Legislature(2005 - 2006)BUTROVICH 205

03/14/2006 03:30 PM RESOURCES


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03:35:25 PM Start
03:44:52 PM SB305
05:07:25 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> --
Continuation of Presentation by Econ 1
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                         March 14, 2006                                                                                         
                           3:35 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 Gretchen Guess                                                                                                          
Senator Gene Therriault                                                                                                         
Senator Hollis French                                                                                                           
Senator Lyda Green                                                                                                              
                                                                                                                                
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                                                                           
03/13/06       (S)       Heard & Held                                                                                           
03/13/06       (S)       MINUTE(RES)                                                                                            
03/14/06       (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: Answered questions relative to Econ One                                                                   
presentation on 3/13/06 regarding SB 305.                                                                                       
                                                                                                                                
DR. TONY FINIZZA                                                                                                                
Econ One Research, Inc.                                                                                                         
Suite 2825                                                                                                                      
Three Allen Center                                                                                                              
333 Clay Street                                                                                                                 
Houston, TX  77002                                                                                                              
POSITION STATEMENT: Answered questions relative to Econ One                                                                   
presentation on 3/13/06 regarding SB 305.                                                                                       
                                                                                                                                
OTHER MEMBERS PRESENT                                                                                                         
                                                                                                                                
Senator Gretchen Guess                                                                                                          
Senator Gene Therriault                                                                                                         
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR  THOMAS  WAGONER  called   the  Senate  Resources  Standing                                                             
Committee meeting to order at 3:35:25  PM. Present at the call to                                                             
order were Senators Stedman, Seekins, Elton and Chair Wagoner.                                                                  
                                                                                                                                
               SB 305-OIL AND GAS PRODUCTION TAX                                                                              
                                                                                                                              
CHAIR  THOMAS   WAGONER  said  they   would  finish   Econ  One's                                                               
presentation [that began yesterday] with questions.                                                                             
                                                                                                                                
BARRY PULLIAM,  Econ One Research,  Inc., said that Slide  76 was                                                               
reformatted   to  make   it  more   understandable.  The   yellow                                                               
highlights showed  the effective tax  rates under either  a 20/20                                                               
or a 25/20  plan. The pricing goes in $10  dollar increments from                                                               
$30 WTI to  $80 WTI. The next  chart was in the  same format, but                                                               
instead  of  showing  the  effective  tax  rate,  it  showed  the                                                               
government take  statistics. The next slide  showed the effective                                                               
tax rate as a function  of price. These calculations included the                                                               
6-year transition and the $73 million exemption.                                                                                
                                                                                                                                
3:44:52 PM                                                                                                                    
SENATOR STEDMAN said  in its presentations several  days ago, the                                                               
industry used a base price trend  starting at $30, going up about                                                               
2 percent  a year, for  its forecasting and modeling.  He thought                                                               
the  legislature had  to decide  what  trigger point  to use,  as                                                               
well, regardless  of whether it was  25/20 or 20/20. He  asked if                                                               
$30  was  a  relatively  low   trigger  price  and  a  $50  price                                                               
relatively high.                                                                                                                
                                                                                                                                
3:45:00 PM                                                                                                                    
SENATORS FRED DYSON AND BEN STEVENS arrived.                                                                                    
                                                                                                                                
3:45:23 PM                                                                                                                    
MR. PULLIAM  replied that was  a good  range in general,  but the                                                               
trigger price  also depends  on where the  base tax  rate starts.                                                               
For instance, the  threshold would start at a lower  point with a                                                               
20/20 trigger point than if it were at 25/20.                                                                                   
                                                                                                                                
SENATOR STEDMAN  said that one of  the legislature's consultants,                                                               
Daniel  Johnston, discussed  using a  tide-water comparison  in a                                                               
previous  presentation to  benchmark  Alaska against  competitors                                                               
around  the world  and that  could  be done  a couple  of ways  -                                                               
comparing  it to  Alaska's  historical ELF  average  or to  world                                                               
averages.  The  tidewater  analysis  basically  moved  the  total                                                               
government take  up by about 7  percent. He asked him  to explain                                                               
factoring that in  so the state doesn't  put itself inadvertently                                                               
at an economic disadvantage.                                                                                                    
                                                                                                                                
