Legislature(2005 - 2006)BUTROVICH 205

03/15/2006 03:30 PM RESOURCES

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03:37:18 PM Start
03:37:18 PM SB305
03:39:03 PM Department of Revenue - Roger Marks, Dan Dickinson, Cheri Nienhuis, Robert Mintz from the Department of Law – Question and Answer
04:09:02 PM Department of Revenue - Roger Marks and Cheri Nienhuis
05:10:10 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
Administration - Final Questions and
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                         March 15, 2006                                                                                         
                           3:37 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 Gene Therriault                                                                                                         
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                                                                           
03/14/06       (S)       Heard & Held                                                                                           
03/14/06       (S)       MINUTE(RES)                                                                                            
03/15/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
WITNESS REGISTER                                                                                                              
SHARON NIENHUIS, Petroleum Economist                                                                                            
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT: Commented on SB 305.                                                                                      
ROGER MARKS, Economist                                                                                                          
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT: Commented on SB 305.                                                                                      
DAN DICKINSON, CPA                                                                                                              
Consultant to the Governor                                                                                                      
Office of the Governor                                                                                                          
PO Box 110001                                                                                                                   
Juneau, AK  998811-0001                                                                                                         
POSITION STATEMENT: Commented on SB 305.                                                                                      
ROBERT MINTZ, Assistant Attorney General                                                                                        
Department of Law                                                                                                               
PO Box 110300                                                                                                                   
Juneau, AK  99811-0300                                                                                                          
POSITION STATEMENT: Commented on SB 305.                                                                                      
ROBYNN WILSON, Director                                                                                                         
Tax Division                                                                                                                    
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT: Commented on SB 305.                                                                                      
ACTION NARRATIVE                                                                                                              
CHAIR  THOMAS  WAGONER  called   the  Senate  Resources  Standing                                                             
Committee meeting to  order at 3:37:18 PM.  Present were Senators                                                             
Elton, Dyson, Stedman,  Ben Stevens and Chair  Thomas Wagoner. He                                                               
announced  that they  would hear  the final  presentation on  the                                                               
questions the legislature asked the administration on SB 305.                                                                   
               SB 305-OIL AND GAS PRODUCTION TAX                                                                              
3:37:18 PM                                                                                                                  
CHAIR THOMAS WAGONER announced SB  305 to be up for consideration                                                               
and  that Dan  Dickinson  and Cheri  Nienhuis  would address  the                                                               
committee's questions to the administration.                                                                                    
^Department  of  Revenue  - Roger  Marks,  Dan  Dickinson,  Cheri                                                             
Nienhuis, Robert Mintz from the  Department of Law - Question and                                                             
DAN DICKINSON, CPA, Consultant to  the Governor, said that Robert                                                               
Mintz,  Assistant Attorney  General,  Sharon Nienhuis,  Petroleum                                                               
Economist,  Department of  Revenue, and  Roger Marks,  Economist,                                                               
Department  of  Revenue  would assist  in  the  presentation.  He                                                               
recapped  that a  lot  of the  answers to  the  91 questions  had                                                               
already  been  answered.  Twenty  are remaining  to  be  answered                                                               
today.  He  jumped  in  at  question  22.  [The  answers  to  the                                                               
questions  correspond to  the Department  of Revenue's  letter to                                                               
Senator  Wagoner,  Chairman,   Senate  Resources  Committee,  and                                                               
Representatives Samuels and  Ramras, Co-chairmen, House Resources                                                               
Committee, dated  March 15, 2006.  The answers are  indented, but                                                               
not necessarily verbatim, for this document.]                                                                                   
3:39:03 PM                                                                                                                    
22.  Please provide an  identification of the point of production                                                               
at each unit  in the state under  existing statutes, regulations,                                                               
agreements,  and  court decisions.  Provide  the  same under  the                                                               
definition as proposed.                                                                                                         
     He  answered  the point  of  production  for crude  oil                                                                    
     would not  change under the  proposal and  would remain                                                                    
