Legislature(2005 - 2006)SENATE FINANCE 532

08/07/2006 01:00 PM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV


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Audio Topic
01:10:30 PM Start
01:16:13 PM Bob Malone, Chairman and President, Bp America
01:20:48 PM Steve Marshall, President, Bp Exploration Alaska
01:27:36 PM Bill Hedges, Manager, Corrosion Strategy and Planning, Bp
01:37:01 PM John Norman, Alaska Oil and Gas Association
01:52:38 PM HB3001
01:59:39 PM Robynn Wilson, Director, Department of Revenue, Tax Division
02:36:17 PM Dan Dickinson, Economist, Consultant to Governor
02:58:46 PM Bill Corbus, Commissioner, Department of Revenue
04:25:03 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Time Change --
+= HB3001 OIL/GAS PROD. TAX TELECONFERENCED
Heard & Held
                    ALASKA STATE LEGISLATURE                                                                                  
      SENATE SPECIAL COMMITTEE ON NATURAL GAS DEVELOPMENT                                                                     
                         August 7, 2006                                                                                         
                           1:10 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Ralph Seekins, Chair                                                                                                    
Senator Lyda Green                                                                                                              
Senator Gary Wilken                                                                                                             
Senator Con Bunde                                                                                                               
Senator Fred Dyson                                                                                                              
Senator Bert Stedman                                                                                                            
Senator Lyman Hoffman                                                                                                           
Senator Thomas Wagoner                                                                                                          
Senator Ben Stevens                                                                                                             
Senator Kim Elton                                                                                                               
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Donny Olson                                                                                                             
Senator Albert Kookesh                                                                                                          
                                                                                                                                
OTHER MEMBERS PRESENT                                                                                                         
                                                                                                                                
Senator Bettye Davis                                                                                                            
Senator Gary Stevens                                                                                                            
Senator Charlie Huggins                                                                                                         
Senator Hollis French                                                                                                           
Senator Johnny Ellis                                                                                                            
Representative Harry Crawford                                                                                                   
Representative John Coghill                                                                                                     
Representative Ralph Samuels                                                                                                    
Representative Mike Kelly                                                                                                       
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
Update from BP on TAPS shutdown.                                                                                                
                                                                                                                                
CS FOR HOUSE BILL NO. 3001(FIN)                                                                                                 
"An Act  relating  to the production  tax  on oil  and gas and  to                                                              
conservation  surcharges on  oil; relating  to criminal  penalties                                                              
for  violating   conditions  governing   access  to  and   use  of                                                              
confidential   information  relating   to   the  production   tax;                                                              
amending the  definition of  'gas' as  that definition  applies in                                                              
the  Alaska  Stranded  Gas  Development   Act;  making  conforming                                                              
amendments; and providing for an effective date."                                                                               
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB3001                                                                                                                  
SHORT TITLE: OIL/GAS PROD. TAX                                                                                                  
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
07/12/06       (H)       READ THE FIRST TIME - REFERRALS                                                                        
07/12/06       (H)       FIN                                                                                                    
07/26/06       (H)       FIN AT 10:00 AM HOUSE FINANCE 519                                                                      
07/26/06       (H)       Heard & Held                                                                                           
07/26/06       (H)       MINUTE(FIN)                                                                                            
07/27/06       (H)       FIN AT 10:00 AM HOUSE FINANCE 519                                                                      
07/27/06       (H)       Heard & Held                                                                                           
07/27/06       (H)       MINUTE(FIN)                                                                                            
07/31/06       (H)       FIN AT 10:00 AM HOUSE FINANCE 519                                                                      
07/31/06       (H)       Heard & Held                                                                                           
07/31/06       (H)       MINUTE(FIN)                                                                                            
08/01/06       (H)       FIN AT 10:00 AM HOUSE FINANCE 519                                                                      
08/01/06       (H)       Heard & Held                                                                                           
08/01/06       (H)       MINUTE(FIN)                                                                                            
08/02/06       (H)       FIN AT 10:00 AM HOUSE FINANCE 519                                                                      
08/02/06       (H)       -- Testimony <Invitation Only> --                                                                      
08/03/06       (H)       FIN AT 10:00 AM HOUSE FINANCE 519                                                                      
08/03/06       (H)       Moved CSHB3001(FIN) Out of Committee                                                                   
08/03/06       (H)       MINUTE(FIN)                                                                                            
08/04/06       (H)       FIN RPT CS(FIN) 7DP 1NR 1AM                                                                            
08/04/06       (H)       DP: HAWKER, KELLY, WEYHRAUCH, STOLTZE,                                                                 
                         FOSTER, MEYER, CHENAULT;                                                                               
08/04/06       (H)       NR: JOULE;                                                                                             
08/04/06       (H)       AM: KERTTULA                                                                                           
08/06/06       (H)       ENGROSSED                                                                                              
08/06/06       (S)       NGD AT 1:30 PM SENATE FINANCE 532                                                                      
08/06/06       (S)       -- Meeting Canceled --                                                                                 
08/07/06       (S)       NGD AT 1:00 PM SENATE FINANCE 532                                                                      
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
BOB MALONE, Chairman and President                                                                                              
BP America                                                                                                                      
PO Box 196612                                                                                                                   
Anchorage, AK 99519                                                                                                             
POSITION STATEMENT: BP presentation on TAPS shutdown.                                                                         
                                                                                                                                
STEVE MARSHALL, President                                                                                                       
BP Exploration (Alaska), Inc.                                                                                                   
PO Box 196612                                                                                                                   
Anchorage, AK 99519                                                                                                             
POSITION STATEMENT: BP presentation on TAPS shutdown.                                                                         
                                                                                                                                
BILL HEDGES, Manager                                                                                                            
Corrosion Strategy and Planning                                                                                                 
BP Exploration                                                                                                                  
PO Box 196612                                                                                                                   
Anchorage, AK 99519                                                                                                             
POSITION STATEMENT: BP presentation on TAPS shutdown.                                                                         
                                                                                                                                
JOHN NORMAN, Commissioner                                                                                                       
Alaska Oil and Gas Conservation Commission (AOGCC)                                                                              
333 W. 7th Ave., Ste. 100                                                                                                       
Anchorage AK 99501                                                                                                              
POSITION STATEMENT: Commented on the BP presentation.                                                                         
                                                                                                                                
ROBYNN WILSON, Director                                                                                                         
Tax Division                                                                                                                    
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT: Commented on CSHB 3001(FIN), version P.                                                                   
                                                                                                                                
DAN DICKINSON, CPA                                                                                                              
Consultant to the Governor                                                                                                      
Office of the Governor                                                                                                          
PO Box 110001                                                                                                                   
Juneau AK  998811-0001                                                                                                          
POSITION STATEMENT: Commented on CSHB 3001(FIN), version P.                                                                   
                                                                                                                                
DR. PEDRO VAN MEURS                                                                                                             
Consultant to the Governor                                                                                                      
Office of the Governor                                                                                                          
PO Box 110001                                                                                                                   
Juneau, AK  00911-0001                                                                                                          
POSITION STATEMENT: Commented on CSHB 3001(FIN), version P.                                                                   
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR  RALPH  SEEKINS  called  the  Senate  Special  Committee  on                                                            
Natural Gas  Development meeting to  order at 1:10:30  PM. Present                                                            
at the  call to order were  Senators Wagoner, Ben  Stevens, Bunde,                                                              
Stedman,  Hoffman,   Dyson,  Elton,   Wilken,  Green,   and  Chair                                                              
Seekins. Also  present at the  meeting were Senator  Gary Stevens,                                                              
Ellis, French, and Huggins; Representatives Coghill and Samuels.                                                                
                                                                                                                                
                ^UPDATE FROM BP ON TAPS SHUTDOWN                                                                            
                                                                                                                                
CHAIR SEEKINS  announced the  first topic on  the agenda  was BP's                                                              
presentation  on the  TAPS shutdown  and  that he  would turn  the                                                              
gavel over to  Senate Resources Chairman Wagoner for  this part of                                                              
the meeting.                                                                                                                    
                                                                                                                                
SENATOR   WAGONER    stated   that    he   had   conferred    with                                                              
Representatives  Samuels  and  Ramras,   co-chairs  of  the  House                                                              
Resource  Committee  about having  a  joint committee  meeting  in                                                              
Anchorage  next  week,  but  today   he  wanted  to  receive  BP's                                                              
presentation.                                                                                                                   
                                                                                                                                
^BOB MALONE, Chairman and President, BP America                                                                                 
BOB  MALONE,  Chairman  and  President,   BP  America,  introduced                                                              
others  from BP  and  profusely apologized  for  the necessity  of                                                              
closing the pipeline  on the Prudhoe Bay field.  He announced that                                                              
BP would  bring its  production back  up as  quickly as  it safely                                                              
could. He  said BP  would work with  state and federal  regulators                                                              
to develop  a program for the  field's orderly shutdown,  but they                                                              
would  also run  a parallel  study  to look  for opportunities  to                                                              
safely maintain  some level  of production.  It was possible  that                                                              
some lines might be able to remain in operation.                                                                                
                                                                                                                                
He said BP  has decided to replace  all the main transit  lines in                                                              
Prudhoe Bay  with new  lines as part  of the first-phase  program.                                                              
Its top  four priorities are: to  assure the safety  and integrity                                                              
of their operating  infrastructure, to minimize any  impact on the                                                              
environment,  to  continue the  cooperative  working  relationship                                                              
with  the relevant  federal and  state agencies,  and fourthly  to                                                              
restore production as soon as it is safe.                                                                                       
                                                                                                                                
CHAIR  WAGONER  announced  that   Senator  Davis  had  joined  the                                                              
committee.                                                                                                                      
                                                                                                                                
1:16:13 PM                                                                                                                    
^Steve MARSHALL, president, BP Exploration Alaska                                                                               
MR.  STEVE  MARSHALL,  President,   BP  Exploration  Alaska,  also                                                              
offered  his  apologies  and  regret   for  having  to  close  the                                                              
pipeline. He explained  that BP had been conducting  operations in                                                              
accordance  with  the  Department   of  Transportation  compliance                                                              
action order,  which requires BP  to clean, scrape, and  smart pig                                                              
all  of the  transit lines  at Prudhoe  Bay.  Smart pigging  would                                                              
give BP  definitive information on  the condition and  location of                                                              
any  defects  in  those  lines   so  they  could  be  repaired  or                                                              
replaced.                                                                                                                       
                                                                                                                                