MR. PULLIAM  replied that he  understood Mr.  Johnston's analysis                                                               
and explained that Econ One's  government take calculation looked                                                               
at the  percentage of divisible  income that each of  the parties                                                               
get  -  in other  words,  what  is  left  over after  costs.  The                                                               
calculations he  used today were  based on a  well-head valuation                                                               
with costs of production subtracted.                                                                                            
                                                                                                                                
In  adding the  variant  of "tidewater  take,"  Mr. Johnston  was                                                               
trying to  adjust for the  fact that ANS,  unlike a lot  of other                                                               
crudes, is produced a long way  from the market that it gets sold                                                               
in. He  was trying to bring  oil to the  point of sale and  so he                                                               
suggested adding on costs of  shipping to the well-head value. It                                                               
puts the  government take for ANS  on the same basis  with crudes                                                               
worldwide.                                                                                                                      
                                                                                                                                
He said  that Econ One's  figures don't make that  adjustment and                                                               
so, for that increment, he  decided to move the oil, essentially,                                                               
to Valdez, which  is the load port. Using that  adjustment, the 7                                                               
percent is  not that high. It  also varies with price.  At $30 it                                                               
would be  about 7.5 percent; at  $40 the difference reduces  to 5                                                               
percent; at $50 it goes down to  3.5 percent; at $60 it goes to 3                                                               
percent; at $70 it  goes to 2.5 percent; and at $80  it goes to 2                                                               
percent.                                                                                                                        
                                                                                                                                
3:52:40 PM                                                                                                                    
SENATOR STEDMAN asked  if he thought comparing Alaska  oil to the                                                               
oil in the rest of the world was relevant.                                                                                      
                                                                                                                                
MR.  FINIZZA replied  that  the government  takes  listed in  his                                                               
chart  were doable  compared to  competition in  the rest  of the                                                               
world.                                                                                                                          
                                                                                                                                
MR.  PULLIAM added  that government  take  is a  measure of  what                                                               
return  will look  like  area to  area, but  it's  not the  whole                                                               
picture. It doesn't measure political risk, for instance.                                                                       
                                                                                                                                
3:56:22 PM                                                                                                                    
SENATOR GUESS asked for the cost assumptions made in the model.                                                                 
                                                                                                                                
MR. PULLIAM  replied that for  a starting point, Econ  One looked                                                               
at  DOR's cost  assumptions and  assumptions from  other sources,                                                               
which  caused  him  to  modify  DOR's  assumptions  somewhat.  He                                                               
brought  more costs  forward into  the  first 10  years than  Mr.                                                               
Johnston did.  This was  largely to account  for fields  that are                                                               
under development  and will be  coming on  in the next  10 years.                                                               
Most  of the  development costs  are upfront,  after which  would                                                               
follow ongoing costs of operation and capital.                                                                                  
                                                                                                                                
Econ One started with an  assumption about pricing downstream WTI                                                               
(West Texas  Intermediate). They  assumed that ANS  (Alaska North                                                               
Slope) traded  for $2 a  barrel below WTI  and that ANS  would be                                                               
placed  on  the  West  Coast.  They  backed  that  off  from  the                                                               
estimated DOR  transportation costs  of just  under $2  a barrel.                                                               
From that  they backed  off estimated TAPS  tariffs based  on the                                                               
volume  estimates for  the throughput.  The TAPS  tariffs are  in                                                               
place now  and DOR  projected them to  change downward  after the                                                               
TAPS settlement  agreement expires  in 2009. Upstream,  costs for                                                               
operations  were also  backed off.  Those  were $3  a barrel  for                                                               
large fields and,  he inserted, all of the costs  were grown over                                                               
time  for  inflation. For  smaller  fields  and heavier  oil,  he                                                               
assumed costs were  $5 a barrel. Costs for  ongoing production on                                                               
the North  Slope in the larger  fields was assumed to  be $3.50 a                                                               
barrel and for the heavy oil fields, $8 a barrel.                                                                               
                                                                                                                                
SENATOR GUESS asked  if this model had no  costs for exploration,                                                               
development or production of gas.                                                                                               
                                                                                                                                
