                                
SENATOR asked him to review the penalties.                                                                                      
                                                                                                                                
MR.  IVERSEN  noted several  provisions  in  current law  address                                                               
confidentiality;  he would  mention  the main  ones.   There  are                                                               
several  DNR confidentiality  provisions.    Three in  particular                                                               
are:   AS 38.05.035(a)(9), with  respect to  maintaining records;                                                               
AS 38.05.036(b),  regarding royalty,  net  profit share  leasing,                                                               
and  exploration-incentive  credits; and  AS 38.05.036(f),  which                                                               
addresses auditing.                                                                                                             
                                                                                                                                
MR. IVERSEN  said for DOR  there are a  couple of statutes.   The                                                               
primary driver  here is AS  43.05.230, which sets  out penalties.                                                               
That section  relates to disclosure  of tax returns  and reports.                                                               
Subsection (a) says in part that  it is unlawful for a current or                                                               
former employee  or agent of the  state to divulge the  amount of                                                               
income or  the particulars set  out or  disclosed in a  report or                                                               
return made  under this title.   He  noted "title" means  the DOR                                                               
statutes.    Subsection  (f)  of   that  statute  says  a  wilful                                                               
violation is punishable by a fine  of not more than $5,000, or by                                                               
imprisonment for not more than two years, or both.                                                                              
                                                                                                                                
1:47:50 PM                                                                                                                    
CHAIR FRENCH  requested confirmation that  someone can be  put in                                                               
jail for divulging this information without statutory authority.                                                                
                                                                                                                                
MR. IVERSEN affirmed  that for a wilful violation.   He also said                                                               
there  is an  express exception  to  the Public  Records Act  for                                                               
confidential taxpayer information.   Those are the main operative                                                               
statutes in terms of confidentiality.                                                                                           
                                                                                                                                
CHAIR  FRENCH asked  whether there  were further  questions about                                                               
confidentiality  or   information  sharing.     He   then  turned                                                               
attention  to seismic  data.   He specified  that the  discussion                                                               
would  be about  the  original  version of  SB  2001, Version  A,                                                               
rather than CSSB 2001(RES).                                                                                                     
                                                                                                                                
SENATOR THERRIAULT highlighted Sections 36-44 of Version A.                                                                     
                                                                                                                                
1:49:18 PM                                                                                                                    
^Julie  Houle, Section  Chief, Resource  Evaluation, Division  of                                                               
Oil & Gas, DNR                                                                                                                  
JULIE  HOULE, Section  Chief,  Resource  Evaluation, Division  of                                                               
Oil &  Gas, Department  of Natural  Resources, noted  that Kurtis                                                               
Gibson, the division's deputy director,  would try to join in but                                                               
had another commitment.  Ms.  Houle explained that she would talk                                                               
about the  ACES bill with  respect to Sections 36-44,  which were                                                               
removed from the bill and relate to AS 43.55.025.                                                                               
                                                                                                                                
CHAIR FRENCH  asked her  to focus  on information  sharing rather                                                               
than  financial  aspects,  which  would be  left  to  the  Senate                                                               
Finance Committee.                                                                                                              
                                                                                                                                
MS. HOULE told  members AS 43.55.025 is a program  with DOR.  The                                                               
Division  of Oil  & Gas  gets  involved because  it collects  the                                                               
confidential  seismic  or  well  data   for  DOR  and  makes  the                                                               
determination  for   DOR  under  this  program   that,  yes,  the                                                               
companies  have turned  in  the  data.   In  general, DOR,  which                                                               
administers  this program,  will ask  questions of  the division;                                                               
DOR  determines  whether  or  not the  company  gets  the  money.                                                               
Generally, DOR doesn't look at  the data unless a question arises                                                               
as to  whether something should  be an  allowable cost.   Part of                                                               
the language in the ACES bill was  just to shore up some of these                                                               
requirements that the division has  found, in collecting data, to                                                               
be troublesome.                                                                                                                 
                                                                                                                                
MS.  HOULE  noted  it  added   two  other  things  to  the  bill:                                                               
5 percent  credits  for  all  seismic  surveys  and  an  extended                                                               
timeline  for drilling  wells,  from  150 to  540  days.   As  an                                                               
investor with all these  exploration-incentive credits, the state                                                               
is  one  of  the  largest  investors  in  Alaska  for  wells  and                                                               
"seismic."  With  the 5 percent credit for a  seismic survey shot                                                               
prior to  2003, there is  value, not  for whoever shot  the data,                                                               
but for the  explorer years from now who wants  that data without                                                               
the restrictions of a licensing agreement.                                                                                      
                                                                                                                                
MS. HOULE  explained that  with the 5  percent credit,  the state                                                               
would be  purchasing data that  the commissioner deemed  of value                                                               
to future explorers.  The state  would own the data and then hand                                                               
it  out to  companies  interested  in exploring.    That was  the                                                               
intent.  She noted people  in her group are petroleum geologists,                                                               
geophysicists, and engineers; they'd  said if they were explorers                                                               
coming to  Alaska they'd want access  to data to get  started and                                                               
then could  decide where to  then focus their exploration.   Data                                                               
like this would be of huge value.                                                                                               
                                                                                                                                
1:52:37 PM                                                                                                                    
CHAIR  FRENCH   asked  to   what  extent   this  data   has  been                                                               
commercially abandoned.  Why is it  no longer the property of the                                                               
seismic crew or the company that employed the seismic crew?                                                                     
                                                                                                                                
MS.  HOULE  answered that  the  companies  still have  the  data.                                                               
However, it  is of  little value  to them  at this  point because                                                               
they have  newer surveys.   The older  data is likely  sitting in                                                               
their vaults.  While  it's not of much use to them,  it can be of                                                               
great value to a new company coming in.                                                                                         
                                                                                                                                
CHAIR FRENCH asked where this is in the process of leasing.                                                                     
                                                                                                                                
MS. HOULE answered  that someone interested in an  area in Alaska                                                               
would first  want to acquire  seismic data.  This  allows looking                                                               
at  the  big  picture  of what  potentially  exists  underground,                                                               
looking for  the older wells  drilled in the area,  and combining                                                               
those to  come up with  prospects.  With respect  to exploration,                                                               
most fields on  the North Slope have been  discovered looking for                                                               
something else;  fortunately, the original objective  was deeper.                                                               
She emphasized that much of it is happenstance in exploration.                                                                  
                                                                                                                                
1:53:59 PM                                                                                                                    
MS. HOULE  referred to the extension  of the time to  drill wells                                                               
from 150  to 540  days.   She noted Armstrong,  which came  in to                                                               
drill  the Oooguruk  area, was  able to  drill three  exploration                                                               
wells in one  season, all within three miles of  each other.  The                                                               
extension would give an incentive  to an explorer who is actively                                                               
trying to explore an area.                                                                                                      
                                                                                                                                
MS. HOULE indicated another predictability  process DNR wanted to                                                               
describe  was to  allow  companies to  come  in for  preapproval.                                                               
This  is for  two  reasons.   First,  now  some  seismic data  is                                                               
partially shot over  state land and partially  over private land.                                                               
The state  only gets the  data shot  over state acreage  and thus                                                               
the survey is  of little value; credit is provided,  but it isn't                                                               
as useful  to a future  explorer.  So  private owners need  to be                                                               
made aware,  up front, that if  they want this credit,  the whole                                                               
survey will be provided to the state  and in ten years it will be                                                               
available to the public.                                                                                                        
                                                                                                                                
MS. HOULE explained that currently  the only way seismic data can                                                               
be  available  publicly  is  through  the  exploration  incentive                                                               
credit (EIC) process.  In response  to Chair French, she said the                                                               
EIC  is an  incentive  for  explorers to  look  for  oil and  gas                                                               
outside of the existing units.   Now if someone comes in to apply                                                               
for a  seismic permit from  the State  of Alaska and  the permits                                                               
group,  that  data  never  becomes  public.    Through  this  EIC                                                               
process, the data becomes public in ten years.                                                                                  
                                                                                                                                
1:56:10 PM                                                                                                                    
SENATOR  THERRIAULT gave  his understanding  of  the current  EIC                                                               
process:  The  company decides to spend the money  and then comes                                                               
to the  state to request reimbursement  after the fact.   Part of                                                               
the  effort with  this  set of  statutory changes  is  to have  a                                                               
process  wherein  the  company  comes  to  the  state  first  for                                                               
preapproval for whatever the company will do for the credit.                                                                    
                                                                                                                                
MS. HOULE  affirmed that, emphasizing  predictability.   She said                                                               
if the state is  investing up front, it wants to  be able to know                                                               
what is  being invested  in.   And the  company knows,  up front,                                                               
that its credit will more than likely be given.                                                                                 
                                                                                                                                
SENATOR  THERRIAULT surmised  if the  company follows  through on                                                               
the plan  it has  been presented and  that has  been preapproved,                                                               
then the company will qualify.                                                                                                  
                                                                                                                                
MS.  HOULE affirmed  that, adding  that preapproval  won't be  an                                                               
onerous process.   Her  group has  people who  know the  State of                                                               
Alaska well  and can  easily assist  in the  process in  a fairly                                                               
short order.  This reduces  uncertainty, and the company knows it                                                               
will get the credit.  With  respect to data sharing, this way the                                                               
state acquires  seismic data that  can be provided to  the public                                                               
in a timely  manner:  ten years for newly  shot seismic data, and                                                               
within a  month of getting  a credit  for the older  seismic data                                                               
from before 2003.                                                                                                               
                                                                                                                                
SENATOR WIELECHOWSKI asked what an average seismic survey costs.                                                                
                                                                                                                                