He reported  that the Lisbourne  line had  been pigged and  it was                                                              
found to be in  very good shape. It was put back  into service and                                                              
remains at  about 17,000  barrels per day.  A second  30-inch line                                                              
from flow  station 2 (about  33,000 barrels  per day) on  the east                                                              
side of Prudhoe  Bay to flow station 1 had been  cleaned, scraped,                                                              
and  smart-pigged and  he  reported that  preliminary  information                                                              
indicated  16 anomalies  of wall  thickness loss  in excess  of 70                                                              
percent.  Those   anomalies  will   have  ultrasonic   testing  to                                                              
pinpoint where exactly  the defects are. Removing  insulation from                                                              
one  of the  locations revealed  oil  stains and  they decided  to                                                              
shut it down.                                                                                                                   
                                                                                                                                
MR. MARSHALL said  further investigation found about  four to five                                                              
barrels  of  crude  oil  leaking   on  to  the  tundra.  That  was                                                              
contained and about  half of it has been cleaned  up. The line was                                                              
isolated,  a vacuum  inserted, and  the rate  of leakage is  going                                                              
down and there should  be no further spillage. This  leak had been                                                              
occurring  for about  15 minutes  after  flow station  2 was  shut                                                              
down.                                                                                                                           
                                                                                                                                
He said  these results  were unexpected. The  testing BP  had done                                                              
prior to the  smart pigging didn't indicate this  level of damage.                                                              
It  appeared that  a  different corrosion  mechanism  was at  work                                                              
that had been seen  on the GC2 line spill in  March. So systematic                                                              
approach  to shutting down  the rest  of the  fields was  taken to                                                              
corroborate   and  further   understand  the   condition  of   the                                                              
remaining  lines  before  putting   them  back  into  service.  He                                                              
stated, "Care for the environment ranks a number-one priority."                                                                 
                                                                                                                                
1:20:48 PM                                                                                                                    
SENATOR  BUNDE asked  how  the main  line  is  impacted if  feeder                                                              
lines have corrosion  and if other corrosion techniques  were used                                                              
on TAPS that weren't used on the feeder lines.                                                                                  
                                                                                                                                
MR. MALONE answered  that Alyeska Pipeline Service  Company uses a                                                              
mechanism  to clean  and  de-wax  the TAPS  [TransAlaska  Pipeline                                                              
System] as a matter of course and it doesn't have this problem.                                                                 
                                                                                                                                
SENATOR BUNDE  asked if  TAPS-type activity  would be  extended to                                                              
feeder lines in the future.                                                                                                     
                                                                                                                                
MR.  MALONE  responded  that  BP   believed  it  had  an  adequate                                                              
corrosion control  program on the  field lines, but they  now know                                                              
that it was  not adequate. "So,  we will be modifying  our program                                                              
moving it  to all the  recent technology  and science that  we can                                                              
find  in  order  to  enhance that  program  to  assure  that  this                                                              
doesn't happen again."                                                                                                          
                                                                                                                                
CHAIR WAGONER  announced that  Representative Crawford  had joined                                                              
the committee.                                                                                                                  
                                                                                                                                
1:22:49 PM                                                                                                                    
SENATOR DYSON  asked if more anomalies  were found on one  side of                                                              
the lease than the other.                                                                                                       
                                                                                                                                
MR. MARSHALL  replied that  BP is looking  at the section  of line                                                              
from flow station  2 to flow station 1, a section  of line that is                                                              
further east  than the 34-inch GC2  line that failed  earlier. The                                                              
velocity of  the oil through  that line  is perhaps the  lowest of                                                              
any in the  field - about a  half-foot per second -  as opposed to                                                              
2 feet  per second for  the GC2 section.  This might  have bearing                                                              
on the ability of  the fluids to keep the water  from dropping out                                                              
and staying  in the  line. He  mentioned that  the Lisbourne  line                                                              
didn't show  any significant damage and,  in fact, it was  in very                                                              
good condition  - even  though it  was installed  in the  mid-80s.                                                              
This is the first  of the 1977 transit lines that  has been smart-                                                              
pigged   and   he  reminded   them   that   it's  early   in   the                                                              
investigation.                                                                                                                  
                                                                                                                                
1:25:19 PM                                                                                                                    
SENATOR  DYSON said  he noticed  that BP wasn't  doing any  blame-                                                              
shifting,  which he  really appreciated  and he  assumed from  Mr.                                                              
Marshall's  remarks that  the problems  they were  seeing now  are                                                              
corrosion,  not erosion. He  asked if  new metallurgy  or coatings                                                              
were  available   now  that  might  provide  a   better  corrosion                                                              
resistant environment.                                                                                                          
                                                                                                                                
^Bill Hedges, Manager, Corrosion Strategy and Planning, BP                                                                      
BILL  HEDGES,  Manager,  Corrosion   Strategy  and  Planning,  BP,                                                              
replied  the velocities  in  this  line are  so  low that  erosion                                                              
couldn't  be  a  problem.  The  problems  are  clearly  corrosion-                                                              
related and  are limited  to the  very bottom  of the  pipeline in                                                              
the  six-o-clock  position.  This  corrosion  is in  the  form  of                                                              
discrete pits that  are not an interlinked network  of damage - as                                                              
was found  in the  late 80s and  early 90s  due to carbon  dioxide                                                              
corrosion  that attacked  a  broad surface  area,  which was  much                                                              
easier to  find. While  he said  it's early to  say for  sure, the                                                              
pits look like  they are formed from microbiological  activity. He                                                              
said that probably  the best mechanism to control  corrosion is to                                                              
keep  the lines  clean and  remove  the solids  that the  bacteria                                                              
hide  behind  and  to  treat  the  bacteria  with  chemicals  that                                                              
industry is already using.                                                                                                      
                                                                                                                                
SENATOR  DYSON  asked  if  better   coatings  or  metallurgy  were                                                              
available  now  and observed  that  the  carbon steel  systems  in                                                              
Prudhoe Bay have  already exceeded their original  design life and                                                              
were going to continue to be in use.                                                                                            
                                                                                                                                
1:27:36 PM                                                                                                                    
SENATOR ELTON asked  the BP representatives to  keep the committee                                                              
informed of whether  or not they intend to charge  off the capital                                                              
and operating  expenses so  the tax issues  can be dealt  with. He                                                              
said BP is  talking about replacing  all the transit lines  in the                                                              
Prudhoe  Bay unit  and asked  how much  steel would  be needed  to                                                              
accomplish the rebuild and how much was actually available.                                                                     
                                                                                                                                
MR. MARSHALL  replied that the line  sizes vary from  30-inches to                                                              
34-inches depending on  which section of the field  the line is in                                                              
and  reminded them  that  the Lisbourne  line  didn't  need to  be                                                              
replaced at  this time. Probably smaller  lines - 12, 14,  and 18-                                                              
inch  - would  be installed  to  better suit  today's volumes.  He                                                              
said BP has put  out requests worldwide to find out  what level of                                                              
steel is available  and he would share that information  with them                                                              
when it became available.                                                                                                       
                                                                                                                                
1:31:43 PM                                                                                                                    
^ JOHN NORMAN, Alaska Oil And Gas Association                                                                                   
JOHN NORMAN, Alaska  Oil and Gas Conservation  Commission (AOGCC),                                                              
said they have  received good reports from BP  along with constant                                                              
briefings. He said that AOGCC inspectors are on the North Slope.                                                                
                                                                                                                                
SENATOR BUNDE asked to be kept in the loop on the briefings.                                                                    
                                                                                                                                
SENATOR  SEEKINS  asked what  kind  of  solids scraping  the  pipe                                                              
generates and if they posed any downstream threats.                                                                             
                                                                                                                                
MR.  HEDGES replied  that  a variety  of things  come  out of  the                                                              
pipes. On  the west  side of the  Slope, which  is where  the leak                                                              
was first  detected, they get a  lot of sand,  corrosion products,                                                              
and oily  hydrocarbon residues,  like solid  particles of  wax and                                                              
asphaltenes. On  the east side,  in addition to all  those things,                                                              
they see  mineral scale  calcium carbonate  like those  that build                                                              
up in a domestic  boiler system. This is because  of the nature of                                                              
the water that comes out of the ground.                                                                                         
                                                                                                                                
He said  he didn't personally perceive  that solids pose  a direct                                                              
threat  in themselves,  because  they are  non-corrosive; but  the                                                              
real  threat is  that  they allow  bacteria  to harbor  underneath                                                              
them. The  chemicals that  kill the  bacteria can't penetrate  the                                                              
solids  to get  to them.  He explained  that  at high  velocities,                                                              
solids can  cause erosion of  metal off  the surface of  the pipe.                                                              
However, this is not an issue for BP or the TAPS pipeline.                                                                      
                                                                                                                                
He  further  explained  that  Alyeska  Pipeline  Services  filters                                                              
solids  out before  they get into  it's systems,  but its  biggest                                                              
problem would  be that filtering  all the  solids at one  go would                                                              
plug  up the  filtration systems.  Solids  continuously enter  the                                                              
lines and  BP's specification  to Alyeska is  .35 percent  of base                                                              
sediment  and water  - meaning if  you multiply  the total  volume                                                              
going  down  TAPS  by .35  percent,  that's  the  maximum  average                                                              
volume  of  sediment  that  it can  handle  comfortably.  This  is                                                              
accomplished with continuous pigging.                                                                                           
                                                                                                                                
1:37:01 PM                                                                                                                    
MR. MARSHALL  commented that BP's  reliance on ultrasonic  testing                                                              
was clearly  inadequate  and once  the lines  were cleaned  or new                                                              
ones  were   installed,  its  intention   would  be  to   rely  on                                                              
maintenance pigging  on a regular basis, such  that these problems                                                              
do not crop up in the future.                                                                                                   
                                                                                                                                