MR. PULLIAM replied  that was correct, although the  DOR had four                                                               
different volume scenarios;  two of them assumed  the gasline was                                                               
developed and two  of them did not. In the  ones that assumed the                                                               
gasline  was  developed, the  department  put  in the  additional                                                               
costs associated with Pt. Thomson  and, after 2030, of developing                                                               
gas resources outside of Prudhoe Bay and Pt. Thomson.                                                                           
                                                                                                                                
4:01:23 PM                                                                                                                    
SENATOR STEDMAN asked if Slide 77  could be narrowed from 2007 to                                                               
2016.                                                                                                                           
                                                                                                                                
MR. PULLIAM replied that could be done.                                                                                         
                                                                                                                                
4:02:44 PM                                                                                                                    
SENATOR  THERRIAULT asked  if Econ  One moved  what Mr.  Johnston                                                               
used for tidewater into the governmental take side.                                                                             
                                                                                                                                
MR. PULLIAM  replied yes. It was  included as a part  of revenue,                                                               
because  at the  wellhead, oil  is not  as valuable  as it  is at                                                               
tidewater or at  the point of loading. That  more closely matches                                                               
ANS with  world crudes. But,  he clarified, if the  producer owns                                                               
the transportation asset, that should be taken into account.                                                                    
                                                                                                                                
SENATOR  THERRIAULT   said  TAPS   is  fairly  generous   to  the                                                               
producers.                                                                                                                      
                                                                                                                                
MR. PULLIAM  responded that the  issue is when the  producer owns                                                               
the transportation  asset and is earning  a profit on it.  If the                                                               
profit is  earned is in excess  of a competitive rate  - what the                                                               
market would  allow - then one  should take that into  account in                                                               
the analysis. That is an issue in the current settlement.                                                                       
                                                                                                                                
SENATOR THERRIAULT  said he wanted  to make  sure he had  not put                                                               
that profit for operation of  the transportation system back into                                                               
the producers' side.  That would get complex and  he didn't think                                                               
it was necessary to run the exercise.                                                                                           
                                                                                                                                
MR. PULLIAM assured him that they hadn't attempted to do that.                                                                  
                                                                                                                                
SENATOR THERRIAULT referenced  a conclusion regarding exploration                                                               
impacts on  page 26 from yesterday  saying that at low  prices, a                                                               
25/20 plan helps explorers more than  a 20/20. He wondered if, in                                                               
a  low-price scenario,  it  makes sense  to have  the  tax at  25                                                               
percent  and  if  there  would  actually be  more  risk  for  the                                                               
government considering all the variables.  He obviously wanted to                                                               
control the  downside risk for the  state and going to  a minimum                                                               
tax  mechanism to  protect the  downside to  the state  was being                                                               
considered.                                                                                                                     
                                                                                                                                
MR. FINIZZA responded that the  producer is better off with 25/20                                                               
because the  government shares the  negatives that are  likely at                                                               
low prices.  To lower government  risk, he advised  starting with                                                               
the 20/20 combination.  If they want the 25/20 at  a higher price                                                               
level,  they could  simulate  that with  the  sliding scales.  He                                                               
emphasized  that it's  precisely  at low  prices  that the  state                                                               
should  help the  explorer and  he didn't  think taking  away the                                                               
credit at  lower prices was a  good idea. He wanted  the state to                                                               
recognize the importance of striking the right balance.                                                                         
                                                                                                                                
4:09:34 PM                                                                                                                    
SENATOR  ELTON followed  up on  Senator Therriault's  question by                                                               
asking what happens  to incentives for exploration  at 20/20 with                                                               
progressivity added.                                                                                                            
                                                                                                                                
MR.  FINIZZA replied  that progressivity  would start  at a  much                                                               
higher threshold  level -  most of them  are centered  around $45                                                               
and higher.                                                                                                                     
                                                                                                                                
4:10:47 PM                                                                                                                    
CHAIR WAGONER asked what would happened  if you take away the $73                                                               
million at  low prices and  increased the credits to  30 percent.                                                               
Would that create a robust climate for explorers?                                                                               
                                                                                                                                
MR.  FINIZZA replied  yes,  but  he didn't  know  what the  right                                                               
credit number  would be. The state  runs the same risk  of paying                                                               
the bill if exploration doesn't pay off.                                                                                        
                                                                                                                                