MS.  HOULE indicated  geophysicist  Paul Anderson  works for  her                                                               
group and is  familiar with it.   She said on the  North Slope it                                                               
is $25,000 to  $35,000 a square mile, actually less  than at Cook                                                               
Inlet,  where it  is  $90,000  to $120,000  a  square  mile.   In                                                               
further response, she said if the  seismic survey is outside of a                                                               
unit and 25 miles away  from infrastructure, the company receives                                                               
40 percent credit.   If it's  within 25 miles of  existing units,                                                               
it  is 20  percent.    "Similar to  the  wells  also, under  that                                                               
program," she added.                                                                                                            
                                                                                                                                
The committee took a brief at-ease.                                                                                             
                                                                                                                                
1:58:36 PM                                                                                                                    
CHAIR FRENCH  welcomed Senator Ellis  and Senator Wagoner  to the                                                               
meeting, indicating they'd been present for some time.                                                                          
                                                                                                                                
MS.  HOULE, in  response  to Senator  Therriault, explained  that                                                               
it's easier to  shoot seismic data on the North  Slope because in                                                               
the  winter the  geophones can  be  set out  and it  can be  done                                                               
quickly.  At  Cook Inlet it can  only be shot at  slack tide, and                                                               
the  terrain is  much more  difficult to  shoot on  land.   Also,                                                               
there are  a couple  of other  types of data  that DNR  is asking                                                               
for.  One  is fluid analyses, very important for  heavy oil.  The                                                               
other is core data, which the  state would then provide to future                                                               
explorers.  The  reason to provide this data to  the public is so                                                               
future explorers can have a good data set to start with.                                                                        
                                                                                                                                
CHAIR  FRENCH  asked:   It  isn't  as  if  the state  is  selling                                                               
someone's proprietary information, is it?                                                                                       
                                                                                                                                
MS.  HOULE  replied no,  they're  not  looking  at it  that  way.                                                               
Rather,  they're viewing  it  as the  state  investing by  giving                                                               
credits in  a proper timeframe.   Two years within drilling  of a                                                               
well or ten years within  shooting seismic data, the data becomes                                                               
public.    The company  that  shot  the  data  may no  longer  be                                                               
interested in the area, but someone  else might be.  It makes the                                                               
prospectivity better for new explorers coming to Alaska.                                                                        
                                                                                                                                
CHAIR  FRENCH asked:   What  if whoever  shot the  data is  still                                                               
interested and is perhaps just proceeding slowly?                                                                               
                                                                                                                                
MS. HOULE  answered that if they  had the leases all  tied up, it                                                               
wouldn't  be a  problem.   And if  they wanted  to keep  the data                                                               
confidential,  they wouldn't  have to  apply for  the exploration                                                               
incentive credit.   If they didn't want the  money, they wouldn't                                                               
have to provide the data.                                                                                                       
                                                                                                                                
SENATOR  WIELECHOWSKI asked:   If  a company  wants to  keep this                                                               
information confidential, it just doesn't take the credit?                                                                      
                                                                                                                                
MS. HOULE said yes.  But under the  rules of the Alaska Oil & Gas                                                               
Conservation Commission (AOGCC), which  permits wells, within two                                                               
years of drilling a well,  in general, the well "becomes public."                                                               
In  further response,  she  said except  for  under this  current                                                               
AS 43.55.025 program,  there is  no other  way that  seismic data                                                               
becomes publicly  available.  There  is one caveat:   The charter                                                               
data from  the BP merger  is available,  but someone must  sign a                                                               
licensing  agreement,  and  someone  who  gets  that  data  after                                                               
signing such an agreement cannot hand it to someone else.                                                                       
                                                                                                                                
2:02:05 PM                                                                                                                    
MS. HOULE  concluded by saying the  data sharing was to  shore up                                                               
the language  in the EIC  program, which is working  pretty well.                                                               
Most of the EICs applied for  generally have been for seismic and                                                               
wells in the National Petroleum Reserve-Alaska (NPR-A) area.                                                                    
                                                                                                                                
SENATOR THERRIAULT said it seems this  is one thing the state can                                                               
do to  help new entrants.   He referred  to the modeling  done by                                                               
Gaffney  Cline yesterday  on the  legacy fields,  noting this  is                                                               
potentially very meaningful outside those fields.                                                                               
                                                                                                                                
MS.  HOULE  concurred, saying  this  is  very important  for  new                                                               
entrants who  want to get started  in an area but  don't have any                                                               
data to begin with.  It  is definitely outside the legacy fields.                                                               
In order  to qualify  for the  credits, it  must be  greater than                                                               
three miles  from an existing well,  and more than 25  miles from                                                               
an existing unit to get the additional 20 percent.                                                                              
                                                                                                                                
SENATOR  THERRIAULT gave  his understanding  that there  was some                                                               
criticism of the  5 percent credit allowance  that a commissioner                                                               
can use  to get  access to  the old data.   The  commissioner now                                                               
would have power  to issue these credits.  He  asked Ms. Houle to                                                               
touch on that.                                                                                                                  
                                                                                                                                
MS. HOULE agreed  there was an objection raised about  that.  She                                                               
said there is  a process that her Resource  Development group has                                                               
to go  through to  evaluate whether  that data  is indeed  in the                                                               
best interest  of the state.   There would  have to be  a finding                                                               
and   decision,  and   then  it   would  be   presented  to   the                                                               
commissioner.   But  the commissioner  couldn't willy-nilly  just                                                               
give  credit for  data  if someone  in her  group  deemed it  not                                                               
usable to  future explorers.   She indicated  her group  had been                                                               
looking at  this from the point  of view of a  potential explorer                                                               
and what type of data such an explorer would want.                                                                              
                                                                                                                                
MS.  HOULE, in  further response,  said that  would be  available                                                               
within 30 days after purchase,  because basically the state would                                                               
be purchasing  it without a licensing  agreement restriction, and                                                               
after  30  days  the  older   data  would  then  become  publicly                                                               
available.                                                                                                                      
                                                                                                                                
SENATOR  THERRIAULT noted  it would  be a  quick turnaround.   He                                                               
again highlighted  the change  in the  current system  that would                                                               
give  applicants  preapproval  instead  of having  to  request  a                                                               
credit after the fact.                                                                                                          
                                                                                                                                
MS. HOULE  said the preapproval  would be for new  seismic shoots                                                               
and new  wells.  That data  would be confidential for  ten years.                                                               
In further response,  she said currently who applies  for an EIC,                                                               
whether it  was granted  or not,  and when  the data  will become                                                               
available aren't  in the  public record.   Language in  this bill                                                               
would require  that DOR put it  on its website so  companies know                                                               
certain data will be available.  Now it's all confidential.                                                                     
                                                                                                                                
CHAIR FRENCH  surmised if it  can be listed publicly,  then folks                                                               
can see what's  available, make an informed  choice, and actually                                                               
access the data in a meaningful way.                                                                                            
                                                                                                                                
MS.  HOULE agreed,  noting it  will help  people know  what areas                                                               
they might want to explore.   Otherwise, they'd have to go to the                                                               
different  companies  to  get  data.    If  three  companies  had                                                               
participated in a  seismic shoot, for example, two  might be okay                                                               
with trading the  data but the third might not;  then it wouldn't                                                               
become available.                                                                                                               
                                                                                                                                
The committee took an at-ease from 2:07:06 PM to 6:06:42 PM.                                                                
                                                                                                                                
^Public testimony                                                                                                               
CHAIR FRENCH opened public testimony.                                                                                           
                                                                                                                                
JACKIE STEWART,  Juneau, informed  members that she  was speaking                                                               
as  an  individual  but  has  been in  business  in  Alaska  over                                                               
20 years.    The  last  8.5  years  she  has  been  the  business                                                               
counselor  for  the  Small  Business  Development  Center,  which                                                               
serves  all of  Southeast Alaska.   Because  financial statements                                                               
are difficult,  she spends a  lot of time consulting  with people                                                               
about them,  including the difference  between gross  revenue and                                                               
net profit.   She expressed amazement that  the legislature would                                                               
consider  taxing  on  net  profit,  which  she  characterized  as                                                               
"whatever you  want it to be."   She invited members  to attend a                                                               
class  she  was teaching  November 28  on  the subject  and  also                                                               
offered to consult with members  individually; she clarified that                                                               
she didn't intend it to be demeaning.                                                                                           
                                                                                                                                
MS.  STEWART said  companies always  complain when  taxed.   Last                                                               
year they complained  about the taxes they wound  up getting; now                                                               
they seem to think it was  a sweet deal and continue to complain.                                                               
She recalled  a Chamber  of Commerce meeting  where a  woman said                                                               
this  is about  jobs,  not taxes,  and the  state  is taxing  oil                                                               
companies at  64 percent; Ms.  Stewart had asked  what percentage                                                               
of that is royalties, but the woman had said she didn't know.                                                                   
                                                                                                                                
MS.  STEWART  surmised   legislators  understand  the  difference                                                               
between  royalties and  taxes,  though.   Royalties  pay for  the                                                               
resource,  which the  companies  don't own;  it's  their cost  of                                                               
goods.   To  her understanding,  the  state has  arranged to  tax                                                               
partly  on royalties  and then  have a  tax that  is basically  a                                                               
sharing of the risk.  At  the Chamber of Commerce meeting the two                                                               
were confused, however, as if the 64 percent were all taxes.                                                                    
                                                                                                                                
MS.  STEWART urged  legislators to  do what  she believes  should                                                               
have been  done last year:   tax based on gross  revenue, not net                                                               
profit.   The latter only  leads to  lots of work  for attorneys.                                                               
She said any company can  claim expenses that are legitimate; she                                                               
cited an example.   She then asked:   Do we really  want to argue                                                               
with  oil companies  over  what their  expenses  are and  whether                                                               
they're legitimate?                                                                                                             
                                                                                                                                
MS. STEWART  recalled Governor Palin  said she wants this  tax to                                                               
be  transparent, be  fair,  and  encourage resource  development.                                                               
Ms. Stewart  agreed, but  emphasized keeping  it simple  and easy                                                               
for Alaskans  to understand.   If it is  simple, it will  be fair                                                               
and will eliminate having to spend time and money on litigation.                                                                
                                                                                                                                
