Legislature(2005 - 2006)BUTROVICH 205

02/22/2006 03:30 PM RESOURCES


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03:34:45 PM Start
03:35:39 PM SB305
03:41:08 PM Department of Revenue – Bill Corbus, Commissioner
03:51:17 PM Department of Natural Resources – Mike Menge, Commissioner
04:02:43 PM Dan Dickinson, Cpa, Consultant to the Governor on Ppt
04:54:59 PM Department of Revenue – Robynn Wilson, Director, Tax Division
05:48:07 PM Rationale for $73 Million Allowance
06:40:31 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ SB 305 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
Presentation by Administration
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                       February 22, 2006                                                                                        
                           3:34 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Thomas Wagoner, Chair                                                                                                   
Senator Ralph Seekins, Vice Chair                                                                                               
Senator Ben Stevens                                                                                                             
Senator Fred Dyson                                                                                                              
Senator Bert Stedman                                                                                                            
Senator Kim Elton                                                                                                               
Senator Albert Kookesh                                                                                                          
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
OTHER MEMBERS PRESENT                                                                                                         
                                                                                                                                
Senator Gary Stevens                                                                                                            
Senator Gene Therriault                                                                                                         
Senator Hollis French                                                                                                           
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 305                                                                                                             
"An Act repealing  the oil production tax and  gas production tax                                                               
and providing  for a production tax  on the net value  of oil and                                                               
gas; relating to the relationship  of the production tax to other                                                               
taxes; relating to the dates  tax payments and surcharges are due                                                               
under AS  43.55; relating  to interest  on overpayments  under AS                                                               
43.55; relating  to the treatment  of oil and gas  production tax                                                               
in a  producer's settlement with  the royalty owner;  relating to                                                               
flared gas, and to  oil and gas used in the  operation of a lease                                                               
or property, under AS 43.55;  relating to the prevailing value of                                                               
oil or gas under AS 43.55;  providing for tax credits against the                                                               
tax  due under  AS 43.55  for certain  expenditures, losses,  and                                                               
surcharges; relating to statements  or other information required                                                               
to be filed  with or furnished to the Department  of Revenue, and                                                               
relating  to the  penalty for  failure to  file certain  reports,                                                               
under  AS 43.55;  relating to  the  powers of  the Department  of                                                               
Revenue, and  to the disclosure  of certain  information required                                                               
to be  furnished to  the Department of  Revenue, under  AS 43.55;                                                               
relating   to  criminal   penalties   for  violating   conditions                                                               
governing access to and use  of confidential information relating                                                               
to the  oil and gas  production tax;  relating to the  deposit of                                                               
money  collected by  the Department  of Revenue  under AS  43.55;                                                               
relating to  the calculation of the  gross value at the  point of                                                               
production of  oil or gas;  relating to the determination  of the                                                               
net value  of taxable oil  and gas  for purposes of  a production                                                               
tax on the net value of  oil and gas; relating to the definitions                                                               
of  'gas,' 'oil,'  and certain  other  terms for  purposes of  AS                                                               
43.55;  making  conforming  amendments;   and  providing  for  an                                                               
effective date."                                                                                                                
     HEARD AND HELD                                                                                                             
                                                                                                                              
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB 305                                                                                                                  
SHORT TITLE: OIL AND GAS PRODUCTION TAX                                                                                         
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
02/21/06       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/21/06       (S)       RES, FIN                                                                                               
02/22/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
                                                                                                                                
                                                                                                                                
WITNESS REGISTER                                                                                                              
BILL CORBUS, Commissioner                                                                                                       
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT: Commented on SB 305.                                                                                      
                                                                                                                                
MIKE MENGE, Commissioner                                                                                                        
Department of Natural Resources                                                                                                 
400 Willoughby Ave.                                                                                                             
Juneau, AK  99801-1724                                                                                                          
POSITION STATEMENT: Commented on SB 305.                                                                                      
                                                                                                                                
ROBYNN WILSON, Director                                                                                                         
Tax Division                                                                                                                    
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT: Commented on SB 305.                                                                                      
                                                                                                                                
DAN DICKINSON, C.P.A.                                                                                                           
Consultant to the Governor                                                                                                      
PO Box 110001                                                                                                                   
Juneau AK 99811-0001                                                                                                            
POSITION STATEMENT: Commented on SB 305.                                                                                      
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
                                                                                                                                
CHAIR  THOMAS  WAGONER  called   the  Senate  Resources  Standing                                                             
Committee meeting to  order at 3:34:45 PM.  Present were Senators                                                             
Seekins,  Ben  Stevens,  Stedman,  Elton, Fred  Dyson  and  Chair                                                               
Thomas Wagoner.                                                                                                                 
                                                                                                                                
3:35:39 PM at ease 3:40:40 PM                                                                                               
                                                                                                                                
               SB 305-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                              
CHAIR  THOMAS WAGONER  announced  that  the administration  would                                                               
present SB 305.                                                                                                                 
                                                                                                                                
3:40:56 PM                                                                                                                    
SENATOR AL KOOKESH arrived.                                                                                                     
                                                                                                                                
3:41:08 PM                                                                                                                    
BILL CORBUS, Commissioner, Department  of Revenue (DOR), said the                                                               
Profit-based  Production Tax  (PPT)  embodied in  SB  305 is  the                                                               
first  major  oil  and  gas tax  legislation  considered  by  the                                                               
legislature since 1989. He stated:                                                                                              
                                                                                                                                
     The  new  statute  will replace  the  broken  ELF-based                                                                    
     production  tax.  The  new  PPT  will  encourage  badly                                                                    
     needed   investment  in   oil   and  gas   exploration,                                                                    
     development  and production.  It  will provide  special                                                                    
     incentives  for small  companies  proposing to  explore                                                                    
     and  develop oil  and gas  in Alaska.  And finally,  it                                                                    
     will  enhance   state  revenues,   particularly  during                                                                    
     periods of high oil prices.                                                                                                
                                                                                                                                
He  said  that  the  study  originally  started  with  the  prior                                                               
administration when it  retained Dr. Pedro Van Meurs  in 1996. He                                                               
acknowledged  the numerous  people in  the Department  of Revenue                                                               
who had worked on this project.                                                                                                 
                                                                                                                                
3:45:55 PM                                                                                                                    
MIKE MENGE, Commissioner, Department  of Natural Resources (DNR),                                                               
explained how  this legislation fits  into the larger  context of                                                               
oil and gas  development in Alaska. It  should accurately reflect                                                               
the geologic circumstances that fit  a particular basin for which                                                               
it  was designed  and this  is a  very good  fit for  Alaska. The                                                               
state  is  looking at  a  diminishing  population of  perspective                                                               
targets; they  will also  be smaller and  more difficult  to find                                                               
and, therefore, more costly to develop.                                                                                         
                                                                                                                                
He said  Cook Inlet is a  very mature basin and  the Interior has                                                               
highly  speculative  basins  in  Nenana,  Copper  River  and  the                                                               
emerging work  in Bristol Bay. The  tax is designed to  create an                                                               
environment  to  encourage  smaller and  mid-sized  companies  to                                                               
explore.  The administration's  goal is  to put  more oil  in the                                                               
pipeline  and   more  gas   down  its   pipeline  once   it  gets                                                               
constructed. It  wants to encourage an  atmosphere of investment,                                                               
further exploration and  discovery that would set  the stage well                                                               
into the middle of this century.                                                                                                
                                                                                                                                
The  state lands  have the  potential of  small discoveries,  but                                                               
federal lands  have larger ones, particularly  ANWR and offshore.                                                               
He stated  that the  state needs  this legislation  regardless of                                                               
what happens with the gas pipeline.                                                                                             
                                                                                                                                