     the point  where the oil  is first metered  or measured                                                                    
     in a condition of  pipeline quality. (Note that certain                                                                    
     oil used on  the lease will no longer  be taxable under                                                                    
     the proposed production tax reforms,  but that is not a                                                                    
     point of production issue.) As  examples, the points of                                                                    
     production  for oil  are and  will be  the LACT  (lease                                                                    
     automatic  custody transfer)  meters at  the inlets  to                                                                    
     TAPS (for  Prudhoe Bay) and  the Kuparuk  Pipeline (for                                                                    
     Kuparuk), and at the  onshore production facilities for                                                                    
     the Cook Inlet platforms.                                                                                                  
     What  will  change, in  some  cases,  is the  point  of                                                                    
     production  for some  gas. At  Prudhoe  Bay, while  the                                                                    
     current point of  production for most gas  is the inlet                                                                    
     to  the Central  Gas  Facility (CGF),  there are  other                                                                    
     potential points of production  for other gas uses. For                                                                    
     example,  in the  separation facilities,  gas is  taken                                                                    
     right  out  of  the  flow stream  and  burned  in  that                                                                    
     facility  (however this  gas is  not taxable  under the                                                                    
     free use of gas rules).                                                                                                    
     For taxable gas, the inlet  to the CGF is generally the                                                                    
     point of production  for all gas that  emerges from the                                                                    
     CGF, including  the NGLs that  are recovered  in liquid                                                                    
     form. This  compares to  other gas  plants that  are or                                                                    
     have   been  operating   at   Kuparuk,  Endicott,   and                                                                    
     Lisburne.   For   these   facilities,  the   point   of                                                                    
     production  for gas  under current  law  is the  outlet                                                                    
     where the  facility is  tied to a  sales or  other line                                                                    
     that take  the gas off  the unit. Why? Because  in each                                                                    
     of these facilities,  the liquid hydrocarbons extracted                                                                    
     from the  processed gaseous  stream are  reblended with                                                                    
     oil   and  run   through   gas-oil  separators   again.                                                                    
     Therefore,  the gaseous  stream  entering the  facility                                                                    
     has not yet been completely  separated from oil and the                                                                    
     point of production  for gas must be  downstream of the                                                                    
     facility.   Under   the   bill,  all   gas   processing                                                                    
     operations (as  long as  they do  not also  include gas                                                                    
     treatment)  are considered  upstream  of  the point  of                                                                    
     production. Therefore, the point  of production for gas                                                                    
     run through the  Prudhoe Bay CGF will be  where the gas                                                                    
     is metered after leaving the  CGF. In this respect, the                                                                    
     point of production for gas  will change at Prudhoe Bay                                                                    
     but remain the same -  downstream of the gas processing                                                                    
     facilities - at the other  North Slope fields using gas                                                                    
3:42:00 PM                                                                                                                    
SENATOR SEEKINS joined the committee.                                                                                           
3:42:11 PM                                                                                                                    
23. Please provide an identification  of "gas treatment" and "gas                                                               
processing" facilities in the state  under the existing statutes,                                                               
regulations, agreements,  and court  decisions. Provide  the same                                                               
under the definition as proposed.                                                                                               
     To  date in  administering the  tax, there  are no  gas                                                                    
     treatment facilities on the North  Slope. The only "gas                                                                    
     processing  plant"  currently  in   the  state  is  the                                                                    
     Central Gas  Facility (CGF),  because by  definition in                                                                    
     the  department's  regulations,  a facility  is  a  gas                                                                    
     processing plant  only if it  is located  downstream of                                                                    
     the point  of production for gas  (15 AAC 55.900(b)(7).                                                                    
     Under the  definitions in the  bill, it will  no longer                                                                    
     matter whether a facility is  a "gas processing plant."                                                                    
     All four  of the  North Slope facilities  will continue                                                                    
     to  be characterized  as  conducting "gas  processing,"                                                                    