MS.  STEWART  also  suggested  if  oil  companies  want  the  tax                                                               
percentage reduced, taxing the gross  does that.  She opined that                                                               
oil companies make 30-34 percent  profit, but posed a scenario in                                                               
which a company  makes 10 percent profit, average  for a company.                                                               
If 100 percent is gross revenue  and the company makes 10 percent                                                               
profit,  then  1 percent   of  gross  revenue  is   the  same  as                                                               
10 percent of profit.  Taxing on gross reduces the percentage.                                                                  
                                                                                                                                
6:13:31 PM                                                                                                                    
TIM ARNOLD, Juneau, speaking on his  own behalf, said he has been                                                               
employed in the mining industry 30  years and came to Alaska from                                                               
Nevada four  years ago, thinking  the state was  pro-business and                                                               
pro-mining.   Although  he still  feels that  way, other  factors                                                               
have him worried  about doing business in Alaska.   Asserting all                                                               
is  not well  in  the private  sector, he  cited  impacts to  the                                                               
Southeast Alaska timber industry, mining, fishing, and tourism.                                                                 
                                                                                                                                
MR. ARNOLD  expressed appreciation for legislators'  concern with                                                               
ensuring the state is funded  adequately and the growing needs of                                                               
its citizens  are met.  But  he said the private  sector actively                                                               
generates the bulk  of the state's revenue.  Thus  it is critical                                                               
that  Alaska  have  a healthy  business  climate,  positioned  to                                                               
compete  on  a  global  scale for  the  investment  necessary  to                                                               
develop small  and big projects in  Alaska's resource industries.                                                               
These  projects  will keep  local  and  state government  revenue                                                               
streams and will provide jobs for Alaskans.                                                                                     
                                                                                                                                
MR.  ARNOLD said  there are  plenty  of hurdles  for the  private                                                               
sector.   He hopes  legislators are  cautious about  creating new                                                               
ones through new taxes, higher taxes,  or any other measures.  He                                                               
opined that  the most learned body  to make laws was  designed to                                                               
be, and  is, the state  legislature.  Legislators should  craft a                                                               
proper message about  how willing Alaska is  to promote business.                                                               
Alaska fell  to 47 out of  50 states in a  recent Forbes magazine                                                             
ranking  of  business  climates,  he   recalled.    He  said  the                                                               
legislature's decisions  in this historic session  should be ones                                                               
that  will preserve  and attract  a  business climate,  whittling                                                               
that number down a few notches.                                                                                                 
                                                                                                                                
6:16:56 PM                                                                                                                    
DONALD  BENSON described  himself  as a  55-year lifelong  Alaska                                                               
resident and third-generation descendant  living in the Matanuska                                                               
Valley.  He strongly encouraged  members to add back key elements                                                               
of  the  ACES  plan  that  were  stripped  out  in  the  previous                                                               
committee:     the  .02 progressivity;   the  $30   trigger;  the                                                               
25 percent tax rate; and the  most important administrative tools                                                               
that  expand  the  list of  reporting,  return,  and  expenditure                                                               
information, which the administrative accountants need badly.                                                                   
                                                                                                                                
MR. BENSON requested passage of  ACES to restore public trust and                                                               
bring Alaska  its fair share  of oil and  gas revenues.   He said                                                               
the governor's plan will do this.   He recalled polls in the past                                                               
weeks showing 72 percent or more  of the public agree that Alaska                                                               
isn't  getting its  fair share  and that  PPT is  broken in  some                                                               
manner; the  latest poll shows  83 percent approval  for Governor                                                               
Palin and her  administration.  He said Alaskans  are telling the                                                               
legislature  their  position; they  are  the  voters.   He  asked                                                               
members to follow  the will of the people by  making ACES the new                                                               
tax system.   It is  an accounting system  and must be  intact in                                                               
order to  work for Alaska and  the administration.  He  said ACES                                                               
ensures Alaska will be treated as an equal partner.                                                                             
                                                                                                                                
CHAIR FRENCH noted Senator Thomas of Fairbanks was present.                                                                     
                                                                                                                                
6:20:04 PM                                                                                                                    
MARK SHARP  told members  he was representing  the future  of the                                                               
state:   his  children and  grandchildren.   A 52-year  Fairbanks                                                               
resident,  Mr. Sharp  said he  counts himself  among the  growing                                                               
number of  Alaskans who've become disenchanted  or disgusted with                                                               
the integrity and ineffectiveness of  the legislature.  He opined                                                               
that  most Alaskans  simply don't  trust  legislators; that  many                                                               
representatives are  ignoring the governor; that  the legislature                                                               
has  abdicated responsibility  to police  its own,  and thus  the                                                               
federal government has  had to step in; and  that the legislative                                                               
branch  has  become  paralyzed.     He  indicated  he'd  provided                                                               
testimony and  input about  tax ideas several  times but  felt he                                                               
wasn't being listened to.                                                                                                       
                                                                                                                                
MR. SHARP  said Alaskans  face a  staggering energy  crisis, with                                                               
Cook Inlet gas drying  up and Railbelt heating oil at  $3 or $4 a                                                               
gallon, higher  at Dutch Harbor.   He mentioned rampant  greed of                                                               
the "big three" oil companies,  which have set another record for                                                               
profits while  crying impoverishment.  Referring  to his previous                                                               
testimony,  he  said  both resources  committees  have  abdicated                                                               
responsibility to  assess the value  of the oil resources  and to                                                               
develop a  fiscal policy  to maximize the  benefit to  Alaskans -                                                               
which he surmised is being  interpreted as maximum benefit to the                                                               
oil industry.                                                                                                                   
                                                                                                                                
MR. SHARP suggested legislators  who aren't corrupt are complicit                                                               
for closing their eyes to the  criminal activity.  Worse, as they                                                               
sequester  themselves in  Juneau  with scores  of oil  lobbyists,                                                               
Alaskans are frozen  out of their own political  process and thus                                                               
have lost  control of their  economic future.   He asked  what it                                                               
would have  taken to  schedule a committee  meeting or  two along                                                               
the highway system, rather than  having legislators listen over a                                                               
crackly intercom; perhaps  then they'd hear folks say  to keep it                                                               
simple.     Mentioning   a   point-of-production-based  tax   and                                                               
capturing Alaska's  fair share, Mr.  Sharp said allowing  the oil                                                               
companies to  "write the  PPT legislation  and then  use it  as a                                                               
starting and finishing point was, and is, insane."                                                                              
                                                                                                                                
6:25:52 PM                                                                                                                    
BUZZ  OTIS,   Great  Northwest,   noted  Great  Northwest   is  a                                                               
construction  group; he  indicated  he has  been  in business  in                                                               
Fairbanks 33  years.   Unlike the  previous speaker,  he believes                                                               
most politicians in Juneau are there  to do a good job for Alaska                                                               
and  are honorable  people; he  thanked them  for their  service.                                                               
However,  he  believes  Alaska  is  at  an  economic  crossroads.                                                               
Federal funding is being challenged,  which likely will continue.                                                               
He  cited  challenges  to  the  mining  and  housing  industries,                                                               
predicting the construction industry will follow soon.                                                                          
                                                                                                                                
MR. OTIS urged caution, asking members  to come up with a formula                                                               
that is  stable and  will encourage  long-term investment  in the                                                               
oil fields, not  only on the North Slope but  also in Cook Inlet.                                                               
He noted  Doyon and  some of  its partners  are exploring  in the                                                               
Nenana Basin,  for instance.  He  also expressed the need  to not                                                               
have to  revisit this issue.   A business person whose  taxes are                                                               
revisited every year  or 18 months would be  nervous about making                                                               
an investment for the long term.  It's all associated with risk.                                                                
                                                                                                                                
6:28:24 PM                                                                                                                    
JERRY McCUTCHEON,  Anchorage, representing himself, said  the use                                                               
of ridiculous  illustrative examples  needs to stop  because they                                                               
have a bad habit of later becoming  facts.  He asked:  Why do you                                                               
think the  oil companies  are using  DNR/DOR numbers  rather than                                                               
their own?   Referring to  Exxon's testimony today, he  said some                                                               
state employees put  out an illustrative example  that proves the                                                               
oil companies' case better than industry numbers do.                                                                            
                                                                                                                                
MR. McCUTCHEON  referred to the  Gaffney Cline examples  and said                                                               
250,000  barrels  a day  as  the  oil-pipeline minimum  flow  and                                                               
shutdown  point   is  nuts   and  stupid,   even  if   it's  only                                                               
illustrative.   He suggested trying  50,000 barrels a day  at $80                                                               
oil, for  $1.5 billion a year; at  $40, for $750 million;  and at                                                               
$20, for $375 million.  Mr.  McCutcheon negated the idea that oil                                                               
companies would  shut down the  line if the throughput  were only                                                               
50,000  barrels a  day at  $20 a  barrel, abandoning  billions of                                                               
dollars of North Slope infrastructure  and then having to pay for                                                               
its removal.                                                                                                                    
                                                                                                                                
MR.  McCUTCHEON recalled  today  Exxon told  the House  Resources                                                               
Standing  Committee  there's  another 53 billion  barrels  to  be                                                               
discovered in Alaska,  not counting 30 billion of  viscous oil or                                                               
30  billion of  heavy oil.    He said  a perfect  example of  "no                                                               
abandonment" is the  Cook Inlet platforms, where not  one of them                                                               
makes economic  sense "the way  you people have  been calculating                                                               
things."  He  said it costs more to remove  the platforms than to                                                               
keep them, which is why they're still there.                                                                                    
                                                                                                                                