1:38:28 PM                                                                                                                    
SENATOR SEEKINS  asked how  the anomalies  are being addressed  in                                                              
the short term.                                                                                                                 
                                                                                                                                
MR. HEDGES replied  that engineers would decide on  using either a                                                              
temporary   sleeve  or  a   permanent  clamp   as  anomalies   are                                                              
identified. Those  would be  expected to stay  in place  until the                                                              
line could be replaced.                                                                                                         
                                                                                                                                
SENATOR  SEEKINS asked  if BP had  any intention  of shutting  the                                                              
line down.                                                                                                                      
                                                                                                                                
MR. MARSHALL  indicated no  and added  that if irreparable  damage                                                              
is found, as was  the case with the GC2 line,  a bypass line could                                                              
be used.                                                                                                                        
                                                                                                                                
CHAIR  WAGONER also  thanked everyone  for coming  to the  meeting                                                              
and recessed at 1:41:14PM.                                                                                                    
                                                                                                                                
                CSHB 3001(FIN)-OIL/GAS PROD. TAX                                                                            
                                                                                                                                
CHAIR SEEKINS called  the meeting back to order at  1:52:38 PM and                                                            
announced   that   CSHB  3001(FIN),   Version   P,   was  up   for                                                              
consideration.                                                                                                                  
                                                                                                                                
                                                                                                                                
^ ROBYNN WILSON, Director, Department of Revenue, Tax Division                                                                  
ROBYNN  WILSON,  Director,  Tax Division,  Department  of  Revenue                                                              
(DOR),  explained  that  the  bill  does five  things.  It  has  a                                                              
variable  rate  depending  on  investment  per  barrel.  Secondly,                                                              
because it's  now a  variable rate, a  monthly calculation  of the                                                              
tax rate  is not practical.  So this issue  becomes an  annual tax                                                              
return  filing  with  monthly estimated  tax  payments  to  insure                                                              
consistent  cash  flow.  Compared   to  the  conference  committee                                                              
version  of the  bill, one  can  note places  where "monthly"  has                                                              
been changed to "calendar year".                                                                                                
                                                                                                                                
MS. WILSON said  thirdly, version P breaks Section  160 into three                                                              
more user-friendly  sections. Section  160 now provides  the basic                                                              
production tax value  framework; Section 165 contains  the allowed                                                              
and disallowed  lease expenditures;  and Section 170  contains the                                                              
adjustments  to  lease expenditures  that  need  to be  made,  for                                                              
example, when  there is a  sale of an  asset. Some  reordering has                                                              
also occurred and  all the credits are now in  AS 43.55.023, .024,                                                              
and .025.                                                                                                                       
                                                                                                                                
She said  some clarifying  language had  been inserted  regarding,                                                              
for  instance,  disallowed  items,  overhead  allowance,  and  the                                                              
interplay  of   operating  agreements.   The  intention   has  not                                                              
changed,  she stated,  but  perhaps the  most  important thing  it                                                              
does is in AS  43.55.180. Required report: where,  for example, it                                                              
was thought  prudent to  require the  DOR to  provide a  report on                                                              
the reduced tax  rates for private royalties. This  version of the                                                              
bill  greatly  expands  those responsibilities.  So,  rather  than                                                              
having  a couple  of  very small  reports  to do  on  a couple  of                                                              
isolated  aspects   of  the  law,  Section  180   now  requires  a                                                              
comprehensive  report from the  DOR on  the entire chapter  paying                                                              
particular attention to tax rates and the investment credits.                                                                   
                                                                                                                                
Also,  Ms.  Wilson  said,  as  originally   drafted,  Section  180                                                              
required those  two reports  at two or  three different  points in                                                              
time. For  example, one report  was due in  2013 and 2015;  all of                                                              
that has  now been coalesced  into one  large report that  will be                                                              
due the first day of the legislative session in 2011.                                                                           
                                                                                                                                
1:59:39 PM                                                                                                                    
MS.  WILSON started  her analysis  of CSHB  3001(FIN), version  P.                                                              
She  said  the   first  two  pages  weren't  different   from  the                                                              
conference committee  bill, but  page 3, line  4, through  page 4,                                                              
line 25,  dealing with  the variable  tax rate,  is where  the new                                                              
language and the core of the bill lies.                                                                                         
                                                                                                                                
She recalled  the conference  committee bill  had a base  tax rate                                                              
of  22.8  percent  before  progressivity   was  added.  This  bill                                                              
provides  that  the   tax  rate  will  depend  on   the  level  of                                                              
investment.  So, subsection (f)  says if  the investment  is equal                                                              
to or less  than $1 per BTU  equivalent barrel, the tax  rate will                                                              
be  25 percent.  If  it's equal  to  or greater  than  $6 per  BTU                                                              
equivalent barrel,  the tax rate shall be 20  percent. Section (C)                                                              
provides  for investments  between $1  and $6  per BTU  equivalent                                                              
barrel.                                                                                                                         
                                                                                                                                
2:03:05 PM                                                                                                                    
MS. WILSON  said some  of the concern  around an  investment-based                                                              
tax rate  (variable tax  rate) was the  potential it  provided for                                                              
gold plating  and the  question is  if the tax  benefit of  the $1                                                              
capital  investment  is  in  excess  of  the  $1  investment.  She                                                              
explained  that this  bill contains  sort of  a provision  to take                                                              
care of  that with  the equation on  page 4, line  12. It  says if                                                              
the  tax benefits  are  in excess  of 75  percent  of the  capital                                                              
investment, the buying down of the tax rate will be limited.                                                                    
                                                                                                                                
She said  the equation  looks scary, but  it basically  says there                                                              
are four  important tax  benefit pieces that  would accrue  to the                                                              
producer for  a capital investment.  The first and obvious  one is                                                              
that  there is  a tax  deduction provided  for in  this bill.  The                                                              
second  principal  benefit  is if  there's  a  capital  investment                                                              
(CAPEX)  credit of  20 percent.  The third  measurable benefit  is                                                              
that  with the  CAPEX and  given this  tax plan,  the producer  is                                                              
realizing a benefit  because he can buy down his  tax rate [(.25 -                                                              
R)*PT].  At the  same time,  only a  certain amount  of these  tax                                                              
benefits that  change the production  tax payable is borne  by the                                                              
producer because  a certain amount  comes off his  federal taxable                                                              
income. So  in talking about  the benefit  of buying down  the tax                                                              
rate,  the federal  benefit must  be  factored in.  That is  taken                                                              
into  account  in this  equation  by  the [x  (1-IR)](the  highest                                                              
federal tax rate) piece.                                                                                                        
                                                                                                                                
MS.  WILSON  said  the  last  major   piece  is  the  federal  tax                                                              
deduction itself.  If a CAPEX investment  is being made,  not only                                                              
will the producer  be able to deduct that from  the production tax                                                              
value  for this  tax,  he  can also  deduct  it from  his  federal                                                              
income  tax return.  It's not  exactly a  one-for-one, because  on                                                              
the federal  tax return capital  expenditures will  be depreciated                                                              
over a  number of  years. The  sponsors felt  these were  four key                                                              
pieces.  A couple  of  other things,  like  the  state income  tax                                                              
benefit when  it's written off of  the state corporate  income tax                                                              
was not  in the  equation, but she  reminded people  that it  is a                                                              
world-wide calculation  based on an apportionment  percentage. So,                                                              
the impact  for state  corporate income tax  is fairly  small. The                                                              
sponsors felt  that these were the  four main benefits  and that's                                                              
the reason they were taken into account in this formula.                                                                        
                                                                                                                                
2:08:14 PM                                                                                                                    
She  noted however  that this  is  not the  perfect drafting;  the                                                              
equation should be  solving for "R" and it has been  turned into a                                                              
pretty  complex  quadratic  formula.  So,  it  was  felt  that  an                                                              
accountant would find  it easier to pick out the  tax credit piece                                                              
or  the   federal  deduction   piece  using   this  formula.   She                                                              
anticipated that  the actual quadratic formula would  be contained                                                              
in  regulations and  that is  the  background to  the equation  in                                                              
line 12.                                                                                                                        
                                                                                                                                
MS. WILSON said  the progressivity piece was in  subsection (g) on                                                              
page 4,  line 26; the  slope for that  calculation is  .25 percent                                                              
on  page  5,  line  2.  The  trigger,   the  price  at  which  the                                                              
progressivity  kicks  in, is  the  net  production tax  value  per                                                              
barrel -  $40 - and that  is on line  9. The other  difference she                                                              
pointed out  was that  the progressivity tax  shall not  exceed 25                                                              
percent  (on  page  5,  line 6).  For  comparison,  she  said  the                                                              
conference committee  bill had a $35 trigger with  a slope of .175                                                              
percent.  It  had a  combined  rate  of  50 percent  derived  from                                                              
adding the  basic tax rate to  the progressivity, which  could not                                                              
exceed  25  percent. In  this  bill,  because  the base  tax  rate                                                              
varies just  between 20  and 25 percent  based on investment,  the                                                              
progressivity  tax  is  on  top of  that  and  the  progressivity,                                                              
itself, cannot exceed 25 percent.                                                                                               
                                                                                                                                
SENATOR  DYSON   asked  if  progressivity  could   not  exceed  an                                                              
additional 25 percent.                                                                                                          
                                                                                                                                
MS. WILSON  replied yes; the  maximum base  rate is 25  percent in                                                              
addition to the  progressivity. If applicable,  that progressivity                                                              
could provide an additional 25 percent on top of that.                                                                          
                                                                                                                                
2:10:42 PM                                                                                                                    
MS.  WILSON said  the  tax rate  for  private  royalties had  been                                                              
moved and  reordered from  AS 43.55.011 (f)  to subsection  (i) on                                                              
page  5, line 14,  to make  it a  little more  readable. She  said                                                              
subsection (j) on  page 5 contains the Cook Inlet  oil and gas ELF                                                              
provisions and those  are the same as in the  conference committee                                                              
bill. The  tax is  calculated using  the basic  tax rules  for the                                                              
production  tax value  generated  by Cook  Inlet gas  and oil  and                                                              
that result is compared  to the ELF result for those  two things -                                                              
and the  tax is the lower  of the two  - basically an  ELF ceiling                                                              
for Cook Inlet  gas and oil -  the very same language  that was in                                                              
the conference  committee in  AS 43.55.011, but  it shows up  in a                                                              
different subsection.                                                                                                           
                                                                                                                                