     which will be  upstream of the point  of production for                                                                    
     Under  the proposed  definitions,  plants removing  CO2                                                                    
     and H2S  from gas for  delivery to a sales  line, which                                                                    
     in the sponsor group proposal  is assigned to a new Gas                                                                    
     Treatment  Plant (GTP),  would be  a new  Gas Treatment                                                                    
3:42:50 PM                                                                                                                    
SENATOR BEN STEVENS asked to go  back to question 22. He asked if                                                               
the Pt. Thomson  facility would be built the same  as other North                                                               
Slope facilities  using gas  processing and  Prudhoe Bay  so they                                                               
would all be functioning the same.                                                                                              
MR. DICKINSON  replied yes - at  the outlet of those  plants. "If                                                               
there is gas processing going on  in the plants - if that's where                                                               
the separation between the stream  that become gas and the stream                                                               
that   become   oil."   He   said   the   definition   has   four                                                               
characteristics, but he was trying to line them up the same.                                                                    
3:44:49 PM                                                                                                                    
SENATOR SEEKINS  apologized for  arriving late  and asked  if the                                                               
point of  production is where  a future pipeline would  begin and                                                               
if the  tariff costs  start at that  point with  deductible costs                                                               
under the PPT behind that point.                                                                                                
MR. DICKINSON replied yes and added  that that's how it works for                                                               
oil now. The  problem with gas is that it  has traditionally been                                                               
sold with lots of liquids still  in it and the state doesn't have                                                               
a clean definition  of pipeline quality being  transferred to it.                                                               
The  notion  is that  the  last  step  needed  to get  ready  for                                                               
pipeline quality  is now  being called  "gas treatment."  So, the                                                               
gas treatment plant would be  tariffed and PPT type credits would                                                               
not  apply for  it.  The  point of  production  would  be at  the                                                               
boundary  where   you  were  entering  gas   treatment,  anything                                                               
upstream would be  upstream of the point of  production and would                                                               
be gas processing;  all the PPT benefits,  credits and deductions                                                               
would apply.                                                                                                                    
SENATOR  SEEKINS  asked  if  the dehydration  plant  is  all  PPT                                                               
deductible. He asked if the  envelope could carry the liquids and                                                               
those get stripped  out for some other reason,  is that stripping                                                               
plant deductible.                                                                                                               
MR. DICKINSON replied  that gas processing in  general would take                                                               
out the  valuable liquids. People  would make  economic decisions                                                               
about them.  Now they are put  in TAPS and that  will continue to                                                               
happen, in general,  because transforming them into  oil is their                                                               
highest  value.  If a  gas  line  is  built  and enters  into  an                                                               
integrated system someplace  down the road at  a "straddle plant"                                                               
that pulls out  methane or butanes, those decisions  will be made                                                               
at the  time. He  said the heavier  hydro-carbon liquids  will be                                                               
stripped out to make it pipeline quality.                                                                                       
SENATOR SEEKINS asked if that  straddle plant would be deductible                                                               
under the PPT.                                                                                                                  
MR.  DICKINSON replied  the building  of the  plant would  not be                                                               
eligible   for  a   credit;   it  would   be   deductible  as   a                                                               
transportation cost  when the gas  that was stripped out  will be                                                               
valued,  but it  will  be on  the  same basis  as  a pipeline  or                                                               
SENATOR  SEEKINS  said  he  wanted  a  good  idea  on  where  the                                                               
deduction on the PPT ended and where the tariff on gas began.                                                                   
MR.  DICKINSON finished  answering  question 23  saying that  gas                                                               
treatment is  where CO2 and  H2S are  removed. There may  be some                                                               
use for those  for enhanced oil recovery, but on  the other hand,                                                               
it could be  a big problem and  the question is how  to deal with                                                               
it. "But it's  going to have to stripped out  before it goes into                                                               
the pipeline."                                                                                                                  
He skipped ahead to question 27.                                                                                                
3:48:46 PM                                                                                                                    