MR. PULLIAM  added that in  considering raising the credit  to 30                                                               
percent,  it is  important to  remember  that it  applies to  all                                                               
capital invested. So,  a relatively small amount  of that capital                                                               
is  exploration;  most of  the  capital  they are  talking  about                                                               
regardless  of  how  much  exploration the  state  gets,  is  for                                                               
continuing   development  in   the   larger  fields.   Currently,                                                               
exploration is one-twelfth of development  dollars for the larger                                                               
fields.                                                                                                                         
                                                                                                                                
4:12:44 PM                                                                                                                    
SENATOR FRENCH said  he was concerned that they  were designing a                                                               
system that  would drop  taxes at  low prices  and that  may mean                                                               
something different to an explorer  than a producer or the state.                                                               
He asked what the breakeven point was for the producers.                                                                        
                                                                                                                                
MR.  PULLIAM  replied  that  it   was  fairly  low  for  existing                                                               
production. The  big issue  on the North  Slope is  separation of                                                               
water and  gas from the oil  and the gas/oil and  water/oil ratio                                                               
has risen  dramatically over  time. Just dealing  with that  is a                                                               
big  part of  the operation.  To  continue getting  the oil  out,                                                               
companies have to continue to invest capital.                                                                                   
                                                                                                                                
SENATOR  FRENCH asked  if  fields  on the  North  Slope would  be                                                               
profitable somewhere below $20.                                                                                                 
                                                                                                                                
MR.  PULLIAM replied  some of  them would.  That low  of a  price                                                               
would stimulate the flow to where it is currently projected.                                                                    
                                                                                                                                
SENATOR FRENCH asked if fields are profitable north of $20.                                                                     
                                                                                                                                
MR.  PULLIAM replied  yes; forecasts  indicate  that Prudhoe  Bay                                                               
would shut down at a $23 price for oil.                                                                                         
                                                                                                                                
4:16:45 PM                                                                                                                    
SENATOR  THERRIAULT   said  he   has  heard  concerns   from  his                                                               
colleagues  that  allowing  everyone the  $73  million  allowance                                                               
might result in an unnecessary  windfall for the major producers.                                                               
Majors could move through it very  quickly and maybe it should be                                                               
limited to barrels of production.                                                                                               
                                                                                                                                
MR.  PULLIAM  responded  that  it's   possible  the  $73  million                                                               
allowance might  incent too many  companies and they  might think                                                               
about linking  it to production of  first barrels out of  a field                                                               
instead of to  the companies. He suggested giving  the credits to                                                               
the companies upfront would benefit exploration more.                                                                           
                                                                                                                                
4:21:18 PM                                                                                                                    
SENATOR THERRIAULT asked  him to expand on linking  the credit to                                                               
the field instead of to the companies.                                                                                          
                                                                                                                                
MR.  PULLIAM  said  that  often   companies  partner  with  other                                                               
companies  and the  $73 million  allowance would  encourage that,                                                               
but tying the  allowance to new production would  eliminate a lot                                                               
of it.                                                                                                                          
                                                                                                                                
SENATOR  THERRIAULT  asked  if  it  was  workable  to  limit  the                                                               
allowance to companies based on total volume in state.                                                                          
                                                                                                                                
MR. PULLIAM replied that he thought  it was. As long as it's tied                                                               
to volume the state has more  certainty about what the value will                                                               
be. If  it's tied to  the company, the  state loses some  of that                                                               
certainty.  The   assumption  now  is  that   the  equivalent  of                                                               
approximately  seven companies  would  qualify.  The $73  million                                                               
exemption  is worth  $14.6  million in  tax per  year  at the  20                                                               
percent rate, so as more companies  come in, the state would have                                                               
higher total  deductions. If the  allowance were tied  to volume,                                                               
that wouldn't happen.                                                                                                           
                                                                                                                                
4:24:26 PM                                                                                                                    
CHAIR  WAGONER asked  if the  allowance could  be tied  to volume                                                               
versus exploration.                                                                                                             
                                                                                                                                