3:51:17 PM                                                                                                                    
CHAIR  WAGONER  asked  Commissioner  Menge  to  explain  how  the                                                               
Oooguruk royalty  reduction that  the state  granted a  couple of                                                               
weeks ago would be affected by the PPT.                                                                                         
                                                                                                                                
COMMISSIONER  MENGE replied  that  the authority  granted to  the                                                               
department to negotiate a lower  royalty was very broad in scope.                                                               
It provided  him with  the flexibility  of tailoring  the royalty                                                               
picture to  meet the  very specific issues  related to  that very                                                               
geologically-challenged  prospect.   The  PPT  would   take  into                                                               
consideration  all   potential  issues   over  time   and  would,                                                               
therefore,  be more  systematic. He  would  look at  the cost  of                                                               
drilling, production,  transportation and the  historical aspects                                                               
of the project  that was not reflected in the  current system. He                                                               
explained that investments in the  Oooguruk field were made under                                                               
a very  specific set of authorities  and he would make  sure that                                                               
those assumptions  and costs  would not  be violated.  This would                                                               
require a  transition, particularly for Oooguruk.  The PPT offers                                                               
that kind of  an opportunity. The department wants  to retain the                                                               
ability to change royalties site by site.                                                                                       
                                                                                                                                
ROBYNN  WILSON, Director,  Tax  Division,  Department of  Revenue                                                               
(DOR),  said  that  Dan  Dickinson   would  explain  the  current                                                               
production tax  and its problems  and she would give  an overview                                                               
of SB 305 after that.                                                                                                           
                                                                                                                                
3:58:35 PM                                                                                                                    
DAN DICKINSON,  C.P.A. and Consultant to  the Governor, explained                                                               
what was wrong  with the status quo. His  presentation was titled                                                               
"Proposed Production  Tax, Alaska  State Legislature,  Senate and                                                               
House of Representatives Resources  Committees, Dan E. Dickinson,                                                               
CPA, February  22, 2006"  and the  minutes reference  his slides.                                                               
He  said that  in  FY 2005  the  state took  in  $8.9 billion  in                                                               
restricted and  unrestricted revenue.  The largest piece  of that                                                               
was $3.4 billion from oil -  $2.8 billion, or 88 percent, of that                                                               
made  up  the  unrestricted  general fund  budget.  Of  the  $3.4                                                               
billion, just over  half were from royalties. About  a quarter of                                                               
those (restricted)  went into the  Permanent Fund and  the School                                                               
Fund.  He  said  that  the state  received  $863.2  million  from                                                               
production taxes in  2005 and that his comments  were focusing on                                                               
those.                                                                                                                          
                                                                                                                                
His next  slide indicated  Alaska oil  production from  the years                                                               
1965 to  2020 and in  1988, the  height of production,  2 million                                                               
barrels per day were produced and  1.6 million of those were from                                                               
Prudhoe Bay. He termed Prudhoe Bay an elephant.                                                                                 
                                                                                                                                
4:02:43 PM                                                                                                                    
He said  that the Kuparuk  field is  the second largest  field in                                                               
the United States,  but compared to Prudhoe Bay, it  is small. He                                                               
cautioned that  tax policy should  not be set on  the expectation                                                               
of finding another elephant.                                                                                                    
                                                                                                                                
4:03:16 PM                                                                                                                    
His  next slide  graphed the  decline  in oil  production from  2                                                               
million barrels a  day in 1988 to 850,000 barrels  a day in 2006.                                                               
While this  was going on, oil  prices were marching in  the other                                                               
direction. They started  in the $15 range and are  now in the $60                                                               
range.  So while  production  was declining,  the  state did  not                                                               
necessarily feel its effects because  it was seeing basically the                                                               
same gross  product. The volumes  are leveling out a  little, but                                                               
SB 305 seeks to make them go up again.                                                                                          
                                                                                                                                
He began  talking about  why the  current production  tax doesn't                                                               
generate  the kind  of revenues  the state  should expect  at the                                                               
current prices.  He observed that,  as the result of  an analysis                                                               
the Department  of Revenue conducted  for a number of  years, the                                                               
Governor  issued   an  administrative  order  a   year  ago  that                                                               
aggregated  seven fields  on the  North  Slope. He  said the  new                                                               
production tax  is proposed to  start on  July 1, 2006.  So, that                                                               
aggregation  order would  affect about  1.5 years  of production,                                                               
just under  $4 million. That  DOR analysis led to  the conclusion                                                               
that  the tax  had deeper  problems and  he hoped  the PPT  would                                                               
solve them.                                                                                                                     
                                                                                                                                
4:07:00 PM                                                                                                                    
The first problem  was investment. Over the last  four years, not                                                               
including tankers or pipelines,  upstream exploration and capital                                                               
facilities have cost the industry  about $1 billion. This was not                                                               
sufficient to  generate new  amounts of  production, but  it kept                                                               
the  aging fields  open  and  did involve  some  new fields.  The                                                               
question  is if  the lack  of new  production is  due to  the tax                                                               
system.                                                                                                                         
                                                                                                                                
His next slide showed how in 2005,  the net value of oil at point                                                               
of  production  was $10,694  million,  which  was arrived  at  by                                                               
subtracting the  cost of tankering, pipelines  and upstream costs                                                               
from $14,332  million. He explained  that the  current production                                                               
tax ignores upstream costs. Instead,  the state uses the Economic                                                               
Limit Factor  (ELF) as a proxy  for them. It takes  the same 2005                                                               
figures and starts with the gross  value at point of production -                                                               
$12,843.60 million and figures the numbers this way:                                                                            
   · gross value at point of production - $12,843.60 million                                                                    
   · times royalty rate of $0.875 million                                                                                       
   · equals the value net of royalty - $11,238.15 million                                                                       
   · multiply the tax rate of $0.15 million                                                                                     
   · times the ELF rate of $0.55 million                                                                                        
   · equals a 2005 tax of $927.15 million                                                                                       
                                                                                                                                
4:13:19 PM                                                                                                                    
For the same year, 2005, the PPT tax would:                                                                                     
   · start at the value net of royalty - $11,238.2 million                                                                      
   · deduct the upstream costs of $2,150 million, which equals a                                                                
    taxable value at point of production of $9,088.2 million                                                                    
  · times the PPT of 20 percent, which equals $1,827.6 million                                                                  
   · subtract tax credits of $210 million                                                                                       
   · results in a production tax of $1,607.6 million                                                                            
                                                                                                                                
4:17:49 PM                                                                                                                    
MR.  DICKINSON said  the second  problem was  that production  is                                                               
falling on the  North Slope and under that scenario  the ELF also                                                               
falls, but  much faster. The  Kuparuk field is a  perfect example                                                               
of how  the ELF works. It  went from producing a  high of 300,000                                                               
barrels per day in 1990 to about  half of that today. But in that                                                               
same time period, the ELF went from  .8 percent down to zero.  It                                                               
goes  through  the  mid-range  and  reaches  zero  very  quickly.                                                               
Currently, North Star,  Alpine and Prudhoe Bay  have healthy ELFs                                                               
of .8 percent,  but both Alpine's and North Star's  ELF will fall                                                               
dramatically  and  hit  zero  in  six or  seven  years  as  their                                                               
production starts to taper.                                                                                                     
                                                                                                                                
The  second major  criticism of  the ELF  is that  it is  way too                                                               
sensitive to the number of barrels  and rate of production and as                                                               
a proxy, it  does not represent the kinds of  costs involved when                                                               
production falls. It does not  encourage the investment necessary                                                               
to secure future production.                                                                                                    
                                                                                                                                
4:24:14 PM                                                                                                                    
SENATOR THERRIAULT asked if he charted both oil and gas liquids.                                                                
                                                                                                                                