MR.  McCUTCHEON  opined that  Prudhoe  Bay  has already  produced                                                               
6.1 billion barrels, more oil than  would have been produced if a                                                               
gas  line had  been constructed  in the  1980s; at  least another                                                               
9 billion barrels  remain to be produced.   It is a  good time to                                                               
discuss the Cook Inlet platforms,  he said, for those who persist                                                               
in demanding  a gas line  and expensive  oil recovery.   He added                                                               
that   there  is   more  "once-recoverable   oil   that  is   now                                                               
unrecoverable"  under the  platforms than  was recovered,  over a                                                               
billion barrels,  worth at least  $80 billion at  today's prices.                                                               
He explained  that the  gas that  came up with  the oil  had been                                                               
sold  off.   He cited  the example  of Swanson  River, where  the                                                               
percentage  of  oil   recovery  was  three  times   that  of  the                                                               
platforms.                                                                                                                      
                                                                                                                                
MR. McCUTCHEON suggested  since Alaska will own  Point Thomson if                                                               
Governor Palin  doesn't sell  Alaska out,  Alaska should  sue the                                                               
Prudhoe Bay  owners for  a realignment  of Prudhoe  Bay interests                                                               
with Point  Thomson - just  as Prudhoe  Bay owners have  sued one                                                               
another several times to sort  out ownership, the last time being                                                               
a decade  ago.   He concluded  by saying  the injection  of Point                                                               
Thomson gas into  Prudhoe Bay would make the State  of Alaska the                                                               
largest shareholder of Prudhoe Bay.                                                                                             
                                                                                                                                
6:33:42 PM                                                                                                                    
STU GRENIER,  Anchorage, recalled yesterday hearing  on the radio                                                               
that Alberta,  Canada, raised  its royalties by  20 percent.   He                                                               
said that  is very simple.   Everyone understands what  it means.                                                               
By contrast,  ACES has  a lot of  people scratching  their heads.                                                               
He noted  at a  meeting at East  High a few  weeks ago  there was                                                               
mention of raising royalties or  something equivalent for the two                                                               
big producing fields,  Kuparuk and Prudhoe Bay.   That is simple.                                                               
People would understand and support it.                                                                                         
                                                                                                                                
MR. GRENIER similarly  proposed giving tax breaks  on what hasn't                                                               
been   produced  yet   and   raising   royalties,  or   something                                                               
equivalent,  for those  fields.   He expressed  concern that  the                                                               
ship  is  going  down  economically  because  of  the  oil  flow.                                                               
Legislators must  start making hard  decisions so  Alaska doesn't                                                               
end up with infrastructure it cannot  pay for.  They also must do                                                               
something to help the state in the  long run, 30 or 40 years from                                                               
now, such as  taking the increased royalties from  the big fields                                                               
and then developing hydro projects  along the Railbelt.  At least                                                               
then there'd be usable energy for future Alaskans.                                                                              
                                                                                                                                
MR.  GRENIER  pointed out  that  whatever  doesn't get  developed                                                               
because  of raising  taxes  or  royalties will  still  be in  the                                                               
ground  for future  generations to  develop.   Nothing says  this                                                               
generation has  to develop  everything now  for its  own benefit.                                                               
He  expressed   concern  that  the  legislature   isn't  fiscally                                                               
conservative.   Whatever  comes  from future  taxes or  increased                                                               
royalties should go into long-term  productive projects that will                                                               
benefit  future  generations,  rather  than just  having  "a  big                                                               
party" now.   Saying the oil companies are  smooth, getting their                                                               
tax  breaks  and producing  propaganda,  he  asked for  something                                                               
simple and  clear, increasing royalties  as he'd  discussed, with                                                               
the hope of having something to show for all this money later.                                                                  
                                                                                                                                
6:38:37 PM                                                                                                                    
AVES  THOMPSON, Executive  Director, Alaska  Trucking Association                                                               
(ATA),   Anchorage,  said   ATA   is   a  50-year-old   statewide                                                               
organization  representing  trucking  interests  from  Barrow  to                                                               
Ketchikan.  Its more than  200 member companies represent all the                                                               
diverse  trucking operations  in  the state,  and many  associate                                                               
members provide goods and services  to this industry.  In Alaska,                                                               
trucking employs  over 20,000 people,   1 out of every  14 in the                                                               
workforce.  Payrolls  total over $900 million annually.   Most of                                                               
the   several  thousand   family-owned  and   corporate  trucking                                                               
businesses have fewer than 10 employees.                                                                                        
                                                                                                                                
MR. THOMPSON  turned to PPT  issues and  SB 2001.  He  said while                                                               
the  emphasis seemingly  has been  on raising  taxes to  increase                                                               
state revenue, ATA  believes the better way  to maximize benefits                                                               
to Alaska is to provide  good-paying, long-term jobs for this and                                                               
future  generations.   The state  needs to  focus on  slowing the                                                               
production decline.  Investments need  to 1) continue in existing                                                               
fields,  2) be  made in  heavy  oil, and  3) be  made to  promote                                                               
development of new fields.   Existing field development should be                                                               
the first  priority, since  most new  production in  recent years                                                               
has  occurred in  such  fields.   Without  this base  production,                                                               
heavy  oil  and  other  new field  development  will  face  major                                                               
additional challenges.                                                                                                          
                                                                                                                                
MR. THOMPSON said the oil  and gas business is capital-intensive;                                                               
it takes  many years for a  return on investments.   Increases to                                                               
taxes  lengthen  that recovery  time  and  can negatively  impact                                                               
project  economics and  investment decisions.   While  tax policy                                                               
should produce state revenues, it  is more important to encourage                                                               
future  investment to  develop Alaska's  abundant resources.   He                                                               
urged keeping the  tax rate low and using  incentives to increase                                                               
such investment, thereby providing  good, long-term jobs for this                                                               
and future generations.                                                                                                         
                                                                                                                                
6:41:33 PM                                                                                                                    
JASON  BRUNE, Executive  Director,  Resource Development  Council                                                               
(RDC), Anchorage, noted his wife  works for Alyeska Pipeline.  He                                                               
described  RDC   as  a  business   association  with   a  diverse                                                               
membership  including  companies  and individuals  from  all  the                                                               
state's natural  resource industries, as well  as Native regional                                                               
corporations, local governments, organized labor, and more.                                                                     
                                                                                                                                
MR. BRUNE  emphasized sending a  positive message that  Alaska is                                                               
open for business.  He said  Alaska was allowed to become a state                                                               
because of its  rich natural resource wealth, but  it appears its                                                               
industries are  under attack; he  gave examples.  Turning  to the                                                               
oil and gas  industry, he expressed concern that  yet another tax                                                               
increase would  send a bad  message.  Ballot Measure 2  last year                                                               
sent a  message that Alaska may  in the future tax  reserves that                                                               
are in place; although it failed, it could come forward again.                                                                  
                                                                                                                                
MR.  BRUNE said  Alaska  lacks the  infrastructure  and has  high                                                               
costs  of doing  business.   Total government  take presently  is                                                               
around  64 percent.    Under  Governor   Palin's  bill  it  could                                                               
approach  68-70  percent, even  higher  with  progressivity.   He                                                               
urged  committee  members to  reject  any  amendments that  would                                                               
increase it further.                                                                                                            
                                                                                                                                
MR. BRUNE  noted this  morning former  Governor Knowles  spoke to                                                               
RDC.   Mr.  Brune encouraged  reading comments  at akrdc.org.  He                                                               
said  former  Governor Knowles  stressed  the  importance of  the                                                               
partnership between the  state and the oil and  gas industry, and                                                               
also emphasized -  as RDC has done for years  - the importance of                                                               
putting  a  long-term  fiscal  plan   in  place.    He  mentioned                                                               
incredible oil  revenues of  the past two  years, matched  by the                                                               
two largest budgets ever.                                                                                                       
                                                                                                                                
MR.  BRUNE  acknowledged the  state's  sovereign  right to  raise                                                               
taxes, but  said this doesn't  mean it  should.  As  for Alaska's                                                               
fair share,  he asked what a  fair share is and  what legislators                                                               
pay, for instance, as a fair  share to help run state government.                                                               
He  said Alaska  is the  only state  in the  US without  either a                                                               
state income tax or a state  sales tax, and Alaskans also receive                                                               
permanent fund dividends (PFDs), $1,654 each this year.                                                                         
                                                                                                                                
MR. BRUNE said  RDC believes a fiscal plan must  include not only                                                               
industry  taxes, but  also a  broad-based  tax, some  use of  the                                                               
permanent  fund, and  spending restraints.   "Industry  tax after                                                               
industry tax" does  not a fiscal plan  make.  Nor does  it send a                                                               
positive  message to  those  contemplating  investing in  Alaska,                                                               
bringing  future jobs.   He  urged  legislators to  put all  this                                                               
together as  part of a  fiscal plan.  He  also urged them  to let                                                               
PPT, put in place last year, work.                                                                                              
                                                                                                                                
6:46:51 PM                                                                                                                    
JEFFREY KNAUF,  Girdwood, said he  really likes the ACES  bill as                                                               
it  was  presented,  believing  it  provides  for  the  fair  and                                                               
equitable taxation  Alaskans are looking  for.  He views  the oil                                                               
industry  as looking  a  hundred  years ahead,  and  he finds  it                                                               
exceptionally  hard to  believe  the reserves  aren't there,  for                                                               
instance.                                                                                                                       
                                                                                                                                
MR.  KNAUF predicted  any amendments  to the  original ACES  bill                                                               
would likely  result in a  petition process, which  he'd strongly                                                               
support.   He  said  he knows  what  it is  like  to be  impacted                                                               
dramatically  by  the  Exxon  Valdez  incident  and  how  it  was                                                               
handled.   He doesn't  feel adequately represented.   Exxon  is a                                                               
substantial part  of an industry  that he doesn't believe  can be                                                               
trusted.                                                                                                                        
                                                                                                                                
