Legislature(2005 - 2006)BUTROVICH 205

03/13/2006 03:30 PM RESOURCES


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03:33:03 PM Start
03:33:54 PM SB305
03:35:02 PM Econ One Research – Barry Pulliam & Dr. Tony Finizza
06:11:16 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
= SB 305 OIL AND GAS PRODUCTION TAX
Heard & Held
-- Testimony <Invitation Only> --
Econ l Presentation
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                         March 13, 2006                                                                                         
                           3:33 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                                                                                                               
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Albert Kookesh                                                                                                          
                                                                                                                                
OTHER MEMBERS PRESENT                                                                                                         
                                                                                                                                
Senator Gary Stevens                                                                                                            
Senator Gene Therriault                                                                                                         
Senator Hollis French                                                                                                           
Senator Charlie Huggins                                                                                                         
Senator Wilken                                                                                                                  
                                                                                                                              
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                                                                           
02/22/06       (S)       Heard & Held                                                                                           
02/22/06       (S)       MINUTE(RES)                                                                                            
02/23/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/23/06       (S)       Heard & Held                                                                                           
02/23/06       (S)       MINUTE(RES)                                                                                            
02/24/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/24/06       (S)       Heard & Held                                                                                           
02/24/06       (S)       MINUTE(RES)                                                                                            
02/25/06       (S)       RES AT 9:00 AM BUTROVICH 205                                                                           
02/25/06       (S)       -- Reconvene from 02/24/06 --                                                                          
02/25/06       (H)       RES AT 10:00 AM SENATE FINANCE 532                                                                     
02/25/06       (S)       Heard & Held                                                                                           
02/25/06       (S)       MINUTE(RES)                                                                                            
02/27/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/27/06       (S)       Heard & Held                                                                                           
02/27/06       (S)       MINUTE(RES)                                                                                            
02/28/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/28/06       (S)       Heard & Held                                                                                           
02/28/06       (S)       MINUTE(RES)                                                                                            
03/01/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/01/06       (S)       Heard & Held                                                                                           
03/01/06       (S)       MINUTE(RES)                                                                                            
03/02/06       (S)       RES AT 1:30 PM BUTROVICH 205                                                                           
03/02/06       (S)       Heard & Held                                                                                           
03/02/06       (S)       MINUTE(RES)                                                                                            
03/02/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/02/06       (S)       Heard & Held                                                                                           
03/02/06       (S)       MINUTE(RES)                                                                                            
03/03/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/03/06       (S)       -- Meeting Canceled --                                                                                 
03/04/06       (S)       RES AT 10:00 AM SENATE FINANCE 532                                                                     
03/04/06       (S)       Presentation by Legislative Consultants                                                                
03/06/06       (S)       RES AT 3:30 PM SENATE FINANCE 532                                                                      
03/06/06       (S)       Heard & Held                                                                                           
03/06/06       (S)       MINUTE(RES)                                                                                            
03/07/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/07/06       (S)       Heard & Held                                                                                           
03/07/06       (S)       MINUTE(RES)                                                                                            
03/08/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/08/06       (S)       -- Meeting Canceled --                                                                                 
03/09/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/09/06       (S)       -- Meeting Canceled --                                                                                 
03/10/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/10/06       (S)       -- Meeting Canceled --                                                                                 
03/11/06       (H)       RES AT 10:00 AM CAPITOL 106                                                                            
03/11/06       (H)       -- Meeting Canceled --                                                                                 
03/13/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
BARRY PULLIAM, Senior Economist                                                                                                 
Econ One Research, Inc.                                                                                                         
Suite 2825                                                                                                                      
Three Allen Center                                                                                                              
333 Clay Street                                                                                                                 
Houston TX 77002                                                                                                                
POSITION STATEMENT: Commented on SB 305.                                                                                      
                                                                                                                                
DR. TONY FINIZZA                                                                                                                
EconOne Research, Inc.                                                                                                          
Suite 2825                                                                                                                      
Three Allen Center                                                                                                              
333 Clay Street                                                                                                                 
Houston TX 77002                                                                                                                
POSITION STATEMENT: Commented on SB 305.                                                                                      
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR  THOMAS  WAGONER  called   the  Senate  Resources  Standing                                                             
Committee meeting to order at  3:33:03 PM. Present were Senators,                                                             
Elton,  Dyson, Stedman,  Ben Stevens  and  Chair Thomas  Wagoner.                                                               
Senator Gary  Stevens, Senator Hollis  French and  Senator Wilken                                                               
were  also present.  Senators Dyson  and Seekins  arrived shortly                                                               
after the meeting started. Chair  Wagoner announced that Econ One                                                               
would present its comments today.                                                                                               
                                                                                                                                
               SB 305-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                              
3:33:54 PM                                                                                                                    
^ECON ONE RESEARCH - Barry Pulliam & Dr. Tony Finizza                                                                         
BARRY PULLIAM,  Econ One Research, Inc.,  presented the company's                                                               
credentials and  its history of  working as an  energy consultant                                                               
with the State of Alaska, other  oil and gas producing states and                                                               
government entities.  He introduced Dr. Tony  Finizza who teaches                                                               
forecasting  at the  University  of California  Irvine and  stays                                                               
current with energy policy and conditions.                                                                                      
                                                                                                                                
3:35:02 PM                                                                                                                    
SENATORS DYSON and SEEKINS arrived.                                                                                             
                                                                                                                                
3:41:19 PM                                                                                                                    
TONY  FINIZZA, PhD,  said  he  helped the  State  of Alaska  with                                                               
forecasting  oil prices  and explained  that when  he worked  for                                                               
ARCO, Alaska was viewed as the  crown jewel of the company and he                                                               
was  happy to  work  here again.  At ARCO,  he  was charged  with                                                               
keeping management  honest and he  vowed to give them  his honest                                                               
opinion  now of  how they  should  think about  oil prices.  [Dr.                                                               
Finizza's  comments  were  accompanied by  a  slide  presentation                                                               
labeled:  "Presentation   on  Alaska  PPT  to   Senate  Resources                                                               
Committee, March 13, 2006, Analysis  of PPT, by Barry Pulliam and                                                               
Dr. Tony Finizza"]                                                                                                              
                                                                                                                                
He described a set of 50  or 100 questions that could be answered                                                               
true or  false, called  an almanac quiz  where the  answers could                                                               
also be found; the point being  that there is no debate about the                                                               
right answer.  But, that's not  the test;  the real test  was how                                                               
sure you  are that  you have  the correct  answer. It  shows that                                                               
people,  no matter  how  smart they  are,  often overstate  their                                                               
ability  to know  and  they  are very  humbled  by  the test.  He                                                               
summarized that  no one can  know for  sure where oil  prices are                                                               
going to go.                                                                                                                    
                                                                                                                                
3:44:17 PM                                                                                                                    
He began by  putting his conclusions up front.  The producers are                                                               
using  $40 as  a planning  base case  for valuating  projects and                                                               
something like $30  as a stress price case. They  want to protect                                                               
their downside  and look for  some upside; they have  been burned                                                               
in the past and have to be prudent.                                                                                             
                                                                                                                                
3:44:51 PM                                                                                                                    
CHAIR WAGONER asked if the $10 difference was a standard spread.                                                                
                                                                                                                                