MR. DICKINSON  replied that his  production figures  include both                                                               
oil and gas  liquids, but Kuparuk has a very  small amount of gas                                                               
liquids. This brought  him to another important point  - that ELF                                                               
works differently  for gas than oil.  One of the first  things to                                                               
do in  an ELF calculation is  to divide up the  well days between                                                               
oil and gas. Right now most of  the gas that comes out at Prudhoe                                                               
Bay is  simply put back down  in the ground. It  doesn't count in                                                               
calculating the  ELF, because it  is not sold.  If half of  the 8                                                               
BCF that were  being moved that way were being  exported, the gas                                                               
ELF would  suddenly increase  and so  would the  oil ELF.  If the                                                               
gasline is put in place, one could  ask if it makes sense to have                                                               
a system that looks at  the interrelationship between gas and oil                                                               
differently than the current ELF does.                                                                                          
                                                                                                                                
MR. DICKINSON said he was focusing  on the oil ELF, but Mr. Marks                                                               
would talk about  the gas ELF tomorrow. He  emphasized again that                                                               
the ELF is outmoded because  it focuses on well-productivity. New                                                               
wells in the ground have  multiple completions with laterals that                                                               
go out, sometimes, for miles. So,  while a well in Prudhoe Bay is                                                               
producing 600 to  700 barrels per day, other wells  at Alpine and                                                               
Pt. Thompson will be producing 7,000 to 8,000 barrels per day.                                                                  
                                                                                                                                
SENATOR STEDMAN clarified that just  because the ELF goes to zero                                                               
doesn't mean  the state's revenues  go to zero. They  are talking                                                               
about 25 percent of the state's  gross oil revenue and the ELF is                                                               
only a multiplier that is applied  to the severance tax to reduce                                                               
it.                                                                                                                             
                                                                                                                                
4:30:03 PM                                                                                                                    
SENATOR BEN  STEVENS asked to  go back to the  current production                                                               
tax slide and  asked if the ELF  he used could be  applied to the                                                               
entire North Slope.                                                                                                             
                                                                                                                                
MR. DICKINSON replied yes.                                                                                                      
                                                                                                                                
SENATOR  BEN STEVENS  clarified,  then, that  the applicable  tax                                                               
rate was really 8.25 percent, not 15 percent.                                                                                   
                                                                                                                                
MR. DICKINSON replied yes.                                                                                                      
                                                                                                                                
SENATOR BEN  STEVENS continued to  discuss figures on  the slide.                                                               
He  said the  reality of  the  PPT is  that the  tax rate  hasn't                                                               
changed on the  affected barrels of oil, but  investment is being                                                               
encouraged.                                                                                                                     
                                                                                                                                
MR. DICKINSON replied:                                                                                                          
                                                                                                                                
     As you observed, the rate  is variable depending on the                                                                    
     amount  of investment  and  that's  what we're  saying.                                                                    
     That's what's  going to  drive whether  you are  a high                                                                    
     end, high percentage taxpayer or a low percentage.                                                                         
                                                                                                                                
SENATOR BEN  STEVENS said it  would be  helpful if he  could show                                                               
that the  change from status quo,  which is 8.25 percent,  to the                                                               
proposed rate on the effective rate  with PPT is 14.3 percent, an                                                               
increase of approximately 6 percent on the severance tax.                                                                       
                                                                                                                                
MR.  DICKINSON  replied  that  was   right  for  this  particular                                                               
example.                                                                                                                        
                                                                                                                                
4:34:56 PM                                                                                                                    
SENATOR RALPH  SEEKINS asked  if the  $1.7 billion  of additional                                                               
investment in the next slide  rolls into upstream cost deductions                                                               
in the next year.                                                                                                               
                                                                                                                                
MR. DICKINSON  replied that there  would be no  depreciation next                                                               
year,  rather  you  would  get  instantaneous  depreciation  and,                                                               
"Clearly  if  you  built  new   infrastructure,  there  would  be                                                               
additional operating  costs, but  presumably there would  also be                                                               
additional volumes to cover those."                                                                                             
                                                                                                                                
SENATOR  SEEKINS   said  it  should   be  very  clear   that  the                                                               
depreciation  is taken  in one  year and  can't be  expanded over                                                               
multiple years, so there is no double-dipping.                                                                                  
                                                                                                                                
4:36:10 PM                                                                                                                    
SENATOR  KIM ELTON  asked if  investments that  are eligible  for                                                               
credits cover exploration, development and operation costs.                                                                     
                                                                                                                                
MR. DICKINSON  replied that the credit  doesn't cover operational                                                               
costs.  It is  about things  that  would have  to be  capitalized                                                               
under federal rules and that  includes exploration and intangible                                                               
drilling and development costs.                                                                                                 
                                                                                                                                
4:36:54 PM                                                                                                                    
SENATOR BEN  STEVENS asked  if any of  his presentations  have an                                                               
indication  of  the  probability  of success  for  the  different                                                               
investment scenarios.                                                                                                           
                                                                                                                                
MR. DICKINSON  replied that  he has run  four basic  scenarios at                                                               
different price levels,  but it's very difficult to  come up with                                                               
a figure to use for  much the incentive will increase exploration                                                               
and production. He said that Mr.  Marks would run a model of that                                                               
in a future meeting.                                                                                                            
                                                                                                                                
4:39:54 PM                                                                                                                    
SENATOR STEDMAN  asked what  the basis was  for selecting  the 20                                                               
percent tax.                                                                                                                    
                                                                                                                                
MR.  DICKINSON replied  that Pedro  Van Meurs  would go  into the                                                               
credits in more depth with his presentation.                                                                                    
                                                                                                                                
4:42:25 PM                                                                                                                    
SENATOR ELTON asked if Alaska  should expect a premium because of                                                               
its stability.                                                                                                                  
                                                                                                                                
MR. DICKINSON  replied that  Mr. Van Meurs  would observe  in his                                                               
presentation  that   in  places   where  the  resource   is  more                                                               
challenged, the  resource owner would do  more to open it  up. In                                                               
Alaska, a $7-premium for distance to market was used.                                                                           
                                                                                                                                
4:44:36 PM                                                                                                                    
SENATOR  THERRIAULT asked  if  the  administration had  discussed                                                               
whether frontier  exploration should get a  separate extra credit                                                               
from low risk development.                                                                                                      
                                                                                                                                
MR. DICKINSON  responded that  was part  of the  discussion since                                                               
the easy oil has already been  developed and it is more expensive                                                               
to  develop heavy  oil. The  Governor did  not want  to pick  out                                                               
which development  to encourage  and which  not to  encourage and                                                               
while the  proposed tax  would generate a  very large  credit, it                                                               
doesn't take  into account  the different  set of  risks involved                                                               
with each field.  Looking at large known quantities  of heavy oil                                                               
and other  challenged reservoirs on  the North Slope,  he thought                                                               
that  it was  appropriate  to  have this  credit  apply to  those                                                               
expenses, as well.                                                                                                              
                                                                                                                                
4:47:40 PM                                                                                                                    
SENATOR THERRIAULT  commented that there were  still other levers                                                               
to pull  and a company could  ask for assistance on  a particular                                                               
field if it had difficult circumstances.                                                                                        
                                                                                                                                
MR. DICKINSON  reflected that it seems  entirely appropriate that                                                               
a royalty reduction could look at specific leases.                                                                              
                                                                                                                                
4:50:22 PM                                                                                                                    
SENATOR BEN  STEVENS said he  saw a flaw  in ranking the  Gulf of                                                               
Mexico as  one of  the most  attractive regions  in the  world to                                                               
make investments because of the  uncertainty caused by hurricanes                                                               
that happen  there every  year. It's an  instability that  is not                                                               
related  to any  human error  or  action and  an economist  can't                                                               
incorporate that into his analysis.                                                                                             
                                                                                                                                