MR. KNAUF  said he believes  ACES more than  adequately addresses                                                               
that,  and in  the  long term  it provides  good  revenue to  the                                                               
state.   Because  oil companies  cannot  regulate themselves,  he                                                               
counts on the state to present  something such as ACES and follow                                                               
through;  otherwise,  he believes  there  will  be an  aggressive                                                               
petition process to put it on the ballot.                                                                                       
                                                                                                                                
6:51:57 PM                                                                                                                    
EMILY FORD,  Government and  External Affairs  Manager, Anchorage                                                               
Chamber   of   Commerce,   said  her   member-driven,   nonprofit                                                               
organization  has more  than  1,200  members representing  75,000                                                               
employees.   She read  a condensed version  of a  letter recently                                                               
approved by the  board of directors and sent to  the governor and                                                               
the legislature.  Ms. Ford  said while appreciating the desire to                                                               
ensure that  the most vital  component of Alaska's  petroleum tax                                                               
regimen  was  the  result  of  sound  public  policy,  they  have                                                               
significant concerns regarding the review.                                                                                      
                                                                                                                                
MS. FORD  therefore requested the  following actions:   1) review                                                               
PPT to  ensure it is  sound public  policy, but don't  discard it                                                               
simply  because of  circumstances  involving dishonest  lawmakers                                                               
surrounding  its  passage;  2) if  there  are  legitimate  doubts                                                               
concerning the  effects of PPT,  don't be  afraid to allow  it to                                                               
exist  for  a  sufficient  time  to allow  reliable  data  to  be                                                               
generated,  consistent  with   the  original  legislation,  which                                                               
provided  for review  after five  years; 3) take  all appropriate                                                               
caution  to   protect  Alaska's   reputation  as  a   stable  tax                                                               
environment that  encourages and promotes  business opportunities                                                               
and investment; and 4) consider  any revenue enhancements only in                                                               
conjunction  with  developing  a  fiscal  plan,  a  spending-and-                                                               
savings plan for the State of Alaska.                                                                                           
                                                                                                                                
6:55:17 PM                                                                                                                    
JIM  SYKES,  Palmer, representing  himself,  said  he was  former                                                               
executive director of  Oil Watch Alaska, formed  in the mid-1990s                                                               
to ensure  the state gets  its fair  share and oil  companies are                                                               
treated  fairly  as  well.    He  referenced  a  report  released                                                               
December 9, 1998, by Richard  Feinberg of Fairbanks, "How Much Is                                                               
Enough," which said the state  wasn't getting enough oil revenue.                                                               
On that day, oil hit $10 a  barrel.  Mr. Sykes said the industry,                                                               
while  still making  a  profit at  $10 a  barrel,  denied it  was                                                               
making money.  However, it  was learned from oil company insiders                                                               
and government  officials that  the report -  which was  based on                                                               
publicly available information - was close  to the mark.  Even at                                                               
extremely low prices, oil is extremely profitable.                                                                              
                                                                                                                                
MR. SYKES surmised  oil companies have the ability  to move less-                                                               
profitable  heavy oil,  especially  at  today's sky-high  prices.                                                               
Had the  report's six recommendations  been followed,  there'd be                                                               
no need  to be  here today.   It centered  on a  "windfall equal-                                                               
sharing tax"  under which  "x" amount  is taken  out of  the full                                                               
price  of oil.   If  the  state is  an equal  partner, its  share                                                               
should rise and fall along with  the oil industry, resulting in a                                                               
fair  share no  matter what  the  price of  oil is.   The  report                                                               
called for a surcharge to kick in  at about $18.50 a barrel.  The                                                               
current discussion  is about adding  a surcharge after  $40, $50,                                                               
or $60 a barrel.  He opined it should be closer to $25 a barrel.                                                                
                                                                                                                                
MR. SYKES highlighted problems.   Long term, the aging oil fields                                                               
and  infrastructure are  increasingly expensive  and thus  a net-                                                               
profits tax  will assuredly result in  greater write-offs against                                                               
profits.   Short term,  Exxon, BP,  and ConocoPhillips  could rig                                                               
the system and  take advantage of profits they make  on behalf of                                                               
their  shareholders.   With respect  to information  not provided                                                               
from the companies,  he said if the state doesn't  have the tools                                                               
to monitor  a net-profits  tax, those should  be enacted;  it may                                                               
require a commission.                                                                                                           
                                                                                                                                
MR. SYKES agreed  with Mr. Benson that the  portions stripped out                                                               
of ACES should  be put back.  Mr. Sykes  said deductions on newer                                                               
and smaller fields  should only be allowed  for verifiable, cash-                                                               
only field expenses.   There should be more  public disclosure of                                                               
information.   And write-offs for lobbying,  media campaigns, and                                                               
so on should be prohibited.   The cost of cheating and delay must                                                               
be greater  than the  cost of proper  reporting and  the payment.                                                               
Also, access to  North Slope facilities by new  explorers must be                                                               
guaranteed.                                                                                                                     
                                                                                                                                
MR.  SYKES asked  legislators to  look  at actual  transportation                                                               
costs related  to TAPS; for  companies that both produce  oil and                                                               
ship  it  through  the  pipeline,  there  must  be  a  real  cost                                                               
attached, not  just what they say  costs are.  At  the same time,                                                               
those costs  must protect independent  companies, which  are aced                                                               
out of the pipeline because they're not owners.                                                                                 
                                                                                                                                
MR.  SYKES  disagreed  with the  contention  that  taxes  prevent                                                               
investing and  further exploration  on the  North Slope  and that                                                               
the oil producers may leave.  He  said they won't leave at $80 or                                                               
$40 a barrel.  Mentioning  former Governor Walter Hickel, he said                                                               
a partnership  with the oil  companies must  be equal.   He asked                                                               
legislators to reexamine the situation thoroughly.                                                                              
                                                                                                                                
7:02:54 PM                                                                                                                    
DAWN MENDIAS, Chugiak, a retired  teacher, said the profit motive                                                               
is strong  and the state  shouldn't underestimate  its resources.                                                               
As  long as  any  profit  exists, the  oil  companies will  stay.                                                               
Alaska is a  known and stable location, unlike  many other places                                                               
where these companies still operate.   Ms. Mendias also cautioned                                                               
against  thinking of  this  as  a partnership.    Rather, it's  a                                                               
business  relationship.   The  state  owns  the resources,  which                                                               
constitutionally are for the benefit of Alaska's people.                                                                        
                                                                                                                                
MS.   MENDIAS  said   PPT  is   flawed,  passed   in  haste   and                                                               
choreographed by the oil companies.   Corporations have one goal:                                                               
profit  for   their  shareholders.    Fairness   isn't  included.                                                               
Because  legislators   are  dealing   with  agents  of   the  oil                                                               
companies,  however, they  tend to  personalize it  and be  fair.                                                               
Instead, legislators should  get as much as  possible for Alaska,                                                               
especially since the  oil is declining.  As for  giving PPT time,                                                               
time  is money.   The  state cannot  afford to  lose billions  of                                                               
dollars waiting.                                                                                                                
                                                                                                                                
MS.  MENDIAS said  these companies  have slick  public relations,                                                               
accounts  that  can  play  with  net  profits,  and  some  Alaska                                                               
legislators  who are  weak, stupid,  pliant, or  corrupt to  help                                                               
achieve  their  goals.   She  asked  how  it  can be  that  while                                                               
companies rake in  record profits - which they  won't even reveal                                                               
upon  questioning  -  Alaska's schools,  swimming  pools,  social                                                               
programs,  village health  programs, and  infrastructure scramble                                                               
for funding.                                                                                                                    
                                                                                                                                
MS. MENDIAS encouraged  legislators to raise taxes  and take back                                                               
what belongs to  Alaskans, now and for the future.   A 25 percent                                                               
tax might not be enough.   She said ACES is okay unless something                                                               
even more  beneficial for Alaska's  bottom line can  be brokered.                                                               
Whatever it is, choose something simple.  Tax the gross.                                                                        
                                                                                                                                
7:06:50 PM                                                                                                                    
SIG RUTTER,  a 30-year Alaska  resident, said  after construction                                                               
of TAPS  was completed in 1976,  he went to work  on the pipeline                                                               
in 1977.   The  construction camps  were full  of people  and yet                                                               
little was  being done.   They were  flown to remote  hilltops by                                                               
helicopter  and then  sat around  campfires  telling stories  all                                                               
day; at night they returned to camp, where a big spread awaited.                                                                
                                                                                                                                
MR.  RUTTER said  the workers  knew  something extraordinary  was                                                               
going on, but didn't know what.   Later, lawsuits claimed that by                                                               
wasting money, the industry majors  were able to drive the tariff                                                               
up so high  that only they could afford to  bid on future leases.                                                               
Independent  drillers  from  Texas, Oklahoma,  and  Wyoming  were                                                               
unable to compete  because only the pipeline  owners could afford                                                               
to ship  their oil profitably  through TAPS.   The state  and its                                                               
people, because of the royalty, paid for all the waste.                                                                         
                                                                                                                                
MR.  RUTTER said  he believes  all  this talk  about providing  a                                                               
fertile  investment climate  is  poppycock,  whether it's  coming                                                               
from the Chamber of Commerce  or others.  Expressing disgust with                                                               
the legislature,  he discredited the  idea of a  partnership with                                                               
industry; opined  that a profits-based  tax will result in  a lot                                                               
of nonsense,  crime, and  corruption; and said  it is  about time                                                               
the oil companies start paying their own way.                                                                                   
                                                                                                                                
MR. RUTTER recalled  when TAPS was built, workers  expected it to                                                               
last 20  years; he  surmised that figure  came about  because the                                                               
legislature provided  a 20-year depreciation schedule.   Now TAPS                                                               
has gone 10  years beyond its projected life.   The oil companies                                                               
have basically  received a free  ride, because they  were allowed                                                               
to subtract costs  from the state's royalties.   Strongly blaming                                                               
the Republicans, he asked:  How many  times do we have to pay for                                                               
this  pipeline?   He  said  once the  depreciation  ran out,  the                                                               
companies started  talking about new incentives  and whatnot, and                                                               
he believes some fields pay no royalties at all.                                                                                
                                                                                                                                