DR. FINIZZA replied that a $15  spread is a more realistic number                                                               
to  use.  He added  that  he  uses  some  forecasts made  by  the                                                               
Department of Energy that are  slightly above his number, as well                                                               
as the range it used in terms of uncertainty.                                                                                   
                                                                                                                                
He advised  the committee that  what matters most is  what people                                                               
are planning  on and the future  oil price, he surmised,  was the                                                               
biggest  risk of  anything they  faced  in deciding  the PPT.  He                                                               
advised that  the low  he has heard  of $20 and  the high  he has                                                               
heard of $100 were both possible,  but not likely to be sustained                                                               
if they  got there.  He said  that $20 is  not a  sustainable low                                                               
even if  it goes there because  Asia has a strong  oil demand and                                                               
there is  just not enough non-OPEC  supply to fill it.  This will                                                               
give OPEC more market power and that will drive the prices up.                                                                  
                                                                                                                                
3:47:50 PM                                                                                                                    
If that were the case, the  threats the state faces would be from                                                               
alternative liquid supply  - from tar sands,  coal liquids, shale                                                               
oil  -  which  are  all  economic  at  prices  well  below  $100;                                                               
although, he advised that people  do need to see prices sustained                                                               
for long  periods of  time before they  will invest  hard dollars                                                               
into the developing  those technologies. A number  of people have                                                               
coal  liquids technologies  on the  drawing board  that could  be                                                               
produced at  around $30 a  barrel in an  environmentally friendly                                                               
manner. He also  advised that people would  face penetration from                                                               
alternative transportation  when prices  are high.  Finally, high                                                               
prices  impose  a  terrific  tax  on  consumers  that  cannot  be                                                               
sustained.                                                                                                                      
                                                                                                                                
3:49:02 PM                                                                                                                    
MR. FINIZZA  guided them  to the  materials he  would be  using -                                                               
"Annual Energy  Outlook" by  the Department  of Energy  (DOE) and                                                               
the International  Energy Agency's  Outlook, a  Paris-based group                                                               
that was formed  to worry about oil disruptions in  the 1970s. He                                                               
also used  polls thinking  that getting a  number of  wise people                                                               
together is better than just thinking about an issue yourself.                                                                  
                                                                                                                                
The DOE comes  out once a year with its  long-term base-case view                                                               
out  to 2030  and this  year Econ  One participated  in a  Delphi                                                               
survey of people  they know to get a range  of uncertainty to use                                                               
in  developing  its  alternative  price  cases.  He,  personally,                                                               
developed the  probability versions,  that hadn't  been published                                                               
yet, that  say that 60 percent  of future prices will  be between                                                               
$20  and  $80.  He  considered  that  an  honest  range  for  the                                                               
committee to  consider. On page  5, another graph of  18 analysts                                                               
indicated a  median price  of $40.  Another trend  represented on                                                               
page 6 also indicated that $40 was a reasonable long-term view.                                                                 
                                                                                                                                
3:55:07 PM                                                                                                                    
DR.  FINIZZA  explained  that  producers   want  to  be  somewhat                                                               
conservative because they  have been burned by  forecasts of high                                                               
oil prices in the past and  they will test their projects against                                                               
a price path that  is below their most likely view  - and that is                                                               
now around $35 - $40.                                                                                                           
                                                                                                                                
3:56:45 PM                                                                                                                    
Repeating that everyone  has been humbled in the  past, he showed                                                               
the  committee  three types  of  errors  that people  make  using                                                               
Energy  Information Administration  (EIA) annual  price forecasts                                                               
with an overlay of actual prices.  He pointed out some short term                                                               
versus long-term  forecasting scenarios.  Every year  the Society                                                               
of  Petroleum  Evaluation  Engineers  takes  a  poll  of  experts                                                               
including bankers, oilmen, and consultants  asking them their 10-                                                               
year view of  oil prices. Those have been  underestimated most of                                                               
the last 10 years.                                                                                                              
                                                                                                                                
3:59:19 PM                                                                                                                    
He  emphasized  again  that  high   prices  have  not  ever  been                                                               
sustained for a long period and  then he turned to looking at how                                                               
an explorer  would look  at Alaska, comparing  the status  quo to                                                               
the  PPT  by  looking  at   a  sample  exploration  project  with                                                               
conditions that exist  here. He looked at project  cash flows and                                                               
derived some  financial metrics that  producers would use  in the                                                               
evaluation. The  first of  those was looking  at the  net present                                                               
value of future  cash flows, including the  money companies would                                                               
have to put into exploration to  get the production. He figured a                                                               
10-percent  discount   rate  would   be  a  good   candidate  for                                                               
acceptance. The other  criteria he used was the  internal rate of                                                               
return  (IRR),  which is  the  discount  rate  in which  the  net                                                               
present value equals  zero. So it gives one the  idea of the rate                                                               
of return  (ROR) with which to  compare the hurdle rate.  The IRR                                                               
should  be better  than  the  cost of  funds  and should  compare                                                               
favorably  with other  projects a  company has  on the  table. He                                                               
used a  threshold of  15 percent  and said  using less  than that                                                               
would be  too risky.  He preferred to  not use  undiscounted cash                                                               
flow.                                                                                                                           
                                                                                                                                
4:02:09 PM                                                                                                                    
Before getting  into the  economics of  new fields,  he mentioned                                                               
one caveat. He  is not an explorer and he  gets his gambling kick                                                               
by  going to  Las Vegas.  He related  the story  of how  ARCO was                                                               
drilling its very  last well before it pulled out  in 1967 - when                                                               
it found  the Prudhoe  Bay Discovery  Well. He  said that  is the                                                               
very exciting part, but it's also the very highest risk.                                                                        
                                                                                                                                
4:04:01 PM                                                                                                                    
One of  his conclusions  is that without  ANWR being  opened, the                                                               
field size distribution of new  discoveries on the North Slope is                                                               
tilted  towards smaller  fields, which  will be  tougher to  make                                                               
economic. Oil companies  will look at $30 barrel oil  as a stress                                                               
test. The 25/20-scenario  actually helps an explorer  more than a                                                               
20/20, because of the bigger deduction for the losses early-on.                                                                 
                                                                                                                                
It  also  appears  from  the analysis  that  incentives  will  be                                                               
required to  get more exploration than  is going on now.  He said                                                               
that approaches other  than the $73 million  allowance could work                                                               
as well. At  low prices, 25/20 or 20/20  would incent exploration                                                               
and are both  preferred over the status quo. Under  either of the                                                               
two,  it looks  like the  expected commercial  reserves available                                                               
will be economic.                                                                                                               
                                                                                                                                
DR.  FINIZZA   cautioned  that  the  state   may  be  encouraging                                                               
exploration  when the  market isn't.  You  could get  exploration                                                               
that doesn't  pay and the  state would hold  part of the  bill on                                                               
that. He  estimated a seven-year  lag from  beginning exploration                                                               
investment to finding oil or finding a dry hole.                                                                                
                                                                                                                                