MS. WILSON  noted that new language  was added on page  6, lines 6                                                              
- 8  to clarify how  the calculation is  made for the  comparison,                                                              
but it does not  change the purpose or function of  the Cook Inlet                                                              
gas or oil  provisions. That very  same language is on  lines 25 -                                                              
27. New subsection  (l) on page  6 is the Cook Inlet  oil section.                                                              
Language on page  7, lines 5 - 9, clarifies how  the tax reduction                                                              
and the ELF ceiling  in Cook Inlet would be accomplished.  This is                                                              
important because  the base tax rate could utilize  CAPEX credits,                                                              
but they could not be used against the progressivity tax.                                                                       
                                                                                                                                
She said  the next important  section starts  on page 8,  line 27,                                                              
and gives  the rules for the  so-called estimated  tax installment                                                              
payments  while  eliminating  the  safe harbor  provision.  A  key                                                              
element is  that the federal interest  rate will apply  both ways.                                                              
She noted that  AS 43.55.020(a) on  page 8, line 27, sets  out the                                                              
rules  for  how the  estimated  tax  payments are  calculated.  AS                                                              
43.55.020(g) on  page 11, line 17,  talks about the  interest that                                                              
applies  on  the  over  or  underpaid  estimated  tax  installment                                                              
payments  referencing IRC  66.21 and  66.22. These  rates are  set                                                              
and  published quarterly  by  the  Treasury Department.  She  said                                                              
there  is a fairly  robust rate  for underpayments,  but the  rate                                                              
for overpayments  is quite a bit  lees. She emphasized  that these                                                              
are  rules that  the  producers  are very  familiar  with and  the                                                              
rates are  less than  Alaska's statutory rate,  which is  now over                                                              
11 percent.                                                                                                                     
                                                                                                                                
She  explained  the way  it  worked  was  if  an estimated  or  an                                                              
installment payment  were underpaid,  then the interest  would run                                                              
from the date  of that payment due  date until March 31.  On March                                                              
31, the  true-up happens  and at that  point, if the  underpayment                                                              
is still there,  then that becomes  an addition to the  tax. So at                                                              
that  point,  the  federal  interest  rate  stops  and  the  state                                                              
statutory rate  kicks in  again at  11.25 percent. Subsection  (g)                                                              
deals with  underpayments of tax  and (h) deals  with overpayments                                                              
of  tax.  She explained  that  rather  than  the 95  percent  safe                                                              
harbor with  interest that  just went one  way, the  sponsors felt                                                              
that this would  be more fair both ways. She believed  the current                                                              
federal interest rate for underpayments is about 10 percent.                                                                    
                                                                                                                                
2:18:40 PM                                                                                                                    
MS.  WILSON reiterated  that the  CAPEX credit  sections had  been                                                              
changed  to  AS  43.55.023(a),   but  the  substance  hadn't  been                                                              
changed.  She noted the  CAPEX credit  is still  at 20  percent on                                                              
page 12, line 24.  The subsection that deals with  the losses that                                                              
can be converted  to a credit and  be carried forward  to the next                                                              
year is on  page 13, line 14.  Generally, that was intended  to be                                                              
carried forward  based on the  tax rate.  At this point  the state                                                              
has a  variable tax  rate and  the sponsors  felt that  20 percent                                                              
was the appropriate rate to bring that loss forward.                                                                            
                                                                                                                                
MS. WILSON  said the  transitional tax credits  start on  page 15,                                                              
line  26,  subsection  (i).  The  additional  nontransferable  tax                                                              
credits from  section 170  are now  on page  17, starting  on line                                                              
23.  AS 43.55.024(a)  is the  new  area development  credit -  the                                                              
same  language from  the  conference  committee bill  except  that                                                              
here it  reflects the $6,000,000  for a calendar year  as compared                                                              
to the conference  committee, which was monthly  and said $500,000                                                              
per month.  The base allowance  credit of  $12 million is  on page                                                              
18, line 8, and  that was previously in section 170.  She said the                                                              
exploration credits  are still  in AS 14.55.025  on page  19, line                                                              
16.                                                                                                                             
                                                                                                                                
2:21:31 PM                                                                                                                    
MS.  WILSON drew  members'  attention  to the  four  areas of  the                                                              
state  mentioned in  Section 160,  page 25,  line 22  - the  North                                                              
Slope, the  area south of  the Brooks Range  that is not  the Cook                                                              
Inlet (a  new area of  development), the  Cook Inlet oil,  and the                                                              
Cook Inlet  gas - and  pointed out  that the conference  committee                                                              
substitute  contained   the  same   structures.  The   reason  she                                                              
referred  to these  in  four areas  is  because  they are  treated                                                              
slightly differently  with special  rules. The  new area  south of                                                              
the  Brooks Range  that  is not  Cook Inlet  enjoys  the new  area                                                              
development credit.  Cook Inlet  oil and Cook  Inlet gas  have the                                                              
ELF ceiling. She  said the drafter spread out Section  160 so that                                                              
the areas are delineated clearly.                                                                                               
                                                                                                                                
She said another  change in that  section is on page 25,  lines 25                                                              
- 31.  The conference committee  bill language said, "oil  and gas                                                              
produced  from a  lease  or property  in  the  state" and  against                                                              
that, the  producer could take  expenditures regarding  that lease                                                              
or property  in the  state suggesting  that somehow  the bill  was                                                              
requiring individual  accounting  lease by lease  by lease  of the                                                              
production  tax value  and  that  was never  the  intention.   So,                                                              
language in CSHB  3001(FIN) had been changed to  say, "from leases                                                              
or  properties" (lines  25  and 28).  On page  26,  the very  same                                                              
change  is on  lines 1  and 7,  because the  new area  development                                                              
credit  is applicable  to those.  Subparagraphs (C)  and (D)  deal                                                              
with Cook  Inlet oil  and Cook  Inlet gas,  and in that  instance,                                                              
the ELF ceiling  is property by property. So, it  still says "from                                                              
a lease or  property". This looks like inconsistent  language, she                                                              
said, but that is the reason it is not.                                                                                         
                                                                                                                                
MS. WILSON explained  that language on page 26, line  21, says the                                                              
progressivity will  be calculated on a monthly basis,  but it will                                                              
still  be reported  on the annual  tax return.  So, paragraph  (2)                                                              
says  the "monthly  production tax  value" of  the following  four                                                              
sections. The  changes are  the same as  in (A) and  (B) (changing                                                              
from "a lease or property" to "leases or properties").                                                                          
                                                                                                                                
2:25:38 PM                                                                                                                    
MS. WILSON said  that page 28, line 20, now says,  "In determining                                                              
whether  costs  are  lease  expenditures,   the  department  shall                                                              
consider"  and goes  on  to say  "typical  industry practices  and                                                              
standards". She  explained that  the key difference  from previous                                                              
versions of the  bill, is that "shall consider"  was added because                                                              
sponsors  heard  a fair  amount  of discussion  about  substantial                                                              
weight and  that language had been  added to bring clarity  to the                                                              
weight different things are given.                                                                                              
                                                                                                                                
She noted that line  23 contained a very important  phrase that is                                                              
also  in the  previous bill.  It  says that  the department  shall                                                              
consider  typical   industry  practices  "other  than   the  items                                                              
(prohibited  deductions) listed  in  (e) of  this section,".  This                                                              
means that whatever  industry practices are, if  it's a prohibited                                                              
expense on this  next list, it's prohibited. Page 29  has the same                                                              
language on line 25 [regarding (e) and prohibited deductions].                                                                  
                                                                                                                                
MS. WILSON  said clarifying  language was also  added on  page 30,                                                              
line 8, to "overhead  allowance" for the same reason.  It now says                                                              
a reasonable  percentage shall be  allowed for overhead,  but it's                                                              
a reasonable  percentage  of the  costs that  are allowable.  "The                                                              
intention  was  always  to  provide a  percentage  of  the  direct                                                              
costs."                                                                                                                         
                                                                                                                                
She  said the  same clarification  could be  found at  the top  of                                                              
page 31,  line 1.  She pointed out  that (e)  on line  6 contained                                                              
the list  of disallowed expenditures.  That list is the  very same                                                              
as in the conference committee bill.                                                                                            
                                                                                                                                
2:28:56 PM                                                                                                                    
MS.  WILSON  said  that  Section  180  on  page  25  requires  the                                                              
Department  of Revenue  to  prepare  a report,  which  is due  the                                                              
first day  of the  2011 regular  session. However, paragraphs  (1)                                                              
and (2)  expand the reporting  requirements significantly  saying,                                                              
"the effects  of the  provisions of  this chapter  on oil  and gas                                                              
exploration,  development,   and  production  in   the  state,  on                                                              
investment  expenditures...." So  she asked  the committee  to pay                                                              
particular  attention   to  the   tax  rates  provided   under  AS                                                              
43.55.011.                                                                                                                      
                                                                                                                                
2:30:02 PM                                                                                                                    
MS. WILSON said  she hadn't pointed out each  word change relative                                                              
to the change  from monthly filing  to annual, but she  noted that                                                              
language  on page 36,  lines 9  - 10  and lines  27 - 28,  clarify                                                              
that spill fees  are due on March  31. The last change  is on page                                                              
37,  lines  27  -  31, and  while  "BTU  equivalent"  is  not  new                                                              
language, it  has been moved  from one  of the subsections  to the                                                              
general definitions  because it has  been utilized in a  couple of                                                              
sections.                                                                                                                       
                                                                                                                                