7:11:01 PM                                                                                                                    
MARY AND  JIM ODDEN,  Nelchina, testified  via a  joint statement                                                               
read  by Mary  Odden.   They've lived  in Alaska  since the  mid-                                                               
1970s,  working  in  the  public   and  private  sectors.    They                                                               
currently  own  and operate  a  community  newspaper serving  the                                                               
Copper River Valley; their business  is tied to the local economy                                                               
and  to  some intangible  qualities  of  life  in Alaska.    They                                                               
consider themselves fiscal conservatives  who also recognize that                                                               
state  government  bears  responsibility for  maintaining  public                                                               
education,    safety,    resource   management,    transportation                                                               
infrastructure, and care for the weakest citizens.                                                                              
                                                                                                                                
MS.  AND MR.  ODDEN,  through  Mary Odden,  said  they support  a                                                               
careful design  of a fiscal  design for  Alaska.  The  best long-                                                               
term interests  of Alaskans aren't  necessarily those of  the oil                                                               
producers;  legislators  should  determine where  those  diverge.                                                               
They support the  governor's ACES plan, which  they don't believe                                                               
will hurt the  oil and gas industry.  If  the ACES tax percentage                                                               
is lowered,  a progressivity component  should balance it.   They                                                               
request  a price  or cost  protection for  legacy fields  such as                                                               
Prudhoe  Bay.   They  also ask  that  reporting requirements  for                                                               
companies be preserved.  Transparency  is critical.  Alaska needs                                                               
the  tools.   Finally,  legislators  should  adopt some  form  of                                                               
Senator Dyson's amendment which asks  that a future percentage of                                                               
the  progressivity   component  be  dedicated  to   repaying  the                                                               
constitutional budget reserve (CBR) account.                                                                                    
                                                                                                                                
7:15:06 PM                                                                                                                    
MALCOLM RAY,  Eagle River area,  described himself as an  oil and                                                               
gas owner with properties in 14 states  in the Lower 48.  He pays                                                               
from 3 percent  production tax in some states up  to 7 percent in                                                               
Oklahoma.   He  considers a  tax over  10 percent  to stifle  his                                                               
company's ability to explore for oil  and gas, or even to conduct                                                               
lower-risk  oil and  gas  projects.   He  would  never bring  his                                                               
company  to Alaska  under the  current  circumstances and  fiscal                                                               
situation, Mr.  Ray told members.   He has lived in  Alaska three                                                               
times; this time, he's been here 10 years.                                                                                      
                                                                                                                                
MR. RAY  said there  is an initiative  in Alaska  currently being                                                               
championed  by a  self-righteous  governor with  no knowledge  of                                                               
private industry.   Changing the  tax rate for a  single industry                                                               
three times  in as many  years is  an atrocity against  the state                                                               
and its  future well-being, and is  a direct attack on  people in                                                               
the Lower 48  who must pay even higher prices  for natural gas to                                                               
heat  their homes.   He  predicted Alaska  will be  like a  Third                                                               
World country if this continues.                                                                                                
                                                                                                                                
MR.  RAY  said  he  has  personal  knowledge  of  the  waste  and                                                               
corruption in this  government, beyond what has made  the news in                                                               
the last  few years.   He opined that  the real corruption  is in                                                               
the  governor's office,  not  the few  legislators  who may  have                                                               
worked with their buddies for a few thousand dollars.                                                                           
                                                                                                                                
MR.  RAY referred  to  a  five-page report  dated  August 3  from                                                               
Governor  Palin's  administration,  surmising  it's  a  hoax  and                                                               
cannot be  substantiated; Mr.  Ray said  he is  very professional                                                               
when requesting information  and has had a request in  for over a                                                               
week,  but DOR  won't send  data supporting  how this  report was                                                               
arrived at.   Also, while a  net-profits tax is in  line with how                                                               
individuals pay federal  income tax, and while  other states have                                                               
net-based  income  tax,  the  report says  the  State  of  Alaska                                                               
doesn't know  how to administer  this tax.   He closed  by saying                                                               
other  states  aren't  nearly  so greedy  with  respect  to  this                                                               
particular industry.                                                                                                            
                                                                                                                                
7:19:42 PM                                                                                                                    
DANIEL B.  WINN noted  he has  lived in  Alaska 38  years, mostly                                                               
around  Homer.   A commercial  fisherman,  he also  is a  retired                                                               
laborer  out of  Local 341.   He  believes a  gross-based tax  is                                                               
best.   A net-based tax pits  the state against some  of the best                                                               
lawyers  and accountants  in the  US; he  questioned whether  the                                                               
State of Alaska has the resources to  deal with that.  He wants a                                                               
tax to be straightforward, based only on the gross.                                                                             
                                                                                                                                
MR.  WINN  said there  are  shortcomings  with respect  to  state                                                               
oversight of the  oil industry.  The pipeline is  10 years beyond                                                               
its expected life,  he indicated.  He'd worked  in Valdez several                                                               
years ago,  and the place isn't  well kept.  Citing  the settling                                                               
ponds  as an  example, he  expressed concern  that there  will be                                                               
massive  expenses for  Valdez and  all  along the  pipeline.   He                                                               
suggested  considering  that  while  figuring the  tax  out,  and                                                               
putting money away for further inspections and so on.                                                                           
                                                                                                                                
MR. WINN  also said the  system is  a little flawed  because each                                                               
year  the  legislature  decides   how  much  money  goes  towards                                                               
oversight.  That  makes it difficult to  hire outside consultants                                                               
or  engineering companies  that could  actually do  the work  and                                                               
inspect it.   He agreed with former Governor  Jay Hammond, saying                                                               
industry should pay its own way, including commercial fishing.                                                                  
                                                                                                                                
MR. WINN  opined that Alaska  hasn't been getting its  fair share                                                               
from  the oil  industry because  of their  accounting procedures.                                                               
He  hopes  legislators will  pass  something  based only  on  the                                                               
gross, even  for new  fields.   If they  want to  specify certain                                                               
areas where deductions  can be made, that is fine,  but it should                                                               
be really clear and simple.   He added that he can't believe some                                                               
people think the oil industry is being overtaxed by the state.                                                                  
                                                                                                                                
7:23:56 PM                                                                                                                    
KELLY WALTERS  spoke in  favor of a  tax on the  gross.   He said                                                               
when  PPT  passed  last year,  originally  there  weren't  enough                                                               
votes.  Before that, under  then-Governor Murkowski, the deal was                                                               
negotiated in secret  with the oil companies; at  the last minute                                                               
a special session was called and it  was revealed to be tied to a                                                               
proposed  gas  pipeline.    It   wasn't  really  covered  in  the                                                               
newspaper  that this  was a  net-profits  tax, he  said, or  that                                                               
85 percent  of  the   state's  revenue  would  be   tied  to  the                                                               
efficiencies of  the oil producers.   He indicated it  provided a                                                               
disincentive to efficiency,  since the higher the  costs they can                                                               
write  off, the  lower  their taxes  - and  hence  the lower  the                                                               
state's revenue - will be.                                                                                                      
                                                                                                                                
MR. WALTERS  said with  a net-profits  tax, the  state absolutely                                                               
needs  a  legal  and  accounting infrastructure  to  ensure  it's                                                               
getting a fair  share.  It is  a bad idea.   He recalled Governor                                                               
Palin had campaigned  on taxing the gross; he'd seen  a couple of                                                               
her presentations.   In terms of the investment  discussed by the                                                               
media, he  opined that  if there  is profit to  be made,  the oil                                                               
companies will find  a way to do so.   However, it doesn't appear                                                               
there has been significant investment, even with incentives.                                                                    
                                                                                                                                
MR.  WALTERS  referred to  the  recent  trials involving  Alaskan                                                               
lawmakers, saying  there has  been a merger  of the  interests of                                                               
the government with those of  the oil producers.  Suggesting this                                                               
is fascist,  Mr. Walters concluded  by asking legislators  to not                                                               
be fascist and to tax the gross.                                                                                                
                                                                                                                                
7:27:07 PM                                                                                                                    
PAUL KENDALL  began his  teleconferenced testimony  by protesting                                                               
the process.                                                                                                                    
                                                                                                                                
CHAIR FRENCH  acknowledged the frustration  of not being  able to                                                               
testify  in person,  but pointed  out  that no  matter where  the                                                               
committee met, most of the state wouldn't be there.                                                                             
                                                                                                                                
MR.  KENDALL thanked  Governor  Palin, saying  he  thinks she  is                                                               
well-intended, but specified that  he supports a gross-based tax.                                                               
He disagrees with  PPT's complexity.  Today the  pipeline is two-                                                               
thirds  empty; it  has taken  several years  to get  there.   One                                                               
would  think oil  companies would  be knocking  at the  door, but                                                               
they haven't.   Nor  does he  see the  three major  oil companies                                                               
having  a lot  of contractors  looking for  more oil.   He  asked                                                               
whether what goes  in the pipeline is measured  against what goes                                                               
out,  for  example.     He  also  noted  that   the  oil  company                                                               
representatives aren't  sworn in  when testifying.   He suggested                                                               
that should happen.                                                                                                             
                                                                                                                                
MR.  KENDALL   expressed  concern  about   Commissioner  Galvin's                                                               
testimony, since  he represents  the state's interests,  does oil                                                               
forecasting, and  also acts  as an investment  banker and  so on.                                                               
Mr. Kendall  said it  seem every  form of  testimony is  suspect,                                                               
including  his own.   The  legislature has  failed to  make these                                                               
people stand up and be accountable.   They should be sworn in and                                                               
should be  asked to testify.   He said  he believes Alaska  has a                                                               
bright future, but  he's frustrated when looking  at the totality                                                               
of  events, such  as  not opening  the  Arctic National  Wildlife                                                               
Refuge (Arctic National Wildlife Refuge (ANWR)) to development.                                                                 
                                                                                                                                