MR. PULLIAM  replied that the  state is already giving  credit on                                                               
exploration and that  could be raised in lieu of  the $73 million                                                               
allowance.  But the  difference is  that  you don't  get the  $73                                                               
million until  oil starts to  come on line. He  suggested instead                                                               
of  making it  a dollar  amount, making  it a  volume amount.  It                                                               
could  be initial  volume  out of  a field,  which  would give  a                                                               
bigger economic  boost to exploration  and development.  It could                                                               
also be done by using a specific  volume per year coming out of a                                                               
field.   Giving  the   credit  upfront   boosts  the   producers'                                                               
economics;  but  at a  cost  to  the  state, which  would  forego                                                               
revenues early on.                                                                                                              
                                                                                                                                
4:26:42 PM                                                                                                                    
CHAIR  WAGONER said  if the  allowance  is based  on volume,  the                                                               
limit would  either be driven  by a maximum allowable  barrels of                                                               
oil  or a  maximum allowable  barrels of  oil and  a figure  that                                                               
defines the ceiling, because of fluctuations in prices.                                                                         
                                                                                                                                
MR. PULLIAM agreed  and added that it could float  with the price                                                               
of oil  and so the  value of that  exemption would change  as the                                                               
price changes.  Another way  is to  deem what  the value  of that                                                               
production is for purposes of this particular credit.                                                                           
                                                                                                                                
SENATOR  THERRIAULT  asked  if  his modeling  in  Section  20  on                                                               
valuation  methodologies  had  the   sophistication  to  run  the                                                               
impacts of the different valuation methodologies.                                                                               
                                                                                                                                
MR. PULLIAM  replied yes.  He noted  that the  royalty settlement                                                               
agreements are valuation  mechanisms that rose out  of a contract                                                               
between  the producers  and the  state. Periodically  the parties                                                               
can renegotiate them if they are  unhappy and that has been done.                                                               
If they  can't agree, the case  is taken to an  arbitration panel                                                               
and  most recently  the  state  has been  in  arbitration with  a                                                               
producer over a deduction.                                                                                                      
                                                                                                                                
He explained that currently, RSAs  cover one-half of the royalty;                                                               
the other  half of royalty  barrels the  state takes in  kind and                                                               
sells and those are not subject  to RSAs. RSAs cover a quarter of                                                               
the value  of what  the state  gets and if  the state  uses those                                                               
RSAs  to  determine  its  tax values,  they  will  govern  three-                                                               
quarters of the value  it gets.  Some think that  is a good thing                                                               
-  more efficient,  less auditors,  less  fighting about  things.                                                               
But, he advised  using caution in doing that  because there would                                                               
be more  oil at stake and  both the state and  producers would be                                                               
looking at it  more closely. They may end  up having negotiations                                                               
more often - and ending in arbitration more often.                                                                              
                                                                                                                                
4:32:18 PM                                                                                                                    
SENATOR THERRIAULT  said he appreciated  his note of  caution and                                                               
that's why he wanted  the tools from him while he  was in town to                                                               
quantify what amounts are potentially in play.                                                                                  
                                                                                                                                
4:33:01 PM                                                                                                                    
SENATOR STEDMAN  said he  was thinking along  the same  lines and                                                               
wanted the dollars  by volume broken down into  state take versus                                                               
everybody else.                                                                                                                 
                                                                                                                                
SENATOR ELTON said  that Mr. Pulliam seemed to  suggest that they                                                               
may  be creating  an  incentive to  challenge  royalty values  in                                                               
Section 20  and he  asked him  to include  a short  discussion on                                                               
that.                                                                                                                           
                                                                                                                                
MR. PULLIAM responded  that he didn't know how  to quantify that.                                                               
He could say, though, "You are  incenting them and I would expect                                                               
to see more frequent attempts  to renegotiate those values." Each                                                               
of the  agreements is  governed today by  a reopener  provision -                                                               
some of them go year by year and some are three years long.                                                                     
                                                                                                                                
4:35:40 PM                                                                                                                    
SENATOR BEN STEVENS  said he found this discussion  on Section 20                                                               
fascinating because  he remembers receiving cautionary  advice on                                                               
the valuation  method for royalty settlement  agreements from the                                                               
legislative  consultants,  Ms.  Robson,  Mr. Eason  and  now  Mr.                                                               
Pulliam,  who  all developed  and  agreed  to royalty  settlement                                                               
agreements.                                                                                                                     
                                                                                                                                