In  terms  of  transition  timing, she  said,  the  previous  bill                                                              
provided for 10  months. However, this bill with  an annual filing                                                              
and monthly  estimated tax  payments, provides  that for  the rest                                                              
of 2006,  the payments  would be made  under the current  existing                                                              
rules  with a  true-up  on  March 31,  but  that starting  in  the                                                              
January  the estimated  tax installment  payment would  be due  at                                                              
the end  of February. That is  closer to the  six-month transition                                                              
period that  was in the governor's  original bill and  was changed                                                              
to 10 months during House committee action.                                                                                     
                                                                                                                                
2:31:54 PM                                                                                                                    
SENATOR DYSON  said there was  some discussion about  not allowing                                                              
the  producers  to have  a  deduction  for  the money  they  spend                                                              
trying to  influence the legislative  process and he asked  if the                                                              
federal government  allows such  a deduction  and if she  had ever                                                              
talked  about  not allowing  those  as  business expenses  in  her                                                              
experience with the state.                                                                                                      
                                                                                                                                
MS. WILSON  replied  that she didn't  know the  federal rule,  but                                                              
this  bill  said  that activity  would  be  almost  impossible  to                                                              
deduct as  a lease expenditure.  If it's not a  lease expenditure,                                                              
it cannot be deducted  and you cannot get a capital  credit for it                                                              
either.  Clearly   it  would  not  be  an   immediately  allowable                                                              
expenditure. She said  further references on pages 30  and 31 talk                                                              
about lobbying  expense being a  reasonable percentage  of allowed                                                              
costs.                                                                                                                          
                                                                                                                                
SENATOR DYSON said he was referencing 26USC162(E).                                                                              
                                                                                                                                
CHAIR   SEEKINS  asked   Mr.  Dickinson   to   comment  on   lease                                                              
expenditures on page 28, line 12.                                                                                               
                                                                                                                                
^ DAN DICKINSON, Economist, Consultant to Governor                                                                              
DAN DICKINSON,  Economist, Consultant  to the Governor,  responded                                                              
that lobbying  expenses weren't normally  seen as an  ordinary and                                                              
necessary direct  cost. In reference to Senator  Dyson's question,                                                              
he would have  to follow up on  whether the feds disallow  it, and                                                              
if  they do,  find  out  if it's  ordinary  and necessary  with  a                                                              
special  disallowance  for  it or  do  they  simply say  it's  not                                                              
ordinary and  necessary. He  agreed with  Ms. Wilson's  comment on                                                              
it.                                                                                                                             
                                                                                                                                
SENATOR STEDMAN  said he  was curious about  how the  offsets work                                                              
in the tax formula.                                                                                                             
                                                                                                                                
2:36:17 PM recess 2:39:03 PM                                                                                                
                                                                                                                                
CHAIR  SEEKINS called  the meeting  back to  order and  recognized                                                              
that Representative Kelly joined the committee.                                                                                 
                                                                                                                                
MR.  DICKINSON introduced  the "Selection  of  Higher Rate  Table"                                                              
and said  he wanted  to focus on  how to  calculate the  tax rate,                                                              
which in  this bill would  always be a  number between  20 percent                                                              
and 25  percent. He  said this  algebraic formula  is compared  to                                                              
ELF as being  complex and one  of the major differences  he always                                                              
points  out is that  the ELF  can drive  a company's  tax down  to                                                              
zero,  but  this formula  can  only  drive  it  down to  a  number                                                              
between 20 and 25  percent. This bill has a way to  get at the tax                                                              
rate by looking  at the amount  of investment a company  is making                                                              
and  while  there were  some  problems  with  that, he  wanted  to                                                              
explain  the concept  first  using  his tables.  Investments  [per                                                              
barrel]  up to $1  don't get  any tax  relief, he  said, and  this                                                              
covers  the stuff a  company needs  to purchase  for basic  health                                                              
and safety that  can be capitalized under the  federal tax system.                                                              
So, a company's  tax rate starts at 25 percent and  a basic amount                                                              
of capital has to  be spent every year. As per-barrel  spending is                                                              
increased,  the tax  rate goes  down  and this  is set  up with  a                                                              
fairly  simple mathematic  relationship.  So,  for example,  going                                                              
from an  investment of $1  to $2 per barrel  will make a  tax rate                                                              
fall from  25 percent down to  24 percent. Spend an  additional $1                                                              
per barrel  and your tax  rate falls to  23 percent. If  you spend                                                              
up to  $4 on  production per barrel,  it falls  to 22  percent. At                                                              
$6, you hit  the floor of 20  percent and as you  spend additional                                                              
dollars per barrel, you get no further tax relief.                                                                              
                                                                                                                                
2:46:07 PM                                                                                                                    
He  showed the  committee  his  five-step calculation  under  five                                                              
different investment  scenarios. It  indicated that  the investors                                                              
would  get lower tax  rates and  the harvesters  would get  higher                                                              
tax rates.  He said this calculation  has a huge flaw  that has to                                                              
be  corrected  which  is  that at  high  very  high  prices  (like                                                              
today),  when you  begin to  mess with  the tax  rate, the  effect                                                              
overwhelms  the  capital  investment   and  that  can  lead  to  a                                                              
situation called gold plating.                                                                                                  
                                                                                                                                
Gold plating  happens when  someone who  is producing  300 million                                                              
barrels a  year goes  out and spends  an additional  $300 million,                                                              
so their tax  rate drops by 1  percent. But at $70 a  barrel, that                                                              
300 million  barrels is worth  over $20  billion in tax  rate. So,                                                              
just by  making a  $300 million  investment,  a company gets  $200                                                              
million  back  immediately  and  that's  before  credits,  federal                                                              
income  taxes, state  income  taxes,  and a  whole  host of  other                                                              
effects have  been accounted for.  Situations can be  found within                                                              
the realm of  quite reasonable numbers where somebody  could spend                                                              
$1 and get tax  breaks of almost $1.80. That -  everybody agrees -                                                              
is a terrible  effect. It leads  to situations where a  company is                                                              
spending money solely  for purposes of the tax  break, not because                                                              
it's  going  to  increase  production and  not  because  it  makes                                                              
sense. Even  gold plating  opportunities  companies don't  like to                                                              
engage in it.                                                                                                                   
                                                                                                                                
MR. DICKINSON said  that is why he built a formula  that made sure                                                              
gold  plating doesn't  occur. The  calculation  of "R"  in step  2                                                              
prevents  it   by  offering   two  alternative  calculations   and                                                              
basically a  company is  going to have  to pay a  tax rate  at the                                                              
higher of  the two. He  walked the committee  through how  the "R"                                                              
kicks in under the $20 column.                                                                                                  
                                                                                                                                
2:50:01 PM                                                                                                                    
Turning  to the  next table,  Mr.  Dickinson showed  how once  the                                                              
comparison is  done, you find out  what your tax rate  is going to                                                              
be. If oil prices  are $100 and you only make  a $2-investment per                                                              
barrel,  you're still  at 25  percent. It  doesn't go  down to  20                                                              
percent until  roughly $15  a barrel is  being invested -  or five                                                              
times  what  current rates  are.  So,  at  very high  prices,  the                                                              
benefit  is not  picked  up quite  as quickly.  The  danger is  if                                                              
somebody finds  a way to  do that, in  which the state  would have                                                              
to  make  sure  it  is looking  at  the  real  costs.  He  further                                                              
enlightened the committee:                                                                                                      
                                                                                                                                
     In some sense,  what this shows is the "R"  factor means                                                                   
     that  at these high  prices, basically  folks are  going                                                                   
     to be  very near on  the 24, 25  percent range  and it's                                                                   
     going  to take  quite a bit  of spending  to drive  them                                                                   
     down  to the  20  and 21  percent  range.  On the  other                                                                   
     hand, if  you go down to  $20 and $30 [price  per barrel                                                                   
     of oil]  that we expect to  be in, what you will  see is                                                                   
     folks can expect to be at a 20-percent tax rate a lot                                                                      
     of the time.                                                                                                               
                                                                                                                                
2:52:22 PM                                                                                                                    
SENATOR STEDMAN  said he wanted to  compare this with a  flat 22.5                                                              
percent tax rate - simplicity versus complexity.                                                                                
                                                                                                                                
MR. DICKINSON  said he could print  out a graph at a  22.5 percent                                                              
tax rate for his comparison.                                                                                                    
                                                                                                                                
2:56:58 PM                                                                                                                    
SENATOR DYSON  asked if  the administration  was comfortable  with                                                              
this approach  and did he feel he  could negotiate this  kind of a                                                              
scheme with the producers.                                                                                                      
                                                                                                                                
^ BILL CORBUS, Commissioner, Department of Revenue                                                                              
BILL CORBUS, Commissioner,  Department of Revenue,  responded that                                                              
the  administration  supported  its  original  20/20  concept.  He                                                              
couldn't answer how it would address this concept.                                                                              
                                                                                                                                
2:58:46 PM                                                                                                                    
MR. DICKINSON  went on  to step four  that added progressivity  at                                                              
different prices.  At $50 and below, progressivity  brings in zero                                                              
-  subtracting an  assumed  OPEX and  transportation  cost of  $12                                                              
(this takes you  below $40). At $60, you hit zero  because with an                                                              
$8 CAPEX  and a $12  OPEX you get  down to  $40. But at  any price                                                              
above  that,  there is  progressivity.  Step  five shows  the  net                                                              
effect  of   the  20   -  25  percent   rate  mechanism   and  the                                                              
progressivity.                                                                                                                  
                                                                                                                                
3:01:35 PM                                                                                                                    
SENATOR BUNDE  asked what  would be  the tax  rate at  the current                                                              
rate of investment if prices were at $70.                                                                                       
                                                                                                                                
3:02:21 PM                                                                                                                    
MR.  DICKINSON replied  that he  would  go through  an example  of                                                              
today's  investments  at  the  end   of  his  comments.  His  next                                                              
illustration showed  what happens at $1 per barrel  investment and                                                              
the  weaknesses  of  the  system.  He  said  that  decreasing  the                                                              
volumes in the  denominator has the same effect  as increasing the                                                              
volumes in  the numerator.  His illustration  showed what  kind of                                                              
relationship could be seen in a wide range of investments.                                                                      
                                                                                                                                