MR. KENDALL  left his phone  number, 222-7882,  suggesting people                                                               
need to reach  out to form their own means  of dialogue, which is                                                               
what  happens when  leadership  seems to  fail  to represent  the                                                               
people because it has no vision  and no foundation.  He clarified                                                               
that he believes  there is a bright, magnificent  future close at                                                               
hand.  He acknowledged that many are well-intended and do shine.                                                                
                                                                                                                                
7:33:14 PM                                                                                                                    
TOM  LAKOSH  asked  members  to consider  his  written  and  oral                                                               
testimony as well as critical  documents and comments attached to                                                               
an e-mail he'd sent.                                                                                                            
                                                                                                                                
CHAIR FRENCH noted his e-mails would become part of the record.                                                                 
                                                                                                                                
MR. LAKOSH said although there  are many issues, he would correct                                                               
misrepresentations  in   material  publicly  disseminated   by  a                                                               
legislative  consultant and  DOR.   Presented yesterday,  this is                                                               
the representation  that PPT and  the amended ACES system  of tax                                                               
deductions  and  credits  are   necessary  and/or  the  preferred                                                               
mechanism to  advance legacy  oil field  infill drilling  that is                                                               
designed to stem oil-field production decline.                                                                                  
                                                                                                                                
MR. LAKOSH told  members the material omission is  that the lease                                                               
provisions for  the fields already  require the lessee  to "drill                                                               
those wells  as a reasonable  and prudent operators  would drill,                                                               
having due regard  for the interest of the state".   That is from                                                               
the standard  lease form, page  6.   They also omitted  that "the                                                               
commissioner  will  require   amendments  that  the  commissioner                                                               
determines  necessary  to  protect   the  state's  interests"  in                                                               
consideration  of  lessee's  plan  of operations.    That's  from                                                               
page 4 of the  standard lease, and the same language  is found at                                                               
11 AAC 83.158(e).                                                                                                               
                                                                                                                                
MR.  LAKOSH said  a fair  legislative  investigation mandated  by                                                               
Article I, Section 7, of  Alaska's constitution would necessarily                                                               
require the following three actions:   First is a full apology on                                                               
the committee  floor and in  all Alaskan publications  of record.                                                               
Second  is   a  presentation  by  Gaffney   Cline  depicting  the                                                               
necessary infill  drilling and heavy  oil extraction  required of                                                               
lessees  pursuant  to  the  diligence  and  prevention  of  waste                                                               
provisions in section 13 of the leases in question.                                                                             
                                                                                                                                
MR.  LAKOSH  told members  the  modeling  should assume  multiple                                                               
standards  of  "reasonable  profit"  as  garnered  by  all  other                                                               
Alaskan  corporations and  showing  utilization  of all  windfall                                                               
profits above  such reasonable rates  of return  already garnered                                                               
to  date,  and  it  should incorporate  existing  DOR  oil  price                                                               
projections and  any necessary extrapolation into  the future, to                                                               
show a  projection of lifetime field-decline  rates and projected                                                               
revenues comparable to the presentation in question.                                                                            
                                                                                                                                
MR.  LAKOSH said  the third  action required  is calling  the DNR                                                               
commissioner and  his knowledgeable Division  of Oil &  Gas staff                                                               
before  the  committee  to  explain:     1)  the  relevant  lease                                                               
provisions;   2) his  administration   of   these  leases,   both                                                               
consistent  and  inconsistent   with  constitutional,  statutory,                                                               
regulatory,  and contractual  mandates  to  preserve the  state's                                                               
interest;  and   3) in  cooperation  with  Gaffney   Cline,  what                                                               
specific  operational plans  he'll develop  in administration  of                                                               
lessees' duty to fully extract  all hydrocarbons on their leases,                                                               
in conformance with the applicable leases.                                                                                      
                                                                                                                                
MR.  LAKOSH  referred  to  discussion   in  the  House  Resources                                                               
Standing  Committee  today,  where he  said  legislators  finally                                                               
recognized leases are  an important part of this  discussion.  He                                                               
also  referenced a  presentation  by Pioneer  that explained  the                                                               
other  side of  the same  coin; he  said they  have a  net-profit                                                               
lease provision being impaired by  a net-profits tax.  Expressing                                                               
concern   that   leases   which   typically   address   drilling,                                                               
exploration, and production costs are  being impaired by this net                                                               
tax/credit  legislation, he  opined  that this  is prohibited  by                                                               
Article I, Section 15, of Alaska's constitution.                                                                                
                                                                                                                                
7:39:27 PM                                                                                                                    
MARSHALL  BYRD,  Anchorage, on  behalf  of  his family's  future,                                                               
expressed discouragement  with the  government's ability  to lead                                                               
this great  state and  to lay  a foundation for  the future.   He                                                               
said leadership has been overreacting  and leading from emotions.                                                               
He cited  examples involving Matanuska  Maid; Point  Thomson; and                                                               
the  Alaska   Gasline  Inducement  Act  (AGIA),   which  he  said                                                               
effectively  shut  out  those companies  with  the  resources  to                                                               
deliver such  a huge project.   He  suggested these send  a clear                                                               
message,  beyond just  the oil  industry, that  Alaska isn't  the                                                               
place  to invest  and do  business.   Now under  consideration is                                                               
what he considers the knockout blow:   raising taxes a third time                                                               
before the ink has dried on PPT.                                                                                                
                                                                                                                                
MR. BYRD asked  that the legislature lead with  logic and vision,                                                               
securing his family's future by  sending a message that Alaska is                                                               
a place to do business.  He asked  that PPT be left in place long                                                               
enough to  see whether it  works, and asked legislators  to focus                                                               
instead  on diversifying  Alaska's economy.   He  asked:   If the                                                               
current  tax structure  is creating  a budget  surplus, why  take                                                               
more?  And  what will it be  spent on?  He  requested that future                                                               
jobs for his three sons not be traded for a bloated government.                                                                 
                                                                                                                                
7:41:21 PM                                                                                                                    
GLORIA  DESROCHERS, Fairbanks,  an  Alaska  resident since  1960,                                                               
said  it appears  lawmakers  have been  sweet-talked  by the  oil                                                               
industry.   They should  put the interests  of Alaskans  ahead of                                                               
the oil  companies and should act  as the parent, not  the child.                                                               
She  lauded  Frank DeLong,  indicating  he'd  said Indonesia  has                                                               
taken control of  its own resources, for  instance, with positive                                                               
results for  Indonesia, and with  "big oil" making  enough profit                                                               
to stay.                                                                                                                        
                                                                                                                                
MS. DESROCHERS said oil companies  have no allegiance to anything                                                               
but profits.   Alaskans should have  at least as much  desire and                                                               
duty to themselves with respect to  their own profits.  She urged                                                               
members to be  open and listen to the wisdom  of those like Frank                                                               
DeLong, whom she  called a goldmine of  experience and knowledge.                                                               
She  also  wanted  to  know  the  sources  and  reasoning  behind                                                               
information   on  oil-resources   issues  that   have  controlled                                                               
legislative decisions thus far.                                                                                                 
                                                                                                                                
7:46:30 PM                                                                                                                    
JARED HAMLIN told  members he was also representing  his wife and                                                               
young daughter;  all three were  born in  Alaska and want  to see                                                               
Alaska "continue on with its resources."   He said the oil tax is                                                               
being revisited  because the last  change occurred under  a cloud                                                               
of corruption and  bribery.  When any  industry makes accusations                                                               
about instability  because of revisiting something,  it should be                                                               
considered whether the  industry itself is the  reason behind it.                                                               
He asked for  legislators to put something in place  such that it                                                               
doesn't have to be revisited again.                                                                                             
                                                                                                                                
MR.  HAMLIN said  the problem  with  PPT is  it requires  massive                                                               
amounts  of accounting  and so  on, for  which the  state has  to                                                               
attract workers to go up  against lawyers and accountants for the                                                               
oil industry.  Another flaw  is the massive amounts of write-offs                                                               
the industry  can do.   As far as  Governor Palin's tax  plan, he                                                               
said  he likes  some portions,  but  others seem  jumbled up  and                                                               
technical.   Alaskans need  something simple,  more like  a gross                                                               
tax.   However,  he  disagreed  with even  using  the word  "tax"                                                               
because  it's more  like a  fee, since  the state  is paying  the                                                               
industry to take the oil out.                                                                                                   
                                                                                                                                
MR. HAMLIN  said Alaska is  unique and utilizes  those resources,                                                               
under the  constitution, for  Alaskans to  live.   It also  has a                                                               
unique product to  offer.  The state needs to  get the best value                                                               
for the  long term.   He  agreed with  earlier testimony  that it                                                               
doesn't all  have to  be produced  today.   If the  oil companies                                                               
don't want to  play ball, they'll come back sooner  or later.  He                                                               
proposed  having a  higher  tax than  currently;  getting a  fair                                                               
share based on  the world average; and having  this happen sooner                                                               
rather than  later -  not waiting to  see what PPT  will do.   He                                                               
surmised it costs  a lot every day while people  sit and wait for                                                               
a broken plan to try to fix itself.                                                                                             
                                                                                                                                
MR. HAMLIN suggested  moving forward.  He agreed  with wanting to                                                               
have businesses invest  in Alaska; he emphasized  sending a clear                                                               
message.  He referred to ads  from the oil industry, saying a lot                                                               
of people  are scared the industry  will leave.  "We  know that's                                                               
not  true," he  told members,  surmising  they all  know the  oil                                                               
industry won't leave Alaska if  they institute a world average or                                                               
fair share,  whatever those mean.   Mr.  Hamlin said he  wants an                                                               
increased share  to go  to Alaska  for its  product and  to still                                                               
keep  a good,  healthy relationship  with the  oil industry.   He                                                               
expressed hope that this will help  in the future with respect to                                                               
mining as well.                                                                                                                 
                                                                                                                                