He contrasted two studies done  by the US Geologic Survey updated                                                               
in 2005. They  showed a probability distribution  of oil deposits                                                               
in ANWR and  on the Central North Slope. He  took a mean estimate                                                               
of their undiscovered technically  recoverable oil reserve - this                                                               
doesn't mean  they are economic;  it means  the oil is  in place.                                                               
For the central North  Slope, it was 4 BB and for  ANWR, it was a                                                               
little over 10 BB and could  go further north. What is remarkable                                                               
about the  difference is  that the  distribution shows  no fields                                                               
available in excess of 1 BB,  whereas it was expecting 22 percent                                                               
of ANWR  oil to be  in field sizes  of more  than 1 BB.  The last                                                               
line of  the distribution says that  half the oil they  expect to                                                               
be recoverable  in the central  North Slope is in  fields smaller                                                               
than 64 MB. He explained:                                                                                                       
                                                                                                                                
     The  difference is  what you  can get  to now  is small                                                                    
     field  sizes;  what  you  could   get  if  ANWR  opened                                                                    
     eventually -  with a lag,  I'm sure, a litigious  lag -                                                                    
     you're going  to get larger  fields. But, I'm  going to                                                                    
     model  just the  central  North  Slope, because  that's                                                                    
     what you would  be able to do tomorrow if  the PPT were                                                                    
     passed.                                                                                                                    
                                                                                                                                
4:09:32 PM                                                                                                                    
He then  proceeded to explain  his model that supposed  21 fields                                                               
would be  found in  the central  North Slope -  the average  of a                                                               
spread  between 17  and 24.  The forecasts  also addressed  which                                                               
fields  are economically  recoverable and  commercial at  various                                                               
prices.  Looking  at  the  central North  Slope,  the  bar  chart                                                               
indicated  volumes  of  oil  at  various  prices.  Another  chart                                                               
indicated the likely size distribution  that would be found under                                                               
alternative prices. Explorers would likely  find 20 fields in the                                                               
central North  Slope, 12 of  which (60  percent) would be  50 BB,                                                               
five would  be in  the hundreds, two  would be 150  BB and  one -                                                               
$500 BB. The  other alternative was a dry hole.  You get positive                                                               
cash flow  only in  the case  where you hit  oil and  develop the                                                               
field  and his  example estimated  that to  be about  one in  six                                                               
holes.                                                                                                                          
                                                                                                                                
Explorers  don't drill  just one  hole;  there is  an 83  percent                                                               
chance that  it will be  a failure.  One way they  would mitigate                                                               
the risk  of failure is to  drill a portfolio of  wells and maybe                                                               
share them with other companies. If  the chance of failure of one                                                               
well is  83 percent,  if you  had a six  well program,  you would                                                               
lower  the  failure rate  to  33  percent.  He modeled  that  one                                                               
successful  well-in-six  scenario.  There  is only  a  5  percent                                                               
chance that it's a  real big one, a 60 percent  chance it will be                                                               
a 50  BB, and a 10  percent chance it  will be 150 BB.  His model                                                               
graphed the weighted average of all of those cash flows.                                                                        
                                                                                                                                
4:16:45 PM                                                                                                                    
If his $20  million exploration program failed,  under the status                                                               
quo, it  would result in a  negative cash flow of  $20 million to                                                               
the producer. Under a 20/20 scenario,  it would be less then that                                                               
because the  state is giving  the producer the ability  to deduct                                                               
the  capital expenditure  with a  tax credit  for exploration.  A                                                               
25/20 gives  explorers a bigger  tax deduction and a  better cash                                                               
flow position.  He explained:                                                                                                   
                                                                                                                                
     You try with the hope  of getting someone to explore so                                                                    
     that they return when they  get profitable and bring on                                                                    
     production, you  get to  tax 25 percent  of it.  But in                                                                    
     the  first four  years or  whatever you  assume is  the                                                                    
     exploration phase, they're going  to be better off with                                                                    
     a higher  tax rate than a  lower tax rate. And  you are                                                                    
     paying the difference.                                                                                                     
                                                                                                                                
4:17:00 PM                                                                                                                    
SENATOR FRENCH said people were  having trouble with this example                                                               
because the  higher tax  rate was  so counterintuitive.  He asked                                                               
him to explain it another way.                                                                                                  
                                                                                                                                
4:17:13 PM                                                                                                                    
DR. FINIZZA explained again that  the state is subsidizing a loss                                                               
by allowing companies  credits they can sell to  someone else and                                                               
the  risk is,  at low  prices, the  state would  have to  pay the                                                               
explorers.                                                                                                                      
                                                                                                                                
Under the  six-well exploration  program, if a  60 MB  field were                                                               
discovered,  in   Alaska,  it   would  be   high  cost   and  low                                                               
productivity. Putting those parameters  into the model, he looked                                                               
at the status  quo ELF (economic limit factor) system  and if oil                                                               
were $30  a barrel, the company  would lose $80 million.  But, he                                                               
reasoned if someone thought prices would  be $30, he would not be                                                               
exploring in that environment. At  $30 oil, none of the scenarios                                                               
seemed  to work.  At  a  $30 price,  under  a  20/20 PPT  system,                                                               
finding a  50 MB field would  create a negative cash  flow of $37                                                               
million  and  the state  would  get  no  revenue. Under  a  25/20                                                               
scenario, the company  would lose less, because  it would shelter                                                               
some of the  loss through a higher tax rate,  but the state would                                                               
be out $2 million because it  would have to lower someone's taxes                                                               
by  $2 million.  This  phenomenon  is the  state's  risk for  the                                                               
higher tax rate in an exploration  environment - that at the high                                                               
rate,  the  program  doesn't  bear enough  fruit.  With  the  $73                                                               
million allowance, the  producer gets closer to  deciding to take                                                               
a gamble because the numbers get closer to not being negative.                                                                  
                                                                                                                                
4:20:39 PM                                                                                                                    
DR.  FINIZZA referred  to  his six-well  example  and said  under                                                               
status quo  [ELF] conditions  it didn't  look economic.  With the                                                               
PPT, the  internal IRR started to  grow and look decent.  With an                                                               
IRR of $30,  it was below the hurdle rate,  but probably at about                                                               
the  cost of  capital.  So  the venture  was  still marginal.  He                                                               
indicated areas where it would be  helpful for an explorer to get                                                               
an incentive of  some sort to get over the  hurdles. He displayed                                                               
tables of state revenues using different programs to do that.                                                                   
                                                                                                                                
4:27:03 PM                                                                                                                    
He  reviewed his  conclusions: that  field  size distribution  of                                                               
smaller fields  would weigh  very important  on the  economics of                                                               
this program;  that at  low prices the  25/20 actually  helps the                                                               
explorer (since  the state is subsidizing  more); that incentives                                                               
would  be  required  (the  $73  million  program  would  be  very                                                               
helpful);  that both  the 20/20  and the  25/20 combinations  are                                                               
preferred  over the  status  quo (and  that  would surely  incent                                                               
exploration); and  that under either  of the tax  credit schemes,                                                               
oil should come to market (except at prices under $30 a barrel).                                                                
                                                                                                                                
4:28:53 PM                                                                                                                    
SENATOR THERRIAULT  went back  to Chart 42  and said  without the                                                               
$73 million allowance,  the IRRs looked close for  both 20/20 and                                                               
25/20, but if you go to  Chart 43 with the $73 million allowance,                                                               
the net cash flow at 25/20 is  higher at the stress price and the                                                               
rates of return are all higher.                                                                                                 
                                                                                                                                