3:03:50 PM                                                                                                                    
MR. DICKINSON  said that everything  he had talked about  with his                                                              
300 million barrel  example concerned the entire  North Slope, but                                                              
he pointed  out that the  North Slope is  not a single  tax payer.                                                              
So,  he took  numbers from  ConocoPhillips that  lined up  closely                                                              
with  numbers  he   developed  in  looking  at   the  three  major                                                              
producers'  investments per barrel  over the  last five  years. BP                                                              
ranged from  a high of  $5 to a  low of around $2.  ConocoPhillips                                                              
ranged  from a high  of $5  to a  low of  about $2.50.  ExxonMobil                                                              
ranged from a  low of about $2  to a high of about  $3. The others                                                              
are folks who are just investing like Anadarko and Pioneer.                                                                     
                                                                                                                                
He said  the final box  showed the combined  data. BP is  at about                                                              
$3, so they would  be able to knock $2 down (because  the first $1                                                              
doesn't count) and  would probably go from 25 percent  down to the                                                              
23 percent range;  ConocoPhillips is closer to $4  - knock off $1,                                                              
and  they would  go  from  25 percent  to  the 22  percent  range;                                                              
ExxonMobil is  about $2 and knocking  $1 off would take  them from                                                              
25 percent to 24  percent. The others would typically  be found at                                                              
20 percent  or the lowest rate because  they are well  over the $6                                                              
per barrel.                                                                                                                     
                                                                                                                                
3:06:25 PM                                                                                                                    
SENATOR STEDMAN  asked him to go  over how the formula  would work                                                              
year by year.                                                                                                                   
                                                                                                                                
MR. DICKINSON  responded  that the rate  essentially resets  every                                                              
year and  amounts to the  total capital  for that year  divided by                                                              
the production.  So a  two-year building  program would  drive the                                                              
rate  down  during those  two  years  and  as soon  as  production                                                              
started and construction subsided, the rate would go up again.                                                                  
                                                                                                                                
SENATOR STEDMAN and  Senator Elton both discussed  how the formula                                                              
would work with Mr. Dickinson.                                                                                                  
                                                                                                                                
SENATOR STEDMAN  asked what the tax  rates in 2006 would  be using                                                              
the formula.                                                                                                                    
                                                                                                                                
MR. DICKINSON  replied  that the  average base  tax rate would  be                                                              
21.5 percent  across all  the producers.  On the investment  side,                                                              
ConocoPhillips spent  on average $2  a barrel more than  either BP                                                              
or  ExxonMobil; so  the  totals  would be  different  for all  the                                                              
players.                                                                                                                        
                                                                                                                                
3:13:01 PM                                                                                                                    
SENATOR  ELTON said  that given  current events,  he was going  to                                                              
assume  that in  2007  BP  may see  a  large increase  in  capital                                                              
expenditures  and  that  those   additional  capital  expenditures                                                              
would make its  tax rate go down  from 23 to 22.5 percent  if this                                                              
formula were adopted.                                                                                                           
                                                                                                                                
MR. DICKINSON  replied yes  - if it's  adopted. He said,  however,                                                              
that simply  replacing pipe, however much  it is, may not  be that                                                              
expensive  compared  to other  things.  For  example in  2001,  BP                                                              
spent  $600 million,  almost double  its average,  on creation  of                                                              
the  North Star  unit  -  an entire  unit,  an island,  a  sub-sea                                                              
pipeline,  and those  kinds of  things.  But today  BP is  talking                                                              
about replacing  standard pipe, which  he didn't believe  would be                                                              
out of the range of numbers seen here today.                                                                                    
                                                                                                                                
3:15:18 PM                                                                                                                    
SENATOR  BEN  STEVENS  said  he didn't  think  those  costs  would                                                              
impact BP alone.                                                                                                                
                                                                                                                                
MR.  DICKINSON agreed  and  added  that one  of  the anomalies  of                                                              
Prudhoe Bay  is that BP  is a minority  owner and that  ExxonMobil                                                              
and  ConocoPhillips  are  each  picking  up $.37  of  each  dollar                                                              
spent; BP would only be picking up $.26.                                                                                        
                                                                                                                                
3:16:12 PM                                                                                                                    
SENATOR  WILKEN   asked  if  the   colored  chart   accounted  for                                                              
inflation.                                                                                                                      
                                                                                                                                
MR. DICKINSON replied  no and added that the sponsors  of the bill                                                              
didn't want  inflation on  any of  the markers  so that  only real                                                              
increases in spending would be seen.                                                                                            
                                                                                                                                
3:19:21 PM                                                                                                                    
MR.  DICKINSON  explained  that  the Produce  or  Pay  Plan  (POP)                                                              
basically  means that  a  company  is investing  more  than it  is                                                              
getting in  profits, putting it in  a 20 percent tax  bracket. His                                                              
model compared it  to the PPT and the status quo.  He started with                                                              
a value of $73.46  and assumed an OPEX and transportation  cost of                                                              
$12  and a  CAPEX that  is  simply the  2006  estimate. Using  300                                                              
million  barrels and  deducting  the royalty  barrels  he came  up                                                              
with 262  million barrels for a  price of $56.83 per  barrel. This                                                              
generates a  value of $15 billion  in PPT taxable  value. Subtract                                                              
$40  from  $56.83 and  the  resulting  $16.83  is the  profit  the                                                              
progressivity  is  calculated  on.  The baseline  profit  is  $3.7                                                              
billion, but  because they are making  a $4.63 investment  and the                                                              
first  $1  is  knocked  off,  that  leaves  $3.63.  Subtract  3.63                                                              
percent from  25 percent and that  results in 21.3  percent, which                                                              
saves about  a $.5 billion on what  is getting taxed.  The tax for                                                              
this  year  under this  bill  would  be  $3.6 billion.  Under  the                                                              
original  PPT bill  it  would be  about  $1.1  billion less  ($2.5                                                              
billion); under the status quo it would be $1.3 billion.                                                                        
                                                                                                                                
3:26:02 PM                                                                                                                    
SENATOR  STEDMAN asked  if he could  also compare  the tax  scheme                                                              
from  the last  conference committee  bill and  add the  effective                                                              
tax rate calculation.                                                                                                           
                                                                                                                                
SENATOR BUNDE  added that  he also wanted  to see the  government-                                                              
take figures.                                                                                                                   
                                                                                                                                
MR.  DICKINSON  responded that  he  could  get those  figures  for                                                              
comparison  and also  observed that  the governor's  bill and  the                                                              
status  quo falls  within the  range of  some of  the other  bills                                                              
passed.                                                                                                                         
                                                                                                                                
3:27:40 PM                                                                                                                    
SENATOR  ELTON  said he  wanted  to  see  these figures  based  on                                                              
Department of Revenue oil price projections for the next year.                                                                  
                                                                                                                                
MR. DICKINSON  responded  that he  would see  those in the  fiscal                                                              
note.                                                                                                                           
                                                                                                                                
SENATOR STEDMAN asked  if they could just use  a particular number                                                              
rather than getting wrapped up in the day's price.                                                                              
                                                                                                                                
MR. DICKINSON replied that he typically does that.                                                                              
                                                                                                                                
SENATOR WAGONER asked  since the gold plating correction  was just                                                              
a  percentage coming  off of  the  base rate,  would that  require                                                              
extra auditing.                                                                                                                 
                                                                                                                                
MR. DICKINSON  replied  that it  wouldn't take  away the need  for                                                              
auditors   because  DOR   would   still  have   to  know   capital                                                              
expenditures  and  the  total  tax base.  The  auditing  would  be                                                              
identical  to any other  bill that  has the  capital credits.  The                                                              
four  items -  total  capital  expenditure, total  production  tax                                                              
value, the  tax rate (highest  marginal rate according  to federal                                                              
code)  used  in  the  calculation   will  not  require  additional                                                              
auditing.                                                                                                                       
                                                                                                                                
SENATOR WAGONER  asked how many auditing positions  the department                                                              
is short now.                                                                                                                   
                                                                                                                                
MS. WILSON replied  the department had hired a  few auditors since                                                              
the first of the  year and one production tax  auditor position is                                                              
left vacant;  this does not include  the income tax  auditors. She                                                              
agreed  with  Mr.  Dickinson  that   this  bill  does  not  change                                                              
auditing  duties.  The department's  fiscal  note  shows a  slight                                                              
decrease -  a tax technician position  - due to going  to a yearly                                                              
filing from monthly filings.                                                                                                    
                                                                                                                                
3:31:31 PM                                                                                                                    
MR. DICKINSON  said  that last page  in his  model walked  through                                                              
the calculation for ExxonMobil.                                                                                                 
                                                                                                                                
3:35:26 PM                                                                                                                    
CHAIR SEEKINS commented  that ExxonMobil doesn't  quite double its                                                              
tax bill.                                                                                                                       
                                                                                                                                
MR. DICKINSON replied that was correct.                                                                                         
                                                                                                                                
CHAIR SEEKINS  observed that on  average, this bill would  bring a                                                              
tax bill to about 272 percent.                                                                                                  
                                                                                                                                
MR. DICKINSON replied  that is correct and explained  that one way                                                              
to think about this  is that currently Prudhoe Bay  has a tax rate                                                              
of 12  percent of gross. ConocoPhillips  has the Alpine  field and                                                              
BP  has North  Star with  similar tax  rates, but  for the  second                                                              
largest  field in  United  States, Kuparuk  (50  percent owned  by                                                              
ConocoPhillips,  a smaller share  by BP, and  less than  1 percent                                                              
by  ExxonMobil) its  tax  rate is  going  from  zero to  something                                                              
approaching  20 percent.  So, the  investors  beyond Prudhoe  Bay,                                                              
under any  bill that  moves away  from paying  the zero  ELF, will                                                              
see the largest increase.                                                                                                       
                                                                                                                                
3:37:09 PM                                                                                                                    
CHAIR SEEKINS  pointed out  that the tax  rate doesn't  affect all                                                              
oil companies the  same way; it depends on where  their fields are                                                              
located.                                                                                                                        
                                                                                                                                