4:36:53 PM                                                                                                                    
SENATOR THERRIAULT  said it's because  they know it's an  area of                                                               
disagreement  that he  wanted to  know what  type of  dollars the                                                               
state would likely be arguing about.                                                                                            
                                                                                                                                
CHAIR WAGONER said it was about 42 cents a barrel.                                                                              
                                                                                                                                
MR. PULLIAM  said he hadn't  worked on the  settlement agreement;                                                               
but as  part of  the reopener  process, he  advised the  state on                                                               
evaluation  methodologies. The  commissioner  has  the option  of                                                               
looking at  the agreements for  valuations. If it moved  from the                                                               
option to look at valuations to  the requirement to look at them,                                                               
that should be carefully looked at.                                                                                             
                                                                                                                                
4:39:20 PM                                                                                                                    
SENATOR THERRIAULT said  he wanted to know what kind  of money is                                                               
at play with different valuation methodologies.                                                                                 
                                                                                                                                
MR. PULLIAM replied  that he didn't have the  information to look                                                               
at additional methodologies  right now, but said he  would get it                                                               
for them.                                                                                                                       
                                                                                                                                
SENATOR   THERRIAULT   referenced    page   27   of   yesterday's                                                               
presentation that  talked about the timeline  for exploration and                                                               
development and production.  It indicated that Alaska  has a long                                                               
lead-time and companies have a lot  of capital tied up before oil                                                               
finally flows.  But, the allowance  of credits in the  PPT allows                                                               
immediate recoupments and  that has changed the  economics of the                                                               
lead-time fairly dramatically, because the  state is picking up a                                                               
lot of those dollars.                                                                                                           
                                                                                                                                
MR. FINIZZA replied  yes and he supported that  by illustrating a                                                               
positive cash flow chart using the PPT.                                                                                         
                                                                                                                                
4:44:06 PM                                                                                                                    
SENATOR THERRIAULT asked  how the PPT would  affect the economics                                                               
of the gas line.                                                                                                                
                                                                                                                                
MR.  PULLIAM replied  that  it would  have  a positive  influence                                                               
because it  allows capital costs for  exploration and development                                                               
to be deducted immediately.                                                                                                     
                                                                                                                                
4:45:53 PM                                                                                                                    
SENATOR BEN STEVENS  commented that Econ One has  showed what the                                                               
risk to the state treasury is  on the downside. Charts 16, 17, 18                                                               
were  forward-looking projections  from  individuals  who have  a                                                               
great deal more  foresight into the future price of  oil, and all                                                               
but one  of them  were over-projections. So,  as the  state makes                                                               
its projections  on future  impacts based  on current  prices, he                                                               
remembers that after every cresting  wave there is a deep trough.                                                               
He  continually thinks  about the  fact that  the state  is in  a                                                               
short-term harvest  mechanism in  trying to  grab more  money off                                                               
the table at today's rates but  he asked them to think about what                                                               
that would do to the state  treasury when prices were down at the                                                               
other end  of the spectrum.  He said, "At  some point we  need to                                                               
keep  in  mind that  charts  like  that come  from  international                                                               
energy agencies -  to know that we're going to  be wrong and we'd                                                               
better be  wrong on the safe  side." He then thanked  Mr. Pulliam                                                               
and Mr. Finizza for their useful information.                                                                                   
                                                                                                                                
4:49:52 PM                                                                                                                    
SENATOR STEDMAN said  he thought it was a  mistake to concentrate                                                               
on  total dollars  and  he  would rather  focus  on getting  more                                                               
volume down the pipe.                                                                                                           
                                                                                                                                
SENATOR THERRIAULT  agreed and said  that the current  system has                                                               
no price  sensitivity on the upside.  He has said on  a number of                                                               
occasions that  no matter what  mechanism the  legislature picks,                                                               
the system  takes care of  itself on  the downside. The  State of                                                               
Alaska is  not interested in seeing  the oil industry dry  up and                                                               
blow away within its borders.                                                                                                   
                                                                                                                                