4:29:31 PM                                                                                                                    
DR. FINIZZA responded,  "I think a lot  of this has to  do with a                                                               
particular pattern of oil production  than anything else. It does                                                               
seem  that the  $73  million has  a bigger  impact  at the  lower                                                               
prices."                                                                                                                        
                                                                                                                                
4:29:54 PM                                                                                                                    
SENATOR  ELTON asked  if being  far from  a gathering  line would                                                               
change the economics also.                                                                                                      
                                                                                                                                
DR. FINIZZA replied  yes, but he didn't pick a  specific spot for                                                               
his example,  rather he  used an average  of costs  for operating                                                               
and capital  expenditures for a  typical Alaskan-size  field. But                                                               
he agreed  that proximity  to a  facility would  change economics                                                               
dramatically.  Oil   price  is   the  biggest  variable   in  the                                                               
calculations, but the size of the deposit is next important.                                                                    
                                                                                                                                
SENATOR ELTON  asked if  it wouldn't  change the  relationship in                                                               
his tables between 20/20 and 25/20.                                                                                             
                                                                                                                                
DR. FINIZZA replied that he didn't think it would.                                                                              
                                                                                                                                
4:31:47 PM                                                                                                                    
SENATOR  BEN STEVENS  asked if  Slides  39 through  42 took  into                                                               
account all state revenues or just its severance tax.                                                                           
                                                                                                                                
DR. FINIZZA  replied all revenues  - royalties, PPT,  income tax,                                                               
severance - discounted at 10 percent.                                                                                           
                                                                                                                                
SENATOR  BEN  STEVENS pointed  out  that  the difference  between                                                               
these charts  and Dr.  Van Meurs  charts is  that the  later only                                                               
showed production tax.                                                                                                          
                                                                                                                                
CHAIR WAGONER  announced that the  committee would shift  to hear                                                               
Mr. Pulliam's comments.                                                                                                         
                                                                                                                                
4:33:43 PM                                                                                                                    
BARRY  PULLIAM,  Senior  Economist,   Econ  One  Research,  Inc.,                                                               
recapped that Dr.  Finizza talked about the  exploration side and                                                               
the potential for  enhanced volumes. Mr. Pulliam said  he was now                                                               
going  to talk  about  volumes from  fields  that were  currently                                                               
known and  producing, under development  or in  consideration for                                                               
development. While Dr. Finizza talked  most about high oil volume                                                               
scenarios and  assumed that ANWR  was open,  he was now  going to                                                               
talk  about the  low oil  volume scenarios,  which looked  at not                                                               
finding any additional oil or gas.                                                                                              
                                                                                                                                
His first  chart [Effective  Average Tax  Rates at  Various Price                                                               
Levels 25/20 PPT plus sliding  Scale with $30 Threshold (FY 2007-                                                               
2016) -  Alaska Department  of Revenue]  showed the  historic and                                                               
projected effective tax rate (the tax  rate based on the value of                                                               
the oil  at the wellhead).  [His following charts  calculated the                                                               
same for  $35, $40, $45,  and $50  thresholds and another  set of                                                               
the same calculations were prepared for a 20/20 scenario.]                                                                      
                                                                                                                                
The average effective tax rate on  the North Slope from the first                                                               
flow of  oil through the  end of 2005  has been 12  percent; that                                                               
includes  the  nominal  rate,  plus the  ELF,  and  includes  all                                                               
fields. This  rate has been falling  and over the next  few years                                                               
DOR predicts  the average tax rate  will drop to 6.3  percent and                                                               
go down  to 4.9 percent by  2030 when the department  assumed the                                                               
pipeline would shut down if the state doesn't get a gasline.                                                                    
                                                                                                                                
4:37:31 PM                                                                                                                    
Putting  those rates  into perspective  with North  Slope prices,                                                               
where  the average  wellhead  value  has been  $15  a barrel  and                                                               
accounting for inflation, turns that  $15 into $24 in 2006 terms.                                                               
That  North Slope  value  of $24  compares to  a  $32 West  Texas                                                               
Intermediate  (WTI) price  and  about a  $30  Alaska North  Slope                                                               
(ANS) West Coast price.                                                                                                         
                                                                                                                                
He pointed out that Prudhoe Bay  has been on a steady decline and                                                               
Kuparuk has  a tax  rate of virtually  zero today.  Alpine hasn't                                                               
been in production long; the  nominal rate has been 12.25 percent                                                               
and  that will  move up  to 15  percent this  year; the  ELF will                                                               
start to go down; but then it, too, will start to fall quickly.                                                                 
                                                                                                                                
4:40:17 PM                                                                                                                    
MR. PULLIAM  went on  to the  volume charts  [Projected Effective                                                               
Tax  Rates with  Sliding Scale  Tax DOR  Forecast Production  (FY                                                               
2007-2030)  by field  - numbers  taken from  DOR 2005  forecast].                                                               
According to  Dr. Williams, he  said, DOR's current view  is that                                                               
over  the  next  five  years, production  will  be  about  30,000                                                               
barrels per day less than it  had previously forecast - half from                                                               
Prudhoe Bay and half from West Sak.                                                                                             
                                                                                                                                
4:41:51 PM                                                                                                                    
It's important  to realize, he  said, that the 30,000  barrels is                                                               
not lost,  it's still there,  but it's just not  getting produced                                                               
as  quickly. He  inserted here  that  forecasting is  hard to  do                                                               
going out to  2030 as illustrated by the  previous 30,000 barrels                                                               
a day less  estimate. Things can change, but  that shouldn't keep                                                               
people from  forecasting and  giving best  estimates. Information                                                               
about  the near  term is  much more  solid than  it is  about the                                                               
longer term and  he tended to focus his charts  on the first five                                                               
years and  what may  happen over  the next 24  years if  the TAPS                                                               
goes out of service in 2030.                                                                                                    
                                                                                                                                
He inserted  here that the  TAPS would still be  producing around                                                               
100,000 barrels  in 2030, but  that volume would not  be economic                                                               
and  if Prudhoe  Bay  shuts down,  it might  not  be economic  to                                                               
operate  anything   up  there.  However,  he   noted  that  those                                                               
estimates were  done at $20 a-barrel  oil and if you  use $40, as                                                               
some people  are now,  2030 is  probably too  early to  have that                                                               
scenario  happen. People  are predicting  about 5.6  BB over  the                                                               
next 24 years, 1.3 BB of it from new sources.                                                                                   
                                                                                                                                
4:44:56 PM                                                                                                                    
This means  that 80  percent of  the oil  in this  timeframe will                                                               
come from  what they already  know is there. Prudhoe  Bay without                                                               
satellites will  be 36  percent of that  80 percent.  Prudhoe Bay                                                               
and  Kuparuk  without  satellites   would  be  half;  adding  the                                                               
satellites  for those  two fields  would  bring the  total to  65                                                               
percent. Adding  Alpine brings  it to 70  percent. The  volume is                                                               
concentrated  in just  a  few  fields and  does  not include  Pt.                                                               
Thomson.  The DOR  is not  forecasting those  volumes to  come in                                                               
unless  the  state  gets  a  gasline.  These  numbers  assume  no                                                               
gasline, neither  do they  include Oooguruk,  because it  was not                                                               
under development when the forecast was made.                                                                                   
                                                                                                                                