3:37:27 PM                                                                                                                    
SENATOR  BEN STEVENS  wanted  to talk  about  the Chair's  comment                                                              
repealing  ELF or  keeping it  in  place as  a temporary  stop-gap                                                              
measure  during this  time  of uncertainty.  He  observed if  they                                                              
keep  the current  system in  place,  Kuparuk would  still not  be                                                              
subject to production tax.                                                                                                      
                                                                                                                                
MR.  DICKINSON said  that was  correct. Simply  repealing the  ELF                                                              
would be  a big increase  in places with a  low ELF and  almost no                                                              
increase in  those fields, which have  a high ELF and  Kuparuk has                                                              
a zero ELF now.                                                                                                                 
                                                                                                                              
SENATOR  BEN  STEVENS  said  his   point  is  that  the  petroleum                                                              
production  tax is  designed to  include all  production into  the                                                              
realm of being taxed.  He said that Kuparuk would  not be included                                                              
in the formula if  they would merely repeal the ELF  as a stop-gap                                                              
measure.                                                                                                                        
                                                                                                                                
MR. DICKINSON  clarified if the  ELF were repealed,  Kuparuk would                                                              
have a huge payment.                                                                                                            
                                                                                                                                
SENATOR BEN STEVENS asked what if it was changed a little bit.                                                                  
                                                                                                                                
MR.  DICKINSON replied  there  are  ways it  could  be changed  to                                                              
affect Kuparuk;  if you just played  with the parameters  it might                                                              
not  be  effected.  He  said  this   was  the  conclusion  of  his                                                              
presentation.                                                                                                                   
                                                                                                                                
SENATOR STEDMAN  asked if he  would do  a summary table  of prices                                                              
at $50 and $30  along with the $70 using a constant  CAPEX to make                                                              
the model easier to work with.                                                                                                  
                                                                                                                                
MR. DICKINSON replied he would.                                                                                                 
                                                                                                                                
3:42:48 PM at ease 3:52:59 PM                                                                                               
                                                                                                                                
CHAIR  SEEKINS called  the  meeting back  to  order and  announced                                                              
that Dr. Van Meurs would comment next.                                                                                          
                                                                                                                                
DR. ^Dr. Pedro Van Meurs, Economist, Consultant to the Governor                                                                 
PEDRO  VAN  MEURS,  Consultant   to  the  Governor,  said  he  was                                                              
concerned  about  the  overall  impression  he  was  getting  that                                                              
either  lawmakers  prefer  something  that  is  very  simple  that                                                              
doesn't work or  something complex that doesn't work,  but he also                                                              
noticed that something  simple that works doesn't seem  to get the                                                              
votes. He repeated that is what concerns him. He elaborated:                                                                    
                                                                                                                                
     When I gave  my first recommendation to  the Governor, I                                                                   
     said it's very  simple. Do it like anywhere  else in the                                                                   
     world.  We have  lots of  experience in  how the  simple                                                                   
     systems  work.  You  just   take  a  percentage  of  net                                                                   
     profit,  give some  incentive,  like a  tax credit,  and                                                                   
     you  will get  exactly a  simple system  that's easy  to                                                                   
     administer.  It   has  no  problems  and   international                                                                   
     experience  proves that  it  works. And  we  now have  a                                                                   
     House  bill  that  has  many,  many,  good  features.  I                                                                   
     believe  there's a  major progress  on the  text of  the                                                                   
     earlier bill.  I do believe  that the whole  methodology                                                                   
     of monthly  payments is  a simple  system - just  having                                                                   
     interest  payments at the  end of the  year if  you over                                                                   
     or under pay  - I think that's great  simplification and                                                                   
     it is very  sound. But what I'm also  particularly happy                                                                   
     with is  that a  lot of the  wording about cost  control                                                                   
     has  been significantly  tightened  up and  I think,  so                                                                   
     generally speaking,  Mr. Chairman,  I think much  of the                                                                   
     bill  is   very  much   improved  relative  to   earlier                                                                   
     concepts.                                                                                                                  
                                                                                                                                
     I'm  also pleased  that the  House  has come  up with  a                                                                   
     progressivity  formula  that   I  feel  personally  very                                                                   
     comfortable with.  As you know, previously,  I had urged                                                                   
     the various  committees to take the dollar  figure where                                                                   
     you start the  progressivity somewhat high -  $40 or $45                                                                   
     -   but   after   that   you   could   have   a   strong                                                                   
     progressivity.   So,  the  $40   and  a  .25,   I  think                                                                   
     definitely meets  those standards, as I  had recommended                                                                   
     earlier when I recommended against the $35.                                                                                
                                                                                                                                
     As  I  said, the  item  that  I was  somewhat  concerned                                                                   
     about  is  the   matter  of  the  rate  that   has  been                                                                   
     discussed  here.  I'm a  PhD  in  economics and  I  have                                                                   
     spent  now three  days trying  to  fully comprehend  all                                                                   
     the  economic  impacts and  I'm  still not  100  percent                                                                   
     ready,  but  I promise  you  if  you  want to  get  some                                                                   
     economic overview  and if you're  interested in  that, I                                                                   
     can have  it ready  for you  tomorrow morning early,  if                                                                   
     that is of interest to the committee.                                                                                      
                                                                                                                                
     Now,  so  consequently,  I'm concerned  about  the  fact                                                                   
     that that  system is just too  complex. I believe  it is                                                                   
     too   complex  and   I  have  concerns;   I  have   some                                                                   
     preliminary  views on  that which  I would  be happy  to                                                                   
     share if you're  interested. I can provide  a more fully                                                                   
     economic documentation  tomorrow, if you're  interested.                                                                   
     So, consequently [those] are very important issues.                                                                        
                                                                                                                                
     Senator  Wagoner also asked  my views  as to what  could                                                                   
     be done  to enhance the  gross character of  bill...more                                                                   
     on gross  and less on net  and I believe there  are some                                                                   
     things  that  can  be  done   in  the  bill.  I  believe                                                                   
     personally that  a floor as has been suggested  a number                                                                   
     of times  - say like  in HB 3004  - a floor  whereby you                                                                   
     say okay for  instance at $25 a barrel we  have at least                                                                   
     4  percent of  gross  or something  in  that nature  and                                                                   
     then maybe  go down from there  if the price  declines -                                                                   
     something similar  to HB 3004.  I believe that  could be                                                                   
     an enrichment  of the bill - not from an  economic point                                                                   
     of  view. I  personally  don't believe  that  the -  say                                                                   
     economically  such an issue  is not strictly  necessary.                                                                   
     I believe  that the net system  works, but I  do believe                                                                   
     that there is  considerable concern out there  among the                                                                   
     people  in Alaska and  concerned like  oh, if  companies                                                                   
     just  keep deducting  all  these costs,  we  may end  up                                                                   
     with  less than  what we have  now and  a floor  concept                                                                   
     would help.                                                                                                                
                                                                                                                                
     Another  way  of strengthening  the  gross  character  a                                                                   
     little  bit would be  to restrict  somewhat further  the                                                                   
     deductible  costs. We  have, as I  mentioned before,  in                                                                   
     the  legislature  and particularly  to  your  committee,                                                                   
     Mr. Chairman,  I think we have  a laundry list  of items                                                                   
     that are not  lease expenditures and that  are therefore                                                                   
     not  deductible   and  therefore  not  subject   to  tax                                                                   
     credits that  is very long. And I testified  before that                                                                   
     that  list is  very  much in  line  with  even the  most                                                                   
     stringent  international standards.  But it is  possible                                                                   
     to  add some items  to the  list if  Senators feel  very                                                                   
     strongly  about  these  matters.  So, I  believe  it  is                                                                   
     possible  to enhance  the gross  character  of the  bill                                                                   
     somewhat  through maybe  a floor or  through maybe  some                                                                   
     further additions to the non-deductible items.                                                                             
                                                                                                                                
     So,  basically, Mr.  Chairman, that  is my very  initial                                                                   
     view.  I believe  that the  text  of the  House bill  is                                                                   
     clearly  an   improvement  over  what  has   been  there                                                                   
     before. I'm  very pleased with  much of the  language. I                                                                   
     think  it  is  really protecting  Alaska  very  well.  I                                                                   
     think the  progressive feature, although of  course that                                                                   
     is  not  in  the  Governor's  bill -  but  I  have  been                                                                   
     testifying  here about  that -  I believe  that is  very                                                                   
     much  in  line   with  what  I  think   a  well-designed                                                                   
     progressive  feature would be.  I'm concerned about  the                                                                   
     great  complexity of  this PPT  rate-structure, which  I                                                                   
     believe could  cause quite  serious gold plating.  And I                                                                   
     believe  it  is  possible to  maybe  enhance  the  gross                                                                   
     character  of  this  bill somewhat  if  there  would  be                                                                   
     interest  on the  part  of  the Senators  to  do so.  If                                                                   
     there  are any  questions,  I would  be  glad to  answer                                                                   
     them.                                                                                                                      
                                                                                                                                
4:02:00 PM                                                                                                                    
SENATOR  WAGONER asked  if  the formula  in  item (f)  on page  3,                                                              
lines 12  - 25, were  taken out and  a percentage (the  conference                                                              
committee  come up  with  22.8) were  put in,  would  that be  the                                                              
right place to put it.                                                                                                          
                                                                                                                                
DR. VAN MEURS replied that the Governor proposed a 20/20 plan,                                                                  
but from a structural point of view, if section 5 (e)[page 3,                                                                   
lines  5 -  11] simply  said 22.8  percent,  he would  be so  much                                                              
happier with that  than with everything that is now  under (f). He                                                              
reiterated  that this  formula is  horrendously  complex, but  his                                                              
formula, which was  based on extensive modeling,  was very simple.                                                              
It is  no more  than multiplying,  dividing, and subtracting.  The                                                              
problem  with  the new  formula  is  that  all the  factors  start                                                              
interacting quite a bit.                                                                                                        
                                                                                                                                
     If you  assume that the  tax rate  is a constant  and if                                                                   
     you  take a  given value  for the  production tax,  then                                                                   
     really what  this formula does is relating  the PPT rate                                                                   
     to  the   qualified  capital  [QC]  expenditures   as  a                                                                   
     percentage  of  the production  tax  value. Now,  it  is                                                                   
     easy to see  the easiest way to start with  this formula                                                                   
     is simply set QC at zero.                                                                                                  
                                                                                                                                