4:51:36 PM                                                                                                                    
SENATOR STEDMAN remarked that the  ELF is not price sensitive and                                                               
the royalty  and tax  system are regressive.  When prices  go up,                                                               
the  government take  declines and  the  public becomes  alarmed.                                                               
Removing  the  ELF from  the  severance  tax  and plugging  in  a                                                               
profit-sharing tax would  make Alaska's take move  up with rising                                                               
prices instead of down.                                                                                                         
                                                                                                                                
4:54:01 PM                                                                                                                    
ROBYNN  WILSON, Director,  Tax  Division,  Department of  Revenue                                                               
(DOR), recapped  that there  is no incentive  in the  current tax                                                               
system to  encourage oil  companies to  reinvest in  Alaska, that                                                               
there is a low take at high prices  and a high take at low prices                                                               
- what  is commonly referred  to as  a regressive tax.  Also, the                                                               
maturing of  the North Slope  leads to declines in  tax revenues.                                                               
She  presented a  power point  entitled,  "Petroleum Profits  Tax                                                               
(PPT), Overview, Alaska Department  of Revenue, Before the Alaska                                                               
State Legislature, Robynn J. Wilson."                                                                                           
                                                                                                                                
4:54:59 PM                                                                                                                    
She said SB 305  tries to embody five key ideas.  The first is to                                                               
encourage investment, the second  is competitive rates, the third                                                               
is to encourage  small companies and the fourth  is to streamline                                                               
some of the tax provisions.                                                                                                     
                                                                                                                                
The tax  base under the  current system  is based on  gross value                                                               
and the  proposed system is  based on net.  SB 305 suggests  a 20                                                               
percent  tax rate  as compared  to the  current 12.25/15  percent                                                               
scheme. Incentive credits  are a third key  component. The fourth                                                               
element is a base allowance that  is the equivalent of a standard                                                               
deduction  for individuals.  The last  component is  a transition                                                               
provision that recognizes  some of the recent  investments on the                                                               
North Slope.                                                                                                                    
                                                                                                                                
She  started  with  a  one-page comparison  of  the  current  tax                                                               
system, which is  based on gross and allows  no deductions versus                                                               
the  proposed  tax   on  net.  The  value  at   the  wellhead  is                                                               
essentially the same under the  PPT. The current system takes the                                                               
wellhead value  times the  tax rate, which  gives the  tax before                                                               
the ELF. The  PPT starts with the wellhead value  and allows some                                                               
deductions, which establishes a net  taxable amount. That is what                                                               
the  proposed 20  percent is  applied to.  She said,  "It follows                                                               
logically  that the  tax rate  under a  net plan  is going  to be                                                               
higher than the tax rate under a gross plan."                                                                                   
                                                                                                                                
For  the tax  base, she  said  that operating  costs and  capital                                                               
expenditures  are deductible  under  lease  expenditures for  one                                                               
year.  The   difference  between  operating  costs   and  capital                                                               
expenditures  is that  operating  costs are  the normal  expenses                                                               
that  will  benefit  one  year,  but  a  capital  item  would  be                                                               
something that  would benefit a number  of years like a  piece of                                                               
equipment. She explained:                                                                                                       
                                                                                                                                
     What  is unique  about this  bill is  that rather  than                                                                    
     having  the producer  write  if off  over  a period  of                                                                    
     time,  there's an  immediate write  off of  the capital                                                                    
     expenditures.  That's a  key element  to keep  in mind.                                                                    
     So, everything is written off in year one.                                                                                 
                                                                                                                                
Secondly,  the  operating  costs  must be  direct,  ordinary  and                                                               
necessary. Ordinary and  necessary is a common test  from the IRS                                                               
code  to   make  sure  business   expenses  are   necessary.  The                                                               
department is directed to write  regulations, but given direction                                                               
that substantial weight  shall be given to  industry practice and                                                               
standards  adopted by  the Department  of Natural  Resources. The                                                               
costs that are  paid by producers that are billed  by an operator                                                               
under the terms  of a unit operating agreement can  be treated as                                                               
a lease  expenditure. This  is a bit  of streamlining  looking at                                                               
common industry practice.                                                                                                       
                                                                                                                                
SB 305  has an allowance  for overhead  and the formula  would be                                                               
established through regulation. It  would include things directly                                                               
related  to exploration,  development and  production. Any  lease                                                               
expenditures would  be reduced by  any reimbursements  a producer                                                               
might  receive  from  another taxpayer  or  the  government,  for                                                               
instance.                                                                                                                       
                                                                                                                                
5:04:04 PM                                                                                                                    
SENATOR THERRIAULT asked  if SB 305 uses what the  state now uses                                                               
for its  net profit leases in  terms of what gets  subtracted out                                                               
to get to net profit.                                                                                                           
                                                                                                                                
MS. WILSON replied yes.                                                                                                         
                                                                                                                                
SENATOR  THERRIAULT  asked  if any  leases  operating  under  net                                                               
profit are actually paying a percentage of profit to the state.                                                                 
                                                                                                                                
MR. DICKINSON replied yes.                                                                                                      
                                                                                                                                
SENATOR  THERRIAULT  asked  for  a  list of  those  at  a  future                                                               
meeting.  He  asked  if  new  language  streamlines  the  current                                                               
process.                                                                                                                        
                                                                                                                                
MR. DICKINSON  replied that  the way  it is  getting streamlined,                                                               
issues  would only  be fought  once. Right  now the  DNR makes  a                                                               
calculation about what  it takes to get oil from  the North Slope                                                               
to market  and the  DOR goes through  a whole  different process.                                                               
The bill proposed to use the DNR calculation.                                                                                   
                                                                                                                                
SENATOR THERRIAULT  asked if the administration  considered using                                                               
a  flat rate  for the  allowable overhead  so that  it's easy  to                                                               
understand and apply.                                                                                                           
                                                                                                                                
MR.  DICKINSON  replied  yes,  but he  tried  to  mirror  current                                                               
industry practice.  So if the  rate is different in  Kuparuk than                                                               
Prudhoe, he wanted to capture that difference.                                                                                  
                                                                                                                                
5:07:00 PM                                                                                                                    
SENATOR SEEKINS  asked what  kind of  overhead expenses  would be                                                               
defined in regulation.                                                                                                          
                                                                                                                                
MR. DICKINSON  replied that he  would look at  existing standards                                                               
for each field and would like  to be able to deduct actual costs,                                                               
recognizing that they change every  twenty years or so and should                                                               
have some flexibility.                                                                                                          
                                                                                                                                
SENATOR  STEDMAN  asked  if the  capital  expenditures  would  be                                                               
capitalized  in   just  one  year,  would   a  corporation  still                                                               
depreciate those  expenses on  its federal  taxes -  so companies                                                               
would have two sets of books.                                                                                                   
                                                                                                                                
5:09:18 PM                                                                                                                    
MS. WILSON answered yes, but  she noted that current state income                                                               
tax rules for oil and gas  companies require companies to have an                                                               
Alaska-specific   depreciation   separate    from   the   federal                                                               
depreciation system.  This, in effect, would add a third layer.                                                                 
                                                                                                                                
5:10:18 PM                                                                                                                    
SENATOR STEDMAN  asked if a  company takes its  capital deduction                                                               
in  one  year, would  it  be  able  to  use the  depreciation  to                                                               
increase its benefit going forward.                                                                                             
                                                                                                                                
MS.   WILSON  replied   no;   double-dipping   is  not   allowed.                                                               
Depreciation  is a  non-deductible expense.  But she  pointed out                                                               
that a  piece of equipment  can be written off  in year one  as a                                                               
deduction, but the bill also provides  for a credit of 20 percent                                                               
of that.  There is both a  deduction and a credit.  The credit is                                                               
to incentivize investment.                                                                                                      
                                                                                                                                
5:12:10 PM                                                                                                                    
SENATOR ELTON  remarked that companies  get to  pay significantly                                                               
less as part of the state's deal.                                                                                               
                                                                                                                                