MR.  PULLIAM said  he prepared  another chart  for the  fall 2005                                                               
numbers and added Oooguruk, which comes  to about 70 MB. The goal                                                               
of Econ One's discussions with the  DOR, Roger Marks, and Dr. Van                                                               
Meurs  was to  be  able  to tell  the  legislature whether  those                                                               
analyses  were reasonable.  His  view is  that  yes, in  general,                                                               
their  work is  reasonable. Econ  One  has taken  their work  and                                                               
changed some assumptions to make it even more reasonable.                                                                       
                                                                                                                                
4:48:11 PM                                                                                                                    
He remarked that any two analysts  presented with the same set of                                                               
data  may well  come with  two different  reasonable assumptions.                                                               
It's good  to get discussion between  parties as to why  they are                                                               
different.  Ultimately,  the  adjustments   he  and  Dr.  Finizza                                                               
applied  have  two  effects.  One is  that  they  forecast  lower                                                               
increases  in taxes  under the  PPT over  the next  10 years  and                                                               
higher increases  in taxes  under the PPT  over the  period after                                                               
that  and  on  net,  Econ  One  is  forecasting  slightly  higher                                                               
increases in taxes under the  PPT than the DOR's. The differences                                                               
in the two estimates don't change the basic picture, however.                                                                   
                                                                                                                                
He showed the  anticipated increase in severance  taxes under the                                                               
20/20  PPT versus  the status  quo  - including  the $73  million                                                               
exemption  and  the  six-year  transition  period  credit,  which                                                               
amounted to  about $1 billion.  The transition credit is  why the                                                               
line dips in the  first few years and then rises  up [Slides 51 -                                                               
60].  Slide 53  indicated that  over the  next 10  years the  PPT                                                               
would be  expected to bring in  $15.17 billion if oil  prices are                                                               
equal to the  federal government's forecast of  $54.70 WTI. Other                                                               
slides showed variations  on that theme. He said  the charts used                                                               
2006 dollars  and that inflation  would be about 2.5  percent per                                                               
year on average. The 20/20 PPT  would bring in $7.47 billion more                                                               
for the known  fields than the status quo with  an average annual                                                               
difference of $747 million.                                                                                                     
                                                                                                                                
He noted  that the two bottom  rows on the charts  were important                                                               
to understand. He said that  understanding the effective tax rate                                                               
was key and the PPT effective  tax rate would be 12.4 percent and                                                               
the status quo  tax rate is 6.3 percent. He  explained that under                                                               
the  current system,  the  tax is  based on  a  valuation at  the                                                               
wellhead. The  nominal tax  rate of 15  percent gets  adjusted by                                                               
the ELF and  over the next 10 years he  thought that would result                                                               
in 6.3  percent. You  multiply that 6.3  percent by  the wellhead                                                               
value.                                                                                                                          
                                                                                                                                
He  explained that  when he  talks  about the  PPT effective  tax                                                               
rate,  for  comparison,  he calculated  what  percentage  of  the                                                               
wellhead value  the state could  anticipate collecting  under the                                                               
PPT. The  PPT starts with a  nominal rate of 20  percent based on                                                               
the price downstream  (ANS). When the oil is sold,  it is shipped                                                               
out  and brought  back on  tankers. Those  operating and  capital                                                               
costs  get deducted  operating and  capital  costs. After  making                                                               
those adjustments one  is left, at these prices,  with about 12.4                                                               
percent relative to the value at the wellhead.                                                                                  
                                                                                                                                
He urged the  committee to keep in mind that  12 percent has been                                                               
the average  historical tax rate  on the North Slope  with prices                                                               
that have averaged in 2006 terms about $32 WTI a barrel.                                                                        
                                                                                                                                
4:53:47 PM                                                                                                                    
SENATOR  FRENCH   asked  how  he  estimated   industry  operating                                                               
expenses, capital expense and other expenditures.                                                                               
                                                                                                                                
MR.  PULLIAM   answered  through  looking  at   confidential  DOR                                                               
information from producers, which  he couldn't disclose, and from                                                               
information  purchased  from  companies  that  do  that  type  of                                                               
analyses. He is not free  to disclose that information because of                                                               
copyright. His  company also has  information about the  kinds of                                                               
costs  people  typically look  at  for  operating and  developing                                                               
fields. For this  exercise he started with the  estimates the DOR                                                               
made  and, in  some cases,  after  looking at  all the  available                                                               
information, Econ One  decided they were reasonable  and in other                                                               
cases,  upped them  a little  bit. He  would show  them a  little                                                               
later what would happen if they were wrong about those costs.                                                                   
                                                                                                                                
4:55:18 PM                                                                                                                    
SENATOR STEDMAN asked him to go back over the $54.7 estimate.                                                                   
                                                                                                                                
MR. PUllIAM  responded that is  what the EIA  (Energy Information                                                               
Administration)  was forecasting  long-term WTI  prices to  be in                                                               
2006 dollars.                                                                                                                   
                                                                                                                                
4:56:44 PM                                                                                                                    
SENATOR THERRIAULT  asked if he  could explain the  effective tax                                                               
rate to  a constituent using  an analogy of  his being in  the 30                                                               
percent   tax  bracket   and  taking   his  mortgage   deduction,                                                               
itemizations, and childcare deductions.                                                                                         
                                                                                                                                
MR. PULLIAM replied  that he could use that  analogy. The nominal                                                               
tax is 20 percent of a dollar-per-barrel figure. He explained:                                                                  
                                                                                                                                
     That dollar-per-barrel figure is  not a wellhead value.                                                                    
     It's a  wellhead value minus  costs of  production. So,                                                                    
     what I'm  doing is saying, Well...you're  getting those                                                                    
     costs of production,  but in order to think  about it -                                                                    
     our current system  on wellhead value - so  in order to                                                                    
     think what  percent of wellhead  value are we  going to                                                                    
     get, after  we've allowed  you to  deduct all  of those                                                                    
     costs  - what  I do  is calculate.  It's a  very simple                                                                    
     calculation.  You look  at the  wellhead  value of  the                                                                    
     oil, you  look at  the total  taxes you'll  collect and                                                                    
      you divide it by the wellhead value of the oil. It's                                                                      
     really very simple.                                                                                                        
                                                                                                                                
MR. PULLIAM  added that  under any of  the proposals,  that's not                                                               
the kind of rate the state would get on a wellhead value.                                                                       
                                                                                                                                
4:59:06 PM                                                                                                                    
SENATOR  STEDMAN  referenced  Slides  9  and  10  and  asked  how                                                               
sensitive the data is to price ranges.                                                                                          
                                                                                                                                
MR. PULLIAM replied  that it is very sensitive and  he would show                                                               
the  committee what  the tax  rate would  be at  different levels                                                               
including when  it would break  even with the status  quo system.                                                               
He showed  a graph  of what additional  revenues would  have been                                                               
collected under the PPT if it  had been applied in the first half                                                               
of  2006. He  said  the severance  taxes  are deductible  against                                                               
state income  taxes. So, the total  impact to the state  would be                                                               
about 4 percent lower than what he is showing them here.                                                                        
                                                                                                                                