He went  through the formula  [on page  3] that demonstrated  if a                                                              
company  would not  invest one  dime, its  base rate  would be  25                                                              
percent. Then he  said you ask how much of a  company's net profit                                                              
it  has to  spend  to bring  the  rate down  and  basically, if  a                                                              
company would spend  23 percent of its net profits  in Alaska, the                                                              
rate  would be  20 percent.  In  plain language,  he figured  that                                                              
this formula  says if a company  reinvests at least 23  percent in                                                              
Alaska, it  gets to keep  the other 77  percent and would  be able                                                              
to take it out  of Alaska - and also get rewarded  with a PPT rate                                                              
of 20  percent. In  his mind,  that is  a harvester's  formula and                                                              
the  philosophy   behind  it   wouldn't  encourage   investors  to                                                              
reinvest.                                                                                                                       
                                                                                                                                
4:07:15 PM                                                                                                                    
SENATOR WAGONER  asked if  this bill  is salvageable with  certain                                                              
changes.                                                                                                                        
                                                                                                                                
DR. VAN MEURS replied  that this whole section is  complex. He had                                                              
verified  that  all Mr.  Dickinson's  math for  steps  1  - 5  was                                                              
correct, but  what concerned him  still was that the  formula does                                                              
not  prevent gold  plating; it  merely  slows it  down under  very                                                              
high prices.                                                                                                                    
                                                                                                                                
After doing a  back-of-the-envelope calculation and  hearing there                                                              
could be  very large  new expenditures in  the Prudhoe  Bay field,                                                              
Dr. Van Meurs said  his initial assessment of section  (f) is that                                                              
20 percent of the  expenditures would be paid by  the oil industry                                                              
and  80  - 90  percent  would  be  paid  by the  state  through  a                                                              
reduction of  the PPT.  He didn't  know how enthusiastic  Alaskans                                                              
would  be to step  forward  and pay for  that much  of the  repair                                                              
costs.                                                                                                                          
                                                                                                                                
     That  is what  I mean with  gold plating.  The State  of                                                                   
     Alaska would  pay a very  high share of any  incremental                                                                   
     investment  and  that  is  caused  by  firstly  the  tax                                                                   
     credits  that we  have, then  the  deductions, then  the                                                                   
     reduction of  this rate, which  gives the PPT  reduction                                                                   
     even more.  And then don't  forget, we still have  the 2                                                                   
     for 1 system,  which was an additional credit  on top of                                                                   
     that.  So,  by  the  time  you add  it  all  up,  in  my                                                                   
     calculations,   in  the  $60   -  $80  range,   you  get                                                                   
     something  like Alaska  paying 80  - 90  percent of  any                                                                   
     repairs  in the  Arctic through  reductions  of PPT  and                                                                   
     personally I would be very concerned about that.                                                                           
                                                                                                                                
4:10:34 PM                                                                                                                    
SENATOR  WILKEN, referencing  a graph  asked if  the state  didn't                                                              
need  some  component  of inflation-proofing  across  the  top  in                                                              
order  to keep  up with  inflation-proofing  down the  side for  a                                                              
deal as long as 25 years.                                                                                                       
                                                                                                                                
DR. VAN MEURS replied that was another deep concern, so he had                                                                  
done some preliminary modeling on it. He elaborated:                                                                            
                                                                                                                                
     The first  thing to remember  is that this formula  is a                                                                   
     dollar-per-barrel   formula.  In   other  words,   if  a                                                                   
     company starts  at 22.5 percent, in nominal  dollars, as                                                                   
     long as they  decline their investment at  the same rate                                                                   
     as the  decline of  the production,  the rate will  stay                                                                   
     constant.  But, or in  other words,  if your  production                                                                   
     declines  8  percent,  then  you can  let  your  nominal                                                                   
     investment decline  by 8 percent and you  will still pay                                                                   
     the  22.5 percent  rate  -  because it  is  dollars-per-                                                                   
     barrel.  So consequently  your  rate  stays constant  as                                                                   
     long  you  decline  your  investment   along  with  your                                                                   
     declining rate of production.                                                                                              
                                                                                                                                
     Now,  this  issue  is further  aggravated  that  if  you                                                                   
     would want  to look at real  investment, if you  want to                                                                   
     correct for  inflation, what this formula is  saying you                                                                   
     can significantly  faster decline  your investment  than                                                                   
     the decline  of the  field, because as  long as  you are                                                                   
     in constant  dollars equal to  the decline of  the field                                                                   
     you  can still  add  the 3  percent  decline  on top  of                                                                   
     that.  Or  in  other  words,   if  you  have  3  percent                                                                   
     inflation  and  the oil  field  declines by  8  percent,                                                                   
     your  investments  can decline  by  11 percent  and  you                                                                   
     will  still pay  the same  22.5 percent  rate. So,  that                                                                   
     again is another  deep concern that I have,  but I think                                                                   
     adjusting  for inflation really  wouldn't help.  I think                                                                   
     there are very fundamental problems with this concept.                                                                     
                                                                                                                                
SENATOR WILKEN  said it seems like  if the formula  was investment                                                              
in barrels, the  state could have a slight increase  in investment                                                              
and a  slight decrease in  barrels and  the tax rate  either stays                                                              
the same  or it goes down  and that is  the opposite of  what they                                                              
were trying to do.                                                                                                              
                                                                                                                                
DR.  VAN  MEURS  replied  that   he  was  absolutely  correct.  He                                                              
reiterated  that   his  initial   economic  analysis   shows  that                                                              
starting at  22.5 percent,  if a company  decides to  increase its                                                              
investments by 10  percent per year in nominal terms  for three or                                                              
four years and lets  its production decline by 8  percent, in four                                                              
or five  years its  PPT goes  down to  20 percent  and would  stay                                                              
there.                                                                                                                          
                                                                                                                                
SENATOR WILKEN  said he was perplexed.  He asked what  the House's                                                              
response was to  this basic premise. He asked Dr.  Van Meurs if he                                                              
told them what he told the Senate.                                                                                              
                                                                                                                                
DR. VAN MEURS  said he did not  testify on this specific  issue in                                                              
the  House. He  suggested  that the  House  do a  production-based                                                              
formula  [a produce  or pay  concept  (POP)], which  it didn't  go                                                              
for. His  suggested formula  guaranteed that  the state  would get                                                              
production  because that was  its goal.  He emphasized  again that                                                              
there  is  great virtue  in  simplicity  and  that he  would  only                                                              
recommend  a  complication  if  it  was needed  to  get  this  PPT                                                              
passed. Again he said:                                                                                                          
                                                                                                                                
     We  know international  that  a  system that  is  simple                                                                   
     works.  It worked in  Norway; it  worked in Alberta;  it                                                                   
     works in  the Canadian Arctic;  it works everywhere;  it                                                                   
     works   in   Australia;  it   works   everywhere   where                                                                   
     governments   have   already   now   20  or   30   years                                                                   
     experience. As  I mentioned the 20/20 - I  could explain                                                                   
     it in  five minutes  to the Governor.  You just  take 20                                                                   
     percent  of the  net income  and you give  a 20  percent                                                                   
     tax credit  - and  that's the  whole system. That's  all                                                                   
     there  is  to it.  Simple.  And  now  we are  here  with                                                                   
     something  that is so  complex, that  even I need  three                                                                   
     days to figure it out.                                                                                                     
                                                                                                                                
     So,  consequently, my  strong suggestion  is why not  go                                                                   
     back to and  rethink this? Is it really  so difficult to                                                                   
     do something  simple? Is it  really so objectionable  to                                                                   
     do something  simple? Why  we can't  just have a  simple                                                                   
     percent;  and  why  can't  we just  have  a  simple  tax                                                                   
     credit?  Everybody in  the world does  it; everybody  in                                                                   
     the  world  is  successful  with it;  everybody  in  the                                                                   
     world  has stimulated  investment  and  I think  it  was                                                                   
     actually   an   interesting  experience   today   seeing                                                                   
     suddenly  Prudhoe   Bay  being  shut  down.   It  was  a                                                                   
     sobering  look  in the  future.  That's how  Alaska  may                                                                   
     look  like 15  years  from now  if  you don't  stimulate                                                                   
     reinvestment.  And  that is  so  important;  that is  so                                                                   
     important   of   a   simple   system   that   stimulates                                                                   
     investment.  Other nations  know it  does; it cannot  be                                                                   
     abused; it doesn't  have all kind of these  unknown side                                                                   
     effects  that these  complex formulas  have and that  is                                                                   
     why I  appeal to you to  really consider - and  I appeal                                                                   
     to  the House  - to  really  consider something  simple.                                                                   
     There is great virtue in simplicity.                                                                                       
                                                                                                                                
4:19:34 PM                                                                                                                    
SENATOR WILKEN  thanked him for  that explanation and asked  if he                                                              
had offered some economic analysis.                                                                                             
                                                                                                                                
DR.  VAN  MEURS replied  that  he  could  have an  analysis  ready                                                              
tomorrow of the features he just mentioned.                                                                                     
                                                                                                                                
4:21:41 PM                                                                                                                    
CHAIR SEEKINS  asked if he  could be more  specific about  what he                                                              
believed is a harvester's formula.                                                                                              
                                                                                                                                
DR. VAN  MEURS replied  that most nations  that want  to encourage                                                              
reinvestment  think  that a  majority  of  net profits  should  be                                                              
reinvested. That should be a goal, not just 23 percent.                                                                         
                                                                                                                                
4:23:22 PM recess 4:24:18 PM                                                                                                
                                                                                                                                
CHAIR SEEKINS said  they had requested a lot of  charts and graphs                                                              
from  Mr.  Dickinson  and  Dr. Van  Meurs,  so  he  announced  the                                                              
meeting  would resume  at 9 am  tomorrow. There  being no  further                                                              
business to  come before the  committee, he adjourned  the meeting                                                              
at 4:25:03 PM.                                                                                                                

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