MS. WILSON replied yes, that is the intent.                                                                                     
                                                                                                                                
SENATOR ELTON asked  if the allowance for  overhead would include                                                               
lobbying expenses or expenses for  attorneys who may be disputing                                                               
a tax decision by the state.                                                                                                    
                                                                                                                                
MR.  DICKINSON  answered  yes  and  that  the  allowance  is  not                                                               
specific, but should cover the costs of doing business.                                                                         
                                                                                                                                
SENATOR  ELTON  asked if  the  allowance  could  help pay  for  a                                                               
corporation's  attorneys  while  the  state  is  paying  for  its                                                               
attorneys on the other side in a tax dispute.                                                                                   
                                                                                                                                
SENATOR  BEN STEVENS  brought  up  a point  of  order saying  the                                                               
answer to that  question was on page 14. It  says that litigation                                                               
is not allowed as a deduction.                                                                                                  
                                                                                                                                
MS. WILSON referenced language on  page 13 that said expenses had                                                               
to be directly  related to business and lobbying would  be a hard                                                               
sell.                                                                                                                           
                                                                                                                                
MR. DICKINSON clarified  that attorney fees would  be allowed for                                                               
personal injury  cases such as  in a car  crash, but not  for tax                                                               
disputes.                                                                                                                       
                                                                                                                                
5:16:19 PM                                                                                                                    
SENATOR SEEKINS  asked if he  took a $100,000 piece  of equipment                                                               
and deducted 100 percent of it  today and got a 20 percent bonus,                                                               
what would he really save in terms of taxes not paid.                                                                           
                                                                                                                                
MR. DICKINSON replied  that basically the state is  picking up 40                                                               
percent of  the cost of  the piece of  equipment in one  year. If                                                               
that piece  of equipment gets sold  the next year, it  gets added                                                               
back in. "Basically, 20 plus 20 is 40 percent."                                                                                 
                                                                                                                                
5:17:39 PM                                                                                                                    
SENATOR   STEDMAN  recapped   that   the  bill   is  geared   for                                                               
development.   A company would  cut its  risk by sharing  it with                                                               
the state  and federal government.  And the state  is encouraging                                                               
them to  go out and drill  because the probability of  success is                                                               
low. But  the state  would recoup its  incentives by  having more                                                               
wells  drilled,  having more  oil  found  and receiving  enhanced                                                               
revenues from those activities.                                                                                                 
                                                                                                                                
5:18:38 PM                                                                                                                    
MS.  WILSON  said  the non-deductible  expenses  are  covered  in                                                               
section 21 of SB 305, on  page 13. They are depreciation, royalty                                                               
payments (because it never gets in  the base in the first place),                                                               
taxes  based  on  net  income,  interest  and  financing  charges                                                               
(administrative expenses that apply  to all of their properties),                                                               
lease  acquisition   costs  and  other  costs   for  things  like                                                               
arbitration, donations and organizing partnerships.                                                                             
                                                                                                                                
5:20:22 PM                                                                                                                    
SENATOR SEEKINS asked  if a company could deduct  bids to acquire                                                               
leases.                                                                                                                         
                                                                                                                                
MS. WILSON  circled back to  determining value under  the current                                                               
system and  emphasized this is  one of the places  the department                                                               
is  trying to  streamline. Currently,  when oil  is taken  to the                                                               
West Coast and  sold, the wellhead value has to  be calculated to                                                               
impose the  production tax. Now  they work backwards  by starting                                                               
with the sales price on the  West Coast and take out the expenses                                                               
for marine and  pipeline transportation up the  coast arriving at                                                               
a  wellhead value.  Marine transportation  particularly has  been                                                               
the subject  of a lot of  audit and contention. "It's  just not a                                                               
simple system."                                                                                                                 
                                                                                                                                
SB 305 allows possible elections  a producer can use to establish                                                               
gross value.  The first one  is the royalty value  through either                                                               
DNR  or  federal  royalties.  This  includes  royalty  settlement                                                               
agreements  accepted by  DNR. The  other  option would  be a  DOR                                                               
formula that estimates  a value at a specific location  - such as                                                               
point of  delivery into  a common  carrier pipeline.  The formula                                                               
may  use   other  factors  such  as   published  prices,  quality                                                               
differentials,  applicable  transportation  costs  and  inflation                                                               
adjustments.  In   effect,  the   established  body  of   law  is                                                               
maintained, but some elections are  being allowed to simplify it.                                                               
There would be  some timing restrictions. She  clarified that the                                                               
20 percent tax is on net profits.                                                                                               
                                                                                                                                
5:23:44 PM                                                                                                                    
SENATOR THERRIAULT said Pedro Van  Meurs suggested 25 percent and                                                               
asked why the Governor used 20 percent instead.                                                                                 
                                                                                                                                
MR.  DICKINSON   replied  that  the  Governor   analyzed  several                                                               
different  scenarios  and  looked  at a  balance  of  encouraging                                                               
investment and state revenues.   There is nothing magic about the                                                               
scenarios.                                                                                                                      
                                                                                                                                
CHAIR WAGONER  asked if the  committee could see a  comparison of                                                               
what  20 percent  does in  Alaska  versus what  happens in  other                                                               
countries.                                                                                                                      
                                                                                                                                
5:26:23 PM                                                                                                                    
SENATOR THERRIAULT said  the state would pick up more  on the tax                                                               
side, but it also credited more back on investments.                                                                            
                                                                                                                                
5:28:04 PM                                                                                                                    
SENATOR  BEN  STEVENS  emphasized  the   need  to  focus  on  the                                                               
effective tax  rate, which  currently is  8.25 percent  after the                                                               
ELF is computed.  The proposed tax rate of 20  percent equates to                                                               
about 14 percent. Statutory tax  rates are meaningless until they                                                               
have been applied in a formula.                                                                                                 
                                                                                                                                
5:29:45 PM                                                                                                                    
SENATOR THERRIAULT said  they must be careful in  comparing a new                                                               
system with a broken system. He  wanted to compare it to what was                                                               
working.                                                                                                                        
                                                                                                                                
SENATOR BEN  STEVENS countered that the  legislature doesn't know                                                               
the applicable rate  in Trinidad. It can only compare  it to what                                                               
the state has now.                                                                                                              
                                                                                                                                
5:32:19 PM                                                                                                                    
SENATOR STEDMAN said it's important  to look at the international                                                               
oil companies around the world and  see what the split is between                                                               
government and industry.                                                                                                        
                                                                                                                                
5:34:01 PM                                                                                                                    
MS. WILSON moved on to incentive  credits that were found on page                                                               
4 in  section 10. The  credits are transferable and  would mostly                                                               
help small producers.                                                                                                           
                                                                                                                                
5:36:12 PM                                                                                                                    
SENATOR  ELTON  said  he was  struggling  with  the  transferable                                                               
credit.                                                                                                                         
                                                                                                                                
5:37:42 PM                                                                                                                    
SENATOR THERRIAULT  asked if the  credit couldn't be used  or the                                                               
company didn't  have income  to offset  it in  one year,  did the                                                               
purchaser have to use it that same year.                                                                                        
                                                                                                                                
MS. WILSON replied that the  originator of the credit could carry                                                               
it forward to next year. There  is no limit on the carry forward;                                                               
the credits do not expire.                                                                                                      
                                                                                                                                
5:38:58 PM                                                                                                                    
SENATOR BEN  STEVENS asked if  a credit is transferable  only one                                                               
time.                                                                                                                           
                                                                                                                                
MS. WILSON replied that there is  no limit on the number of times                                                               
a credit can be transferred.                                                                                                    
                                                                                                                                
5:39:30 PM                                                                                                                    
She  said that  net operating  losses  (NOL) can  be turned  into                                                               
credits, dollar  for dollar,  and be handled  the same  way. This                                                               
language is on page 5, section 12.                                                                                              
                                                                                                                                