5:03:11 PM                                                                                                                    
Slide  54  [Change in  Projected  Taxes  Under  a 20/20  Tax  DOR                                                               
Forecast  Production (FY  2007-2030)]  was  requested by  Senator                                                               
Wagoner and looks at the effects  of the transition credit in the                                                               
first six years. It shows the  amount of additional tax the state                                                               
would collect  would be  about $1 billion  if the  20/20 scenario                                                               
had  no transition  credit. Another  area of  the chart  shows an                                                               
alternative  credit  scheme that  would  allow  for a  75-percent                                                               
deduction of  2005 expenditures, a  50-percent of 2004 and  a 24-                                                               
percent of 2003. That turns out to  be about 30 percent of the $1                                                               
billion.                                                                                                                        
                                                                                                                                
5:04:19 PM                                                                                                                    
SENATOR SEEKINS asked  if the alternative is  carried forward six                                                               
years.                                                                                                                          
                                                                                                                                
MR.  PULLIAM replied  that it  would be  carried forward  for the                                                               
full six-year period.  Even low forecasts have the  prices of oil                                                               
above  the  threshold  amount  that   is  there  for  taking  the                                                               
transition credit ($40  a barrel ANS West Coast). "So,  if we had                                                               
this scenario  where we  have $54.70  WTI, you  would be  able to                                                               
take that credit  every month over the next six  years until it's                                                               
extinguished."                                                                                                                  
                                                                                                                                
5:05:14 PM                                                                                                                    
SENATOR BEN STEVENS asked if Slide 54 was just a visual.                                                                        
                                                                                                                                
MR. PULLIAM  replied yes. He  explained that the  proposed credit                                                               
amounts  to about  $1 billion  and  their alternative  transition                                                               
credit  would  lower  that  to  $300  million.  So,  taxes  would                                                               
increase by  $700 million.  He said  it would  not be  prudent to                                                               
look at the increase under the  proposed tax at just $54 WTI. The                                                               
impacts of  a number  of different  prices, in  particular, lower                                                               
prices  needs to  be  looked  at. The  table  on  Slide 55  shows                                                               
summary  results for  what would  happen  at lower  prices and  a                                                               
break-even  analysis.  He  spent  a few  minutes  explaining  the                                                               
slide.                                                                                                                          
                                                                                                                                
5:09:47 PM                                                                                                                    
SENATOR  ELTON said  they had  heard from  others that  the break                                                               
even  point was  in  the $25  to  $27 range.  He  asked what  his                                                               
numbers were a reflection of.                                                                                                   
                                                                                                                                
MR. PULLIAM  replied the difference  is the timeframe  they focus                                                               
on.  Others have  talked about  through 2030  and he  included an                                                               
analysis for  that, which  is $28.80 WTI  (ANS is  about $26.50),                                                               
and he didn't disagree with  those numbers. He thought there were                                                               
enough  variables to  account for  the differences.  At $40,  the                                                               
effective  tax  rate  under  the proposal  is  10.2  percent  and                                                               
historical rates  in earlier charts  indicated the  effective tax                                                               
rate  was about  12  percent corresponding  to  today's real  WTI                                                               
price of $32.                                                                                                                   
                                                                                                                                
He said he  also looked at a sensitivity analysis  of costs being                                                               
20 percent  higher than anticipated.  Briefly, he found  if costs                                                               
go up;  because they are allowed  to be deducted, taxes  would go                                                               
down.                                                                                                                           
                                                                                                                                
5:13:27 PM                                                                                                                    
SENATOR  FRENCH said  that presumes  the 20  percent increase  in                                                               
costs  doesn't necessarily  come with  a 20  percent increase  in                                                               
production.                                                                                                                     
                                                                                                                                
MR. PULLIAM agreed. He was looking  at a down side, but suspected                                                               
that at higher prices, people would  spend more money to find and                                                               
produce  a barrel  of oil.  The  companies would  be making  more                                                               
deductions,  but the  state  would be  making  more revenues  and                                                               
everyone would benefit.                                                                                                         
                                                                                                                                
5:14:36 PM                                                                                                                    
SENATOR  THERRIAULT  supposed if  the  costs  of exploration  and                                                               
producing in the administration's  model were based on historical                                                               
data, but  if the state has  stepped up to a  new price paradigm,                                                               
companies could afford  to look for more expensive  oil. He asked                                                               
if that was what he was trying to capture with the 20 percent.                                                                  
                                                                                                                                
MR. PULLIAM  replied no, he  was just looking at  development and                                                               
operating costs for existing oil,  not exploration costs. He said                                                               
that  Mr. Marks  used a  base  case of  production from  existing                                                               
fields and  assumed $100 million  per year for  exploration costs                                                               
as well. He explained that if  you're out there exploring and not                                                               
finding oil, regardless of the  incentives, you won't continue to                                                               
spend that money. You will spend it  for a while and then it will                                                               
taper off  pretty quickly. This  is one of the  assumptions where                                                               
their analyses did not agree.                                                                                                   
                                                                                                                                
5:18:17 PM                                                                                                                    
He switched  to discussing the  other PPT  of 25/20 that  Dr. Van                                                               
Meurs recommended using  a similar series of charts  that he just                                                               
reviewed  and  then  he  said  he  would  compare  the  two.  The                                                               
effective tax rate  at $54 WTI would be about  16 percent. If the                                                               
figures  were projected  back to  January 2006,  the state  would                                                               
have  received about  $782 million  in  additional revenues.  The                                                               
transition credit  would amount  to about $1.25  billion, because                                                               
of the  higher tax  rate. Just  using the  alternative transition                                                               
credit, that would fall to $375 million.                                                                                        
                                                                                                                                
5:19:53 PM                                                                                                                    
SENATOR THERRIAULT  asked if 35  to 40 percent of  the additional                                                               
$782 million  that accrues to  the state  comes from the  feds on                                                               
Chart 58.                                                                                                                       
                                                                                                                                
MR.  PULLIAM  replied  yes.  He cautioned  them  to  think  about                                                               
fairness  and  that for  every  dollar  the state  collects,  the                                                               
federal government  collects 35 cents  less. It doesn't  all come                                                               
out of the producers side.                                                                                                      
                                                                                                                                
5:20:42 PM                                                                                                                    
SENATOR THERRIAULT  said the  converse is if  the state  wants to                                                               
incent things  with the dollar,  it has  to start out  by pushing                                                               
$1.40 across  the table, because  the federal  government reaches                                                               
in for its share.                                                                                                               
                                                                                                                                
MR. PULLIAM replied that was correct. He clarified:                                                                             
                                                                                                                                
     I'd have to do the math  and see if the $1.40 is right,                                                                    
     but to put a net dollar  in the pocket of the producers                                                                    
     through incentives, you have  to provide more than that                                                                    
     because the feds are going to take their 35 percent.                                                                       
                                                                                                                                
SENATOR  THERRIAULT said  the state  has to  ultimately keep  the                                                               
federal tax consequence in mind, because  it has to dip in deeper                                                               
to push the incentive dollar across the table.                                                                                  
                                                                                                                                
MR. PULLIAM wrapped  up his comments on Slide 59  saying the full                                                               
transition  credit  at  the  25/20 scenario  would  be  about  10                                                               
percent of additional tax collected  over the next 10 years. With                                                               
the alternative,  it drops to  3 percent (additional).  Under the                                                               
20/20 scenario, it would be 13 percent and 4 percent.                                                                           
                                                                                                                                