     The industry will  vote with its dollars.  And since we                                                                    
     are  not interested  in seeing  the industry  leave our                                                                    
     borders,   we'll  be   back  at   the  table   to  make                                                                    
     adjustments.  There's an  automatic  protection on  the                                                                    
      downside, because it's in nobody's interest to have                                                                       
     the industry go away.                                                                                                      
                                                                                                                                
4:53:49 PM                                                                                                                    
SENATOR STEDMAN asked how tight  the government take numbers were                                                               
on Slide 77.                                                                                                                    
                                                                                                                                
4:55:38 PM                                                                                                                    
MR.  PULLIAM  replied  that  pricing   and  volume  are  the  big                                                               
assumptions.  The costs  are deducted  and as  long as  those are                                                               
reasonably  modeled, that  defines the  pie. Under  the PPT,  the                                                               
state will  know what  it's getting  without much  variation. The                                                               
size of the pie  would change if they were far  off on the costs,                                                               
but he thought the numbers were fairly tight.                                                                                   
                                                                                                                                
MR. FINIZZA reminded  them that they were  talking about changing                                                               
only  a piece  of  the state's  revenue system  to  make it  more                                                               
progressive. All the other pieces  were generally regressive. So,                                                               
there is very  little hope to change the  government take numbers                                                               
very much by changing the "tail."                                                                                               
                                                                                                                                
4:56:21 PM                                                                                                                    
SENATOR BEN  STEVENS said  he found it  fascinating that  he said                                                               
the severance  adjustments would have  a minimal impact  on total                                                               
government take because of the other three components.                                                                          
                                                                                                                                
MR. FINIZZA replied yes and that  was evidenced by his chart. The                                                               
major components  of the state's  revenues are  royalty, property                                                               
tax, state income  tax and federal tax. Only the  PPT is going to                                                               
be progressive as prices go up.                                                                                                 
                                                                                                                                
SENATOR BEN STEVENS reiterated:                                                                                                 
                                                                                                                                
     The point  that struck  the tune was  the fact  that we                                                                    
     really  have little  impact on,  unless  we have  major                                                                    
     substantive change  that has  to do with  property tax,                                                                    
     corporate   tax    and   royalty    modifications,   to                                                                    
     significantly alter  that government take, in  terms of                                                                    
     the state's take of that piece.                                                                                            
                                                                                                                                
MR. PULLIAM agreed  and added that whatever the  state takes, the                                                               
federal government gets less.                                                                                                   
                                                                                                                                
5:00:46 PM                                                                                                                    
SENATOR FRENCH  asked if a  too aggressive PPT would  scuttle the                                                               
gasline deal.                                                                                                                   
                                                                                                                                
MR.  PULLIAM   replied  that   he  didn't   think  there   was  a                                                               
relationship between  the oil  tax rate, once  it's set,  and the                                                               
decision on  gas, but  he asserted the  credits would  impact the                                                               
gasline  project. However,  if the  state did  something onerous,                                                               
like pulling  every last dime  off the  table it could,  it might                                                               
still have  a project  that is  economic on  its own,  but people                                                               
might be more concerned about having the state a partner.                                                                       
                                                                                                                                
SENATOR  FRENCH  asked  if  any  of  the  scenarios  would  drive                                                               
companies away from the gasline project.                                                                                        
                                                                                                                                
MR. PULLIAM replied that he didn't  think either the 20/20 or the                                                               
25/20  would drive  them  away from  an  economic standpoint.  He                                                               
didn't know  about 30/20; that  might sour someone in  general on                                                               
doing business in Alaska.                                                                                                       
                                                                                                                                
MR. FINIZZA concurred.                                                                                                          
                                                                                                                                
SENATOR  THERRIAULT  asked  if that  was  partially  because  the                                                               
credits allowed for  gas could be charged against  the income for                                                               
oil that is allowed under the PPT.                                                                                              
                                                                                                                                
5:06:20 PM                                                                                                                    
SENATOR  BEN STEVENS  interrupted to  say that  they are  talking                                                               
about issues that are purely  speculation. They are talking about                                                               
issues that are in the contract that they haven't seen yet.                                                                     
                                                                                                                                
CHAIR WAGONER agreed and adjourned the meeting at 5:07:25 PM.                                                                 

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