SENATOR ELTON said that almost seemed like double-dipping.                                                                      
                                                                                                                                
MS  WILSON  clarified  that  the  bill  specifically  allows  for                                                               
immediate  write  off of  equipment  and  a  credit. One  way  of                                                               
looking at  that is a double-dip,  but the reason it  was written                                                               
that way was to provide incentive for investment.                                                                               
                                                                                                                                
MR.  DICKINSON observed  that  the net  operating  loss works  by                                                               
giving the credit  whether there is a loss or  not. The notion is                                                               
that the  effect of buying  a $100,000 piece of  machinery should                                                               
generate  a $40,000  credit  whether a  company  is drilling  dry                                                               
holes or producing tons of barrels.                                                                                             
                                                                                                                                
5:45:15 PM                                                                                                                    
SENATOR  ELTON asked  if  that  means companies  can  have a  net                                                               
operating loss, but  still gets a 40 percent plus  credit that it                                                               
can sell.                                                                                                                       
                                                                                                                                
MS. WILSON  replied no;  that the  40 percent  comes from  the 20                                                               
percent  deduction and  the 20  percent credit.  She likened  the                                                               
base allowance  to the  standard deduction  on a  personal income                                                               
tax  return. After  the  net taxable  income  is calculated,  the                                                               
producer  is allowed  a $73  million deduction  per year  that is                                                               
taken month by month. This cannot  be turned into a net operating                                                               
loss.                                                                                                                           
                                                                                                                                
CHAIR WAGONER asked for the rationale behind the $73 million.                                                                   
                                                                                                                                
MS.  WILSON answered  that  the rationale  was  $200,000 per  day                                                               
translated into a yearly amount.                                                                                                
                                                                                                                                
5:48:07 PM                                                                                                                    
SENATOR  BEN  STEVENS  asked  how  many  oil  and  gas  companies                                                               
operating in Alaska are currently earning less than $73 million.                                                                
                                                                                                                                
MR.  DICKINSON replied  that  some  mediums-sized companies  have                                                               
small  leases  that generate  above  $200,000  a day  at  today's                                                               
prices, but at  lower prices, some of them might  slip below that                                                               
level.                                                                                                                          
                                                                                                                                
5:49:26 PM                                                                                                                    
SENATOR BEN STEVENS asked how  many oil and gas companies operate                                                               
in Alaska now.                                                                                                                  
                                                                                                                                
MS. WILSON replied 14.                                                                                                          
                                                                                                                                
SENATOR BEN STEVENS remarked that  the state could easily see $80                                                               
to $100 per barrel oil on the  immediate horizon and if all 14 of                                                               
those entities  are eligible for  that deduction,  you're talking                                                               
about  $1 billion  per year  in income  that is  not going  to be                                                               
subject to a tax rate.                                                                                                          
                                                                                                                                
MR. DICKINSON responded that quite  a few folks come nowhere near                                                               
the $73 million.                                                                                                                
                                                                                                                                
SENATOR BEN  STEVENS rounded the  number down to  eight companies                                                               
and $500  million. If today's  severance tax would be  applied to                                                               
that,  it would  equal $40  million.  "So, that's  a $40  million                                                               
give-away to the industry."                                                                                                     
                                                                                                                                
5:52:05 PM                                                                                                                    
SENATOR  STEDMAN said  he interpreted  the  $73 million  to be  a                                                               
floor for  everybody and when  production was above  that amount,                                                               
the PPT would kick in.                                                                                                          
                                                                                                                                
MS. WILSON referred  them to page 16 (i) that  said, "Any month a                                                               
producer that  is qualified  may deduct an  allowance". So  it is                                                               
referring to company by company.                                                                                                
                                                                                                                                
SENATOR STEDMAN  asked what  would happen to  someone who  was at                                                               
$74 million. Would just the $1 million be taxed?                                                                                
                                                                                                                                
MS. WILSON replied that was correct.                                                                                            
                                                                                                                                
5:53:59 PM                                                                                                                    
SENATOR BEN STEVENS asked if the  $73 million is a base allowance                                                               
that applies  equally to all  taxpayers, why  was it set  at that                                                               
number and why was it  applicable to each ratepayer regardless of                                                               
their liability.                                                                                                                
                                                                                                                                
MR.  DICKINSON   replied  that  the   notion  was  to   focus  on                                                               
profitability  and $200,000  per day  was established  as a  base                                                               
rate.  Using number  of barrels  at extraordinarily  high prices,                                                               
you'd have  a small company escaping  any tax. "By putting  it in                                                               
dollars you  basically avoided one of  the errors of the  ELF and                                                               
you've made it more susceptible to high prices."                                                                                
                                                                                                                                
5:55:41 PM                                                                                                                    
SENATOR ELTON  asked if Exxon would  get $73 million off  its net                                                               
profit.                                                                                                                         
                                                                                                                                
MS. WILSON replied  that a big company would get  $73 million off                                                               
and a small company would get $73 million off, but no more.                                                                     
                                                                                                                                
SENATOR  ELTON said  he thought  that applying  the allowance  to                                                               
everybody was a regressive element.                                                                                             
                                                                                                                                
     It seems like  we're giving the major  players a break,                                                                    
     too; and  that's taxable income that  doesn't return to                                                                    
     the state  despite the  fact that they  may be  some of                                                                    
     the most profitable corporations in the world.                                                                             
                                                                                                                                
5:57:49 PM                                                                                                                    
CHAIR  WAGONER said  he  thought  they were  trying  to make  the                                                               
allowance a major incentive for  small independents to operate in                                                               
Alaska,  but he  thought it  should have  been thought  through a                                                               
little further  to where it would  apply to just them  versus the                                                               
majors.                                                                                                                         
                                                                                                                                
MR. DICKINSON  responded that  if you're  talking about  the $500                                                               
million, $300 million of that would  go to someone other than the                                                               
big three. "The smaller the company, the larger the effect."                                                                    
                                                                                                                                
SENATOR  BEN  STEVENS  commented,  "It's  a  marginal  rate  with                                                               
different marginal  rates applied  to each  company individually.                                                               
It's not an applicable tax equal across the board."                                                                             
                                                                                                                                
5:59:29 PM                                                                                                                    
SENATOR  DYSON said  the tail  end of  it is  to keep  production                                                               
going on wells that might otherwise become shut in.                                                                             
                                                                                                                                
CHAIR  WAGONER pointed  out that  that dynamic  is taken  care of                                                               
with royalty reductions, such as those in Cook Inlet.                                                                           
                                                                                                                                
SENATOR STEDMAN  reminded the  committee that  as the  basin gets                                                               
older,  more, smaller  producers  would come  in  and this  issue                                                               
might encourage more companies to go forward.                                                                                   
                                                                                                                                
6:02:03 PM                                                                                                                    
MS. WILSON said that current  tax law requires monthly filing and                                                               
that continues under the proposal. But  the PPT has a safe harbor                                                               
where if a  producer pays 90 percent of his  taxes each month and                                                               
has a true-up  on March 31, there is no  penalty and no interest.                                                               
The bill  also contains  options to  use annualized  amounts, but                                                               
there is  a tax filing  on March 31  where the amounts  are trued                                                               
up. She viewed this as a streamlining feature.                                                                                  
                                                                                                                                
6:04:36 PM                                                                                                                    
MS. WILSON went on to the transition provision. She explained:                                                                  
                                                                                                                                
     Think  back,  then,  to a  basic  business,  the  basic                                                                    
     business invests  in a piece  of equipment  or building                                                                    
     or  whatever. There's  a  recognition  that that  asset                                                                    
     generates profitability  for several  years -  the life                                                                    
     of  the  asset.  And  so normally  in  accounting,  how                                                                    
     that's  handled is  that it's  not written  off in  the                                                                    
     first  year,  but   there's  a  depreciation  deduction                                                                    
     that's taken year after year  to offset the income - so                                                                    
     that there's a matching  of the income that's generated                                                                    
     with the expenses that  generated that income including                                                                    
     the  asset.  However,  in  this  bill,  as  I've  noted                                                                    
     before, there's  an immediate write-off in  year one of                                                                    
     investments.                                                                                                               
                                                                                                                                