5:21:40 PM                                                                                                                    
He reminded that  committee that he was looking  at the potential                                                               
impacts  at  different price  levels  and  the break-even  point.                                                               
Slide 60 showed  that at $40, the 25/20 scenario  would result in                                                               
an effective  tax rate  of about 13.6  percent. He  also reminded                                                               
them that this historical rate under  ELF at WTI $32 was about 12                                                               
percent. The breakeven price over the  next 10 years drops to the                                                               
year  2710, about  $1.50  a  barrel lower  than  under the  20/20                                                               
scenario. He cautioned again, that  at very low prices, the 25/20                                                               
would  end  up costing  the  state  money,  relative to  a  20/20                                                               
situation, because it would be subsidizing operations.                                                                          
                                                                                                                                
SENATOR   STEDMAN   asked   if  exploration   would   slow   down                                                               
substantially at lower prices.                                                                                                  
                                                                                                                                
MR.  PULLIAM  replied yes,  but  they  were talking  about  known                                                               
fields and these  projections were built around a  fairly low oil                                                               
price projection.                                                                                                               
                                                                                                                                
SENATOR STEDMAN  pursued asking  at $25 barrel  oil, a  lot fewer                                                               
credits would be created.                                                                                                       
                                                                                                                                
MR.  PULLIAM  replied  yes,  fewer  credits  would  be  generated                                                               
through   exploration  activity   and  development   of  marginal                                                               
properties. The projections are based on a fairly low oil price.                                                                
                                                                                                                                
5:26:18 PM                                                                                                                    
CHAIR WAGONER  asked what affects  the willingness of  a producer                                                               
to spend money on production - the tax rate or the price of oil.                                                                
                                                                                                                                
MR. PULLIAM replied that it's  both. The expected return would be                                                               
a  function of  the prices.  If the  system taxes  the additional                                                               
amount  away,  the  producers  have   no  incentive  to  produce,                                                               
however.                                                                                                                        
                                                                                                                                
5:28:34 PM                                                                                                                    
He referenced the bottom three  lines of Chart 61 which indicated                                                               
the difference between a 25/20 and  a 20/20 is about $450 million                                                               
a year - with  a 16 percent effective tax rate  at 25/20 and 12.4                                                               
percent at 20/20.                                                                                                               
                                                                                                                                
Looking at  the first half  of 2006 on  Slide 62, a  25/20 versus                                                               
20/20, at  $62 WTI (prices they  think will prevail), would  be a                                                               
$305 million difference.                                                                                                        
                                                                                                                                
5:29:43 PM                                                                                                                    
Slide 63 looks  at changes at different price levels.  A 25/20 at                                                               
$40 would bring in $290 million  more than a 20/20. The effective                                                               
tax rate  would be 13.6 percent  as opposed to a  10.2 percent at                                                               
20/20.                                                                                                                          
                                                                                                                                
Slide  64 plots  government take  at different  price levels  and                                                               
different  regimes.  It  shows  that  total  government  take  is                                                               
regressive under  the status quo and  as the price of  oil falls,                                                               
the government  gets a bigger  percentage. Under the  PPT, either                                                               
the 20/20  or the 25/20,  the somewhat progressive nature  of the                                                               
PPT itself  offsets the regressiveness in  the overall government                                                               
take creating a fairly flat line across prices.                                                                                 
                                                                                                                                
5:33:30 PM                                                                                                                    
SENATOR  STEDMAN wondered  about  the  interesting difference  in                                                               
magnitude  between the  state take  on progressive  or regressive                                                               
versus the total government take for the years 2007 to 2016.                                                                    
                                                                                                                                
MR.  PULLIAM responded  that  the  Alaska take  used  to be  more                                                               
dramatic. The  total government  take would  be less,  because in                                                               
part what the state collects, the federal government does not.                                                                  
                                                                                                                                
Slide 65 looks at the change  the state would get in annual taxes                                                               
as a result of  a dollar per barrel increase in  the price of oil                                                               
and what kind of  change it would get as a result  of a change in                                                               
tax rate by 1 percentage  point. He didn't include the transition                                                               
credit.                                                                                                                         
                                                                                                                                
     What you  find...for every  percentage increase  in the                                                                    
     tax rate, at $40, it's  an annual change of $58 million                                                                    
     per year in  taxes. Instead of, at $45,  it's an annual                                                                    
     change of $71 million a year. It's linear....                                                                              
                                                                                                                                
     If you  look at the bolded  line at the bottom  of that                                                                    
     box  that  says  'Change  per dollar  increase  in  WTI                                                                    
     price,'  it doesn't  have to  be WTI...what  that shows                                                                    
     you  is for  any  given tax  rate  what the  additional                                                                    
     revenue collected  under the  PPT is  for a  dollar per                                                                    
     barrel change  in oil prices.  So, at a 20  percent tax                                                                    
     rate  -  given a  dollar  a  barrel oil  change,  given                                                                    
     forecasted volumes  - results  in $52.1 million  a year                                                                    
     in addition over  the status quo. At a  25/20 level, it                                                                    
     would be $65.2 million.                                                                                                    
                                                                                                                                
5:38:21 PM                                                                                                                    
SENATOR BEN STEVENS asked if this  was a change in the production                                                               
tax only, not the royalty tax.                                                                                                  
                                                                                                                                
MR.  PULLIAM replied  yes.  There  wouldn't be  a  change in  the                                                               
royalties,  but  the state  income  tax  would  drop by  about  4                                                               
percent. Changing the credit rate 1  percent - from 20 percent to                                                               
21 percent -  with the same spending level  would reduce revenues                                                               
by $13.6 million a year.                                                                                                        
                                                                                                                                
5:40:25 PM                                                                                                                    
MR. PULLIAM  went back  to Slide  66 and said  the reason  we are                                                               
here is because the severance tax  rate is falling as a result of                                                               
the ELF  and that  fall will  accelerate in  the future.  He went                                                               
through  a series  of  charts  to show  how  the proposals  would                                                               
change that. The  first chart looks at the effective  tax rate as                                                               
a function  of price. The 6.3  percent over the next  10 years is                                                               
not  a function  of price  under  the current  system. Under  the                                                               
20/20  proposal, because  it  allows costs  to  be deducted,  the                                                               
effective tax  rate changes  with the  price of  oil and  goes up                                                               
with  the price.  At 25/20  it  goes up,  but gets  progressively                                                               
flatter. He  explained that  the jog  down graphs  the transition                                                               
credit, which kicks in at $40  ANS West Coast. The 25/20 proposal                                                               
cuts across the  status quo rate at about $27.50  and crosses the                                                               
historical average  at a little more  than $35 a barrel  WTI. The                                                               
transition credit jog is bigger,  because a higher tax rate would                                                               
mean a higher tax credit.                                                                                                       
                                                                                                                                
5:44:57 PM                                                                                                                    
SENATOR STEDMAN said  that Slide 70 shows clearly  that the 20/20                                                               
is progressive and  25/20 is a little more  progressive, but back                                                               
on Slide  64, at a  price of $35.40 to  $72, the 20/20  PPT looks                                                               
like the entire take is a  little regressive from $57.6 to $57.1.                                                               
So, he  concluded that the  20/20 line wasn't  progressive enough                                                               
to make the entire system progressive.                                                                                          
                                                                                                                                