7:51:48 PM                                                                                                                    
BILL WARREN,  Nikiski, said  he came  to Alaska  in 1951  and was                                                               
representing his three-year-old son;  he doesn't want the state's                                                               
resource  to be  dried  up  like a  prune  when  his son  reaches                                                               
Mr. Warren's age, as  is the case in Cook Inlet.   He opined that                                                               
that State of Alaska  is in big trouble.  The  "big three" are in                                                               
Prudhoe Bay, which  has led to a chain of  events and a monopoly,                                                               
with little  competition.   There is  no Railbelt  energy policy.                                                               
Agrium has  failed.  Gas  prices are rising.   There is  a failed                                                               
gas  line contract.   He  mentioned shenanigans  going on  and so                                                               
forth, saying if  Exxon doesn't like the risk, it  should get out                                                               
of the business and manufacture shoes.                                                                                          
                                                                                                                                
MR.  WARREN  highlighted  public  suspicion  of  the  government,                                                               
saying  all this  corruption, indictments,  and convictions  give                                                               
reason  for  suspicion.    He   mentioned  fear  of  ongoing  tax                                                               
litigation by  entities like  Exxon.  Recalling  his own  work on                                                               
the pipeline  and doing  maintenance work at  Valdez, as  well as                                                               
working  from  Ketchikan  to  Barrow,   Mr.  Warren  predicted  a                                                               
tremendous amount  of write-offs  for maintenance because  of the                                                               
mature mechanical and electrical systems.                                                                                       
                                                                                                                                
MR. WARREN highly recommended a  gross tax with very nice credits                                                               
to those "who actually do things  in the state of Alaska, and not                                                               
Oklahoma  or Texas."   The  extra  money from  this tax  increase                                                               
should be used wisely.  There  should be a plan developed for in-                                                               
state  gas use  immediately,  appointing the  Alaska Natural  Gas                                                               
Development Authority  (ANGDA) to be  the vehicle; he  alluded to                                                               
Harold Heinze of ANGDA.                                                                                                         
                                                                                                                                
MR.  WARREN also  mentioned  training  and true  apprenticeships,                                                               
saying there  won't be a need  to compete later if  everything is                                                               
prebuilt  in Alaska,  whether for  a spur  line or  a stand-alone                                                               
line to  Prudhoe Bay, which  the tariffs have  proven economical.                                                               
He  concluded by  saying  the  big three  oil  companies have  an                                                               
increasingly smaller "grazing range" in the world.                                                                              
                                                                                                                                
SENATOR THERRIAULT agreed about  the increasingly smaller grazing                                                               
range, saying  there have  been national articles  about it.   He                                                               
also agreed  that with the  trials of lawmakers, there  is reason                                                               
for  suspicion.    Alluding  to  the debate  on  PPT  last  year,                                                               
however,  he  said  there  were people  in  the  building  asking                                                               
questions, trying to expose what they  felt was going on; he said                                                               
Senator French  was right there with  him.  He opined  that going                                                               
through this new process will lift that cloud.                                                                                  
                                                                                                                                
7:56:41 PM                                                                                                                    
JIM ADAMS,  Nome, indicated  this is  the state's  opportunity to                                                               
receive a portion of its due.                                                                                                   
                                                                                                                                
7:57:14 PM                                                                                                                    
RANDY SELMAN, Wasilla, gave some  personal history, noting he now                                                               
has descendants  working on the  North Slope.   He said  he feels                                                               
PPT  isn't tainted  and  that taxes  do  affect capital  projects                                                               
because they're  a liability and  correspond directly to  the net                                                               
present value and return on capital for any project.                                                                            
                                                                                                                                
MR. SELMAN  said North Slope payrolls  are probably in the  top 5                                                               
or  10  percent  in  the  US  with  respect  to  net  income  for                                                               
individuals; they're also  more than 50 percent  of the operating                                                               
cost  of doing  business  there.   North  Slope construction  and                                                               
drilling  costs  are  some  of  the highest  in  the  world,  and                                                               
facilities are some of the most expense  as well.  This is due to                                                               
the extreme environment there.                                                                                                  
                                                                                                                                
MR. SELMAN  recalled two weeks  ago, two strong companies  in the                                                               
oil  business gave  back  300,000  acres to  the  Bureau of  Land                                                               
Management (BLM)  because they'd decided those  were uneconomical                                                               
to explore.   He said the oil business is  highly competitive and                                                               
companies  are investing  worldwide.   He  challenged members  to                                                               
help Alaska  stay competitive, which  he believes  means lowering                                                               
taxes, not raising them.                                                                                                        
                                                                                                                                
MR.  SELMAN emphasized  getting  new oil  into  the pipeline  and                                                               
keeping  folks employed  in Alaska  until a  gas pipeline  can be                                                               
built,  which  will  get  Alaska  to  the  next  50  years.    If                                                               
legislators do anything with respect  to ACES, he asked that they                                                               
pick up  some of the  important administrative portions  that can                                                               
improve  PPT.   Please don't  raise taxes,  he concluded,  saying                                                               
Alaska   is  headed   in  the   wrong  direction   and  will   be                                                               
noncompetitive worldwide.                                                                                                       
                                                                                                                                
8:00:27 PM                                                                                                                    
SHANNYN  MOORE,  describing herself  as  a  lifelong Alaskan  and                                                               
concerned citizen, said she is  tired of the "jellyfish approach"                                                               
to Alaskan  politics, the lack  of spine.   "This is  our state,"                                                               
she said.   "This is our resource.   And this is our  future.  We                                                               
are the  shareholders -  not the shareholders  of Exxon,  not the                                                               
shareholders  of  BP  nor  anywhere  else."    Indicating  former                                                               
Representatives   Tom  Anderson   and  Pete   Kott  as   well  as                                                               
Representative Vic Kohring  had been found guilty,  she said this                                                               
legislature  has been  corrupted.   This tax  is being  revisited                                                               
because of it.   And it isn't known whether  more indictments are                                                               
coming.  She asked whether this  tax, if it goes through, will be                                                               
revisited as well.                                                                                                              
                                                                                                                                
MS.  MOORE suggested  the Anchorage  Chamber  of Commerce  should                                                               
talk  to the  Chambers of  Commerce in  Cordova, Valdez,  Kodiak,                                                               
Homer, and so  on to see how reliable oil  companies are to them.                                                               
"Don't  blink," she  said.   "Don't  look away."    She said  the                                                               
testimony heard during the daytime  hours came from oil companies                                                               
that lie, saying they'll have a  hard time paying their bills and                                                               
won't be able to explore;  she totally discounted this, surmising                                                               
$94 a barrel should be enough incentive.                                                                                        
                                                                                                                                
MS.  MOORE emphasized  that legislators  are there  for Alaskans.                                                               
This is Alaska's oil.  Just  because the oil companies are taking                                                               
it doesn't mean  they get to negotiate what part  they'll give to                                                               
Alaska.   She  said the  oil companies  trying to  manipulate the                                                               
legislature are  the same  ones that lie  to Alaskans;  she cited                                                               
almost 19 years  of manipulation by Exxon, alluding  to the Exxon                                                               
Valdez disaster, and said  ConocoPhillips rallied the legislators                                                               
and won  PPT; she questioned  how anyone  could want to  keep it.                                                               
She  concluded by  saying legislators  only owe  Alaskans.   They                                                               
don't owe the oil companies.                                                                                                    
                                                                                                                                
8:04:53 PM                                                                                                                    
JOHN  RANDALL, Wasilla,  noted he  has called  Alaska home  since                                                               
1949  and was  president of  the  first borough  assembly on  the                                                               
Kenai  Peninsula.    He  recommended  scrapping  PPT  and  giving                                                               
consideration to a  policy they'd used in those  first few years:                                                               
payment in lieu of taxes.   Under this, taxes on certain parts of                                                               
the facilities  are excused for a  period of time.   In this way,                                                               
Alaska  will  be  -  at  least  in  part  -  indemnified  against                                                               
occurrences such as the Exxon  Valdez oil spill or malfeasance in                                                               
maintenance of  property.  Whether  the price  of oil is  high or                                                               
low won't matter.   An agreement should be reached  that they pay                                                               
in  advance a  sum  that he  reckons  to be  in  the billions  of                                                               
dollars, paid into both the permanent fund and the CBR.                                                                         
                                                                                                                                
MR. RANDALL said  he'd talked about this  with now-Governor Palin                                                               
when she  first was  running for  office and  passes it  along to                                                               
legislators now.   He offered  to talk further with  anyone about                                                               
this.   He also noted that  today a legislator from  his district                                                               
is a convicted felon.                                                                                                           
                                                                                                                                
8:07:52 PM                                                                                                                    
STEVE  MORAWITZ,  Wasilla, a  49-year  Alaska  resident, said  he                                                               
believes there  needs to  be a  vote on PPT.   The  oil companies                                                               
used  unethical  means  to  influence  the  legislature,  and  he                                                               
surmised it's  likely that  more senators are  on the  payroll of                                                               
big oil.   The voters  of Alaska  need to know  where legislators                                                               
stand so  they can  be held  accountable.   He specified  that he                                                               
favors the recommended 25 percent.                                                                                              
                                                                                                                                
CHAIR FRENCH  asked whether  anyone else wished  to testify.   He                                                               
highlighted the  lack of  trust of  the legislative  process that                                                               
had  been  heard,  acknowledging  it's  somewhat  understandable.                                                               
Speaking for  the committee, however,  he said he didn't  see any                                                               
dishonesty  or misdeeds  here.   Rather, he  sees a  lot of  hard                                                               
work.  He thanked the testifiers and held SB 2001 in committee.                                                                 
There being  no further  business to  come before  the committee,                                                               
Chair French adjourned meeting at 8:09:33 PM.                                                                                 

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