     So, then  the next  question is  well, what  happens to                                                                    
     the investments  that a company has  made recently, say                                                                    
     within  the  last  five  years.  Those  are  generating                                                                    
     profits  going forward.  So, what  you have  then is  -                                                                    
     you've  got  income  being  generated  with  really  no                                                                    
     representation  in the  profit  calculation that  there                                                                    
     was  this  investment.  And  so,  what  this  basically                                                                    
     allows, then  is, in  effect, a  depreciation deduction                                                                    
     for those assets that were  invested in, say, last year                                                                    
     and the year  before - to have them  represented in the                                                                    
     profit calculation.  So, the  way the bill  is written,                                                                    
     it  allows  the  cost  recovery  of  assets  placed  in                                                                    
     service  for  the  last 60  months.  Those,  then,  are                                                                    
     written off over  the next six years. There  is a price                                                                    
     floor so  that when the  price of oil falls  below $40,                                                                    
     and  that's average  per month,  then, they  can't take                                                                    
     the deduction.                                                                                                             
                                                                                                                                
CHAIR  WAGONER  asked if  they  lose  the deduction.  "It's  just                                                               
delayed? There's no loss?"                                                                                                      
                                                                                                                                
MS. WILSON replied that was correct.                                                                                            
                                                                                                                                
6:06:58 PM                                                                                                                    
CHAIR WAGONER said that seemed like a sweetheart deal.                                                                          
                                                                                                                                
6:07:08 PM                                                                                                                    
SENATOR THERRIAULT  asked what if the  price of oil was  over $40                                                               
for  the full  six  years.  "Are they  not  allowed  any of  this                                                               
rebate?"                                                                                                                        
                                                                                                                                
MR. DICKINSON replied that if the  price never went over $40, the                                                               
companies would  never recover.  If it stayed  under $40  for six                                                               
years and then went above $40 for six years, they would recover.                                                                
                                                                                                                                
     Essentially, mechanically  the way we described  it is,                                                                    
     you  actually  recover on  a  monthly  basis. It's  the                                                                    
     first 72  months in which the  price is over $40  - you                                                                    
     get to recover 1/72 each of those months.                                                                                  
                                                                                                                                
SENATOR THERRIAULT remarked  that they are not looking  at a six-                                                               
month period and that this could go forward forever.                                                                            
                                                                                                                                
MR. DICKINSON replied that was correct.                                                                                         
                                                                                                                                
6:08:12 PM                                                                                                                    
SENATOR  ELTON  went  back  to  Senator  Seekins'  $100,000-asset                                                               
example and  asked if  the credit  that rolls  forward on  a 2002                                                               
purchase  is based  on the  $100,000 or  if that  asset has  been                                                               
depreciated to $50,000, is the credit $50,000.                                                                                  
                                                                                                                                
MS. WILSON replied that the total  amount is written off over six                                                               
years.                                                                                                                          
                                                                                                                                
     It's  not set  up such  that, let's  say, a  2002 asset                                                                    
     gets the  full six  years, but a  1999 asset  gets five                                                                    
     years. It's just very simply  anything purchased in the                                                                    
     last five  years will get  a six-year  recovery period.                                                                    
     It's not set  up as a credit; it is  a deduction and it                                                                    
     recognizes,  in  effect,  depreciation  deduction.  So,                                                                    
     they would  get the  benefit of 20  percent to  that in                                                                    
     total.                                                                                                                     
                                                                                                                                
SENATOR SEEKINS asked if a total  of $20,000 could be written off                                                               
on a  $100,000 piece of equipment  in terms of the  credit if the                                                               
price of oil is  above $40 a barrel for one sixth  and why was it                                                               
not for one-fifth.                                                                                                              
                                                                                                                                
MR.  DICKINSON replied  that typical  transition rules  contain a                                                               
fair element of arbitrariness.   The companies asked the Governor                                                               
for some aggressive transition rules  and this is what was agreed                                                               
upon as fair.                                                                                                                   
                                                                                                                                
6:10:57 PM                                                                                                                    
SENATOR STEDMAN  said he didn't have  a lot of comfort  with this                                                               
section of  the bill saying, "This  is kind of a  one-sided deal.                                                               
And the effective date  of July 1 of '07 is  a little bit cleaner                                                               
than starting to back up."                                                                                                      
                                                                                                                                
CHAIR WAGONER  noted that oil  companies have been  receiving the                                                               
benefit of  ELF for the last  five years. "To me  this looks like                                                               
more double dipping than everything else we've looked at!"                                                                      
                                                                                                                                
SENATOR BEN STEVENS  said it would be interesting  to compare the                                                               
transition  look back  to  the  $73 million  floor  on an  annual                                                               
basis.                                                                                                                          
                                                                                                                                
6:15:27 PM                                                                                                                    
SENATOR ELTON  said the look  back provision helps  the producers                                                               
and not the explorers.                                                                                                          
                                                                                                                                
MR.  DICKINSON  said  the administration  hadn't  addressed  what                                                               
would happen if a company were  to totally go out of business and                                                               
he would have to give that some thought.                                                                                        
                                                                                                                                
6:16:49 PM                                                                                                                    
SENATOR DYSON  said that he  was worried  that the net  result of                                                               
the credits  and the  floor would mean  very little  more revenue                                                               
coming to  the state, because  a significant analysis  shows that                                                               
the  state  has not  been  getting  a  competitive share  of  oil                                                               
revenues  in  the   past.  "All  we  will  have   gained  in  the                                                               
intervening  years  is  the increased  investment  that  we  hope                                                               
produces more production. "                                                                                                     
                                                                                                                                
6:18:13 PM                                                                                                                    
SENATOR SEEKINS  asked if oil companies  had been able to  take a                                                               
depreciation credit on assets over the last five years.                                                                         
                                                                                                                                
MS. WILSON replied not against the production tax.                                                                              
                                                                                                                                
SENATOR  SEEKINS  remarked,  "So,  they have  not  been  able  to                                                               
depreciate any of those assets against taxes owed to the state?"                                                                
                                                                                                                                
MS. WILSON  replied, "The depreciation deduction  would apply and                                                               
be factored in in the income tax."                                                                                              
                                                                                                                                
SENATOR  SEEKINS said,  "So, in  effect we're  now going  to give                                                               
them credit  for 100  percent of the  asset that  they've already                                                               
written off a portion of against income tax."                                                                                   
                                                                                                                                
6:20:30 PM                                                                                                                    
MS. WILSON replied that was correct.                                                                                            
                                                                                                                                
MR. DICKINSON added  that they are getting a  20 percent benefit.                                                               
"So, it  will be 100 percent  of their depreciation, but  in a 20                                                               
percent tax rate."                                                                                                              
                                                                                                                                
SENATOR SEEKINS countered:                                                                                                      
                                                                                                                                
     We're  giving them  a  100 percent  of  the value  five                                                                    
     years back  versus we're  giving them  20 percent  on a                                                                    
     newly  purchased piece  of equipment.  At  least in  my                                                                    
     industry,  I  would  have  depreciated  that  piece  of                                                                    
     equipment down to  a certain level already  in terms of                                                                    
     my tax  liability and  I don't know  where they  left -                                                                    
     five years straight  line? How are they  allowed in the                                                                    
     terms of their taxes?                                                                                                      
                                                                                                                                
MS. WILSON replied: "It would depend on the type of equipment."                                                                 
                                                                                                                                