5:46:09 PM                                                                                                                    
Mr. PULLIAM  replied that his  reasoning was correct and  part of                                                               
the reason  was that  the $35.40  and the  $72 are  EIA long-term                                                               
projections, but the  numbers are much closer than  that over the                                                               
next 10 years.                                                                                                                  
                                                                                                                                
5:46:42 PM                                                                                                                    
SENATOR BEN  STEVENS asked if  the historical effective  tax rate                                                               
he talks about incorporate the ELF.                                                                                             
                                                                                                                                
MR. PULLIAM replied yes.                                                                                                        
                                                                                                                                
5:48:18 PM                                                                                                                    
He went  on to  say that  he modeled a  potential variant  with a                                                               
sliding scale feature that would  be progressive to show them how                                                               
it  would work  (Slide  71). Others  could be  used.  One of  the                                                               
assumptions he started with was  that the sliding scale tax would                                                               
be .25 percent per dollar and  his example used $45. If the price                                                               
of WTI  went to $55, the  sliding scale severance tax  would be a                                                               
total of 2.5  percent. The $55 WTI translates into  $47 ANS today                                                               
and he assumed that  this would be added on top  of the 20/20 PPT                                                               
base case. He explained:                                                                                                        
                                                                                                                                
     The key  features of this particular  mechanism is that                                                                    
     it would  be in addition to  the PPT; it would  also be                                                                    
     deductible  from  the  PPT,   just  as  other  upstream                                                                    
     payments   are.   Royalty  payments   are   deductible;                                                                    
     property tax  payments are deductible; this  would also                                                                    
     be  deductible. If  WTI is  less than  or equal  to the                                                                    
     threshold price,  there's no additional tax.  If WTI is                                                                    
     greater than  the threshold  price, the  additional tax                                                                    
     is .25 percent per dollar  over the threshold times the                                                                    
     gross wellhead value....                                                                                                   
                                                                                                                                
     If, for  instance, the WTI  were $55 and  the threshold                                                                    
     were $45,  we'd take  that $10  amount, multiply  it by                                                                    
     .25 percent, which  would give us 2.5  percent. We then                                                                    
     multiply that  by the wellhead  value - $47 -  and then                                                                    
     finally, since  it's deductible against the  PPT, which                                                                    
     is  20 percent,  we  multiply that  whole  thing by  80                                                                    
     percent.  That   results  in  94  cents   a  barrel  in                                                                    
     additional  tax. The  key feature  of this  is that  it                                                                    
     would result in  a higher effective tax  rate at higher                                                                    
     prices - anything over $45.                                                                                                
                                                                                                                                
He illustrated how that would work using the same graph.                                                                        
                                                                                                                                
5:52:31 PM                                                                                                                    
SENATOR STEDMAN  said they had  heard from many people  about how                                                               
the ELF  is broken or  is in need  of modernization and  asked if                                                               
legislators  should  be  using  something that  is  broken  as  a                                                               
benchmark. He wanted to know if it needs repair or not.                                                                         
                                                                                                                                
MR. PULLIAM  replied that is one  of the reasons he  has inserted                                                               
the historical  average. At  least for 19  years of  history, the                                                               
ELF  hasn't been  as  big  problem as  it  has  become. "And  so,                                                               
certainly  looking forward,  if you're  looking at  the projected                                                               
rate, that is [ELF] is clearly broken, broken, broken."                                                                         
                                                                                                                                
Other countries don't have the same  kind of system as the United                                                               
States -  like royalties, severance  and income taxes.  They have                                                               
other systems  that accomplish the  same thing and some  of those                                                               
have progressive features in them.                                                                                              
                                                                                                                                
All  producing states  have some  sort of  severance tax.  Twelve                                                               
percent is  in line  with Louisiana. Some  of the  Rocky Mountain                                                               
states are  in the 15 percent  range; Texas is 4.6  percent. None                                                               
of them allow deductions and have  credits in a way that is being                                                               
proposed  here. This  system will  put Alaska  much more  in line                                                               
with foreign systems as opposed  to any other state government in                                                               
the U.S.  "So, when you're  thinking about benchmarking  in terms                                                               
of the severance tax rate, itself,  I think that's why people get                                                               
drawn into looking at other foreign systems."                                                                                   
                                                                                                                                
5:56:59 PM                                                                                                                    
MR. PULLIAM looked at another  alternative. If they decided a .25                                                               
percent slope  wasn't enough,  they could make  it higher  - say,                                                               
.35 percent. The effect of that  would increase the tax rate; for                                                               
every $10  over the  threshold $45  price, you  would have  a .35                                                               
percent tax  rate. "So, if  WTI were  $55, the sliding  scale tax                                                               
would be  3.5 percent. If  WTI jumped  to $65, the  sliding scale                                                               
would jump  to 7  percent, et  cetera." He  said they  could also                                                               
decide to start  the threshold at a lower  price. The legislature                                                               
could basically work  with the two variables to  create the slope                                                               
it wanted.                                                                                                                      
                                                                                                                                
6:03:34 PM                                                                                                                    
SENATOR STEDMAN observed  that going from a  regressive system to                                                               
a  flat  system, as  this  one  does,  and  then making  it  more                                                               
progressive  - at  some  point  the line  gets  so steep  there's                                                               
virtually  no upside  for the  fellow on  the other  side of  the                                                               
table.                                                                                                                          
                                                                                                                                
6:04:41 PM                                                                                                                    
MR. PULLIAM  responded that analysis  was correct, but  there are                                                               
ways  to deal  with  that. He  suggested maybe  capping  it at  a                                                               
certain  price  level  or  flattening  it  out  by  changing  the                                                               
increment with price changes. At  higher prices, after costs have                                                               
been recovered,  there is more  profit to  divvy up. You  want to                                                               
leave a  healthy amount for  people taking the risk.  However, he                                                               
emphasized that  the state is  taking a big  part of the  risk by                                                               
covering  the costs  of  production and  giving  credits for  any                                                               
capital expenditure.                                                                                                            
                                                                                                                                
6:05:58 PM                                                                                                                    
SENATOR STEDMAN  asked what he thought  was fair at the  high end                                                               
of oil prices.                                                                                                                  
                                                                                                                                
MR.  PULLIAM  responded by  referencing  Chart  77 on  government                                                               
take. It  indicated that  at $80  a barrel,  the state  would get                                                               
64.5 percent. That would have  to be compared to other countries'                                                               
take at those prices levels.                                                                                                    
                                                                                                                                
6:08:29 PM                                                                                                                    
SENATOR  STEDMAN  asked what  Alaska  had  to  do to  maintain  a                                                               
competitive advantage against other countries at 20/20.                                                                         
                                                                                                                                
MR.  PULLIAM replied  that  everything he  has  shown would  keep                                                               
Alaska in the competitive range.                                                                                                
                                                                                                                                
DR. FINIZZA  agreed and  said it  would behoove  the state  to be                                                               
better than average so it could attract capital.                                                                                
                                                                                                                                
CHAIR WAGONER  thanked everyone for their  comments and adjourned                                                               
the meeting at 6:11:16 PM.                                                                                                    
                                                                                                                                
                                                                                                                                

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