CHAIR WAGONER  asked what the  maximum number of  years allowable                                                               
to take depreciation in the oil field was.                                                                                      
                                                                                                                                
MS. WILSON answered  that she didn't know the exact  life at this                                                               
point. The  Alaska income  tax structure has  a different  set of                                                               
depreciation rules.                                                                                                             
                                                                                                                                
SENATOR  SEEKINS  remarked  that  he  could  understand  the  oil                                                               
companies wanting  some credit for  what they had  already spent,                                                               
but he  didn't think it would  take 100 percent of  the last five                                                               
years investment to be able to do that.                                                                                         
                                                                                                                                
CHAIR WAGONER wondered  how much depreciation had  been taken off                                                               
of the federal taxes.                                                                                                           
                                                                                                                                
SENATOR SEEKINS  said he wanted  to know what the  dollar amounts                                                               
were.                                                                                                                           
                                                                                                                                
6:22:25 PM                                                                                                                    
SENATOR DYSON asked  if the major benefit to the  state was going                                                               
to be investment in new  equipment that increases production, why                                                               
would  it  pay  for  investments that  were  just  replacing  old                                                               
depreciated   plants   that   were   only   maintaining   current                                                               
production.                                                                                                                     
                                                                                                                                
MR.  DICKINSON  replied  that  was  one of  the  areas  that  had                                                               
restrictions.  It is  important  to  say for  a  very old  field,                                                               
especially  where technology  has  been  fairly innovative,  that                                                               
discouraging  replacement  by drawing  a  line  about an  upgrade                                                               
versus a  replacement could get  the state into disputes  that it                                                               
didn't want to get into.                                                                                                        
                                                                                                                                
     One of the lines we did draw  is, it has to be an asset                                                                    
     newly placed  in service in  the state. So,  it doesn't                                                                    
     have to  be new; you  can buy a second-hand  asset, but                                                                    
     we  can't have  everybody cross-selling  to each  other                                                                    
     every  year   and  say  look   at  the   credits  we're                                                                    
     generating.                                                                                                                
                                                                                                                                
CHAIR  WAGONER asked  if a  piece  of equipment  gets a  one-time                                                               
credit.                                                                                                                         
                                                                                                                                
MR. DICKINSON replied yes.                                                                                                      
                                                                                                                                
CHAIR WAGONER asked  if company A buys a  Solar Centaur generator                                                               
and  puts it  at well  33 and  at a  later date  takes it  out of                                                               
service - it gets rebuilt and  company B buys it and transfers it                                                               
to a different site, can company B take a credit, too.                                                                          
                                                                                                                                
MS.  WILSON replied  no  and referenced  page  7 where  qualified                                                               
capital expenditure  was defined as  "newly placed in  service in                                                               
the state". Cross-selling would not be allowed.                                                                                 
                                                                                                                                
MR.  DICKINSON added  no, they  would  not get  a credit  because                                                               
language  also  states,  "that  has  been  previously  placed  in                                                               
service in the state".                                                                                                          
                                                                                                                                
6:25:42 PM                                                                                                                    
SENATOR ELTON  asked for the  dollar amount that accrues  to this                                                               
particular provision and how it  was divvied up between explorers                                                               
and producers.                                                                                                                  
                                                                                                                                
MR.  DICKINSON  estimated  that  at  $1  billion  per  year,  the                                                               
exploration piece would account for  $100 million to $150 million                                                               
or roughly 15 percent.                                                                                                          
                                                                                                                                
SENATOR ELTON said  he thought this allowed for  cost recovery of                                                               
assets placed  in prior service  and he assumed that  an explorer                                                               
would be investing far less in assets than a producer would.                                                                    
                                                                                                                                
MR. DICKINSON replied  that intangible drilling costs  is a great                                                               
misnomer. When you  go out and drill a well,  you're paying a day                                                               
rate on  the rig.  You don't acquire  that. That's  why so-called                                                               
intangible  drilling costs  are being  capitalized. The  price of                                                               
renting the rig becomes the cost of drilling the hole.                                                                          
                                                                                                                                
SENATOR ELTON  continued then that  would count as an  asset that                                                               
is applicable under the look back provision.                                                                                    
                                                                                                                                
MR.  DICKINSON replied  that was  correct.  Under federal  rules,                                                               
that intangible drilling  cost goes through the  process of being                                                               
capitalized.                                                                                                                    
                                                                                                                                
6:28:00 PM                                                                                                                    
SENATOR  THERRIAULT  said  it  was  portrayed  to  him  that  the                                                               
administration ultimately split the  difference on this provision                                                               
and asked if it totaled $10 million per year.                                                                                   
                                                                                                                                
MR.  DICKINSON  responded  that the  discussion  revolved  around                                                               
whether there  should be  a credit as  well as  depreciation. The                                                               
credit is meant to incent things  and it's hard to incent dollars                                                               
that have already been spent.                                                                                                   
                                                                                                                                
SENATOR THERRIAULT asked  him to go back five years  and what the                                                               
economics were  when the investment  was made. The price  went up                                                               
and  oil companies  were getting  very favorable  treatment under                                                               
the ELF.  It seems  like they  made a very  good return  on their                                                               
investment.                                                                                                                     
                                                                                                                                
MS. WILSON replied  that from an accountant's point  of view, one                                                               
way of looking at it is to  ask if the cost has economically been                                                               
recovered. But she looked at it  by asking how long the asset was                                                               
generating profits. In  a regular business, a  piece of equipment                                                               
generates income  for a given  number of years. Any  business may                                                               
have a  banner year  where economically an  argument can  be made                                                               
they   have  recouped   that  investment.   From  an   accounting                                                               
standpoint, that asset is still generating income.                                                                              
                                                                                                                                
SENATOR  STEDMAN said  he was  becoming more  uncomfortable about                                                               
this provision  the more they  talked about it. Clearly  the last                                                               
three  years had  been fairly  robust and  unprecedented for  the                                                               
industry.                                                                                                                       
                                                                                                                                
6:31:05 PM                                                                                                                    
MS.  WILSON pointed  out  that additional  revenue  from the  PPT                                                               
would depend primarily  on two factors, the price of  oil and the                                                               
amount gas producer  investment in the state.  She then presented                                                               
the  DOR forecast  prices  in  graph form  that  the fiscal  note                                                               
projected.                                                                                                                      
                                                                                                                                
6:35:09 PM                                                                                                                    
SENATOR  BEN STEVENS  asked for  incremental graphs  on different                                                               
prices scenarios.                                                                                                               
                                                                                                                                
CHAIR WAGONER  asked if  the credits had  been factored  into her                                                               
charts.                                                                                                                         
                                                                                                                                
MS. WILSON replied yes.                                                                                                         
                                                                                                                                
SENATOR BEN STEVENS  remarked, "Even with the  credits applied in                                                               
a  transition provision,  we're  still looking  at  a 75  percent                                                               
increase  from  the  existing severance  tax  system  at  current                                                               
prices."                                                                                                                        
                                                                                                                                
MS. WILSON replied yes.                                                                                                         
                                                                                                                                
6:35:53 PM                                                                                                                    
SENATOR THERRIAULT referenced the  $40 projection and pointed out                                                               
that no  credit was being taken  for the five-year look  back and                                                               
that the  state would lose $200  million if the price  of oil was                                                               
$40.01.                                                                                                                         
                                                                                                                                
MS. WILSON replied that was also correct.                                                                                       
                                                                                                                                
SENATOR STEDMAN said  he wanted to see where  Alaska was compared                                                               
to the rest of its competitors.                                                                                                 
                                                                                                                                
MR. DICKINSON  replied that Dr.  Van Meurs' graphs would  do that                                                               
in a future meeting.                                                                                                            
                                                                                                                                
CHAIR WAGONER thanked everyone for their comments and adjourned                                                                 
the meeting at 6:40:31 PM.                                                                                                    

Document Name Date/Time Subjects