27.  How   will  AS  43.55.160(j)   protect  the  state   from  a                                                               
proliferation  of corporate  entities  and/or companies  claiming                                                               
the tax-free  allowance? (He explained  these are  standards that                                                               
the commissioner  uses to determine  whether a  company qualifies                                                               
for the $73 million allowance.)                                                                                                 
     AS 43.55.160(j) does not establish  a maximum number of                                                                    
     companies entering  the market  that could  utilize the                                                                    
     standard  allowance.  However,  this  section  requires                                                                    
     that the  Department of  Revenue evaluate  each company                                                                    
     claiming  the   deduction,  on  an  annual   basis,  to                                                                    
     determine if  the company qualifies for  the deduction.                                                                    
     This section  goes on  to require  the company  to show                                                                    
     that it has not  split operations or property ownership                                                                    
     among  multiple  entities in  order  to  gain usage  of                                                                    
     multiple  $73M  deductions,  when  only  one  deduction                                                                    
     should have been granted.                                                                                                  
3:49:35 PM                                                                                                                    
SENATOR  SEEKINS asked  if  Seekins Oil  Company  has a  standard                                                               
deduction and joint  ventures with a new company, does  he get an                                                               
additional deduction through that joint venture.                                                                                
MR. DICKINSON  replied that  the difficulty is  going to  be that                                                               
joint ventures are  an economic fact of life and  the state isn't                                                               
trying to  warp that situation.  If a joint venture  were created                                                               
without creating a new entity, that wouldn't occur.                                                                             
SENATOR  SEEKINS asked  if he  would get  it if  he were  under a                                                               
corporate structure of a new company as a shareholder.                                                                          
MR. DICKINSON  replied that  is the nub  of the  issue. "Whatever                                                               
rules we set  up, you'll probably find folks who  wanted to avoid                                                               
them taking it one step further."  So, the standard was set up so                                                               
that  the   commissioner  could  look  at   the  transaction  and                                                               
determine whether a  company has demonstrated it  has intended to                                                               
simply split  value to take  advantage of that allowance,  and he                                                               
wouldn't allow it.                                                                                                              
3:51:02 PM                                                                                                                    
SENATOR  ELTON  followed  up  asking if  this  would  be  further                                                               
defined  in regulations  or does  the department  or commissioner                                                               
apply an ad hoc process.                                                                                                        
MR. DICKINSON replied that whether  it becomes a regulatory issue                                                               
or not  depends on  the activity.  If there were  a whole  lot of                                                               
controversial  claims,  regulations  would   be  written  or  the                                                               
legislature may chose to revisit it.                                                                                            
3:51:55 PM                                                                                                                    
29.  Provide  estimates  for undiscovered  resources  in  Alaska.                                                               
Include  the   breakdown  between  technically   recoverable  and                                                               
economically recoverable resources to the extent possible.                                                                      
     Resources  estimated are  those  that  would enter  the                                                                    
     TAPS  north   of  the   Brooks  Range.   These  include                                                                    
     estimates   of  recoverable   oil  from   the  National                                                                    
     Petroleum Reserve  - Alaska  [NPRA], the  Central North                                                                    
     Slope,  the  Beaufort  Sea   and  the  Alaska  National                                                                    
     Wildlife  Refuge  [ANWR].  Estimates are  presented  in                                                                    
     terms  of  barrels   of  technically  and  economically                                                                    
     recoverable    reserves.     Technically    recoverable                                                                    
     estimates  are  mean  estimates. Economic  recovery  is                                                                    
     based upon  the Department  of Revenue [DOR]  long term                                                                    
     forecast  of   Alaska  North  Slope  [ANS]   crude  oil                                                                    
     delivered on  the west  coast at  $25.50 per  barrel in                                                                    
     nominal terms.                                                                                                             
     For purposes of  analysis, all economically recoverable                                                                    
     oil  is presumed  to  be produced  by  2046 [within  45                                                                    
     years].  Estimates  are   obtained  from  United  State                                                                    
     Federal   government  sources   -  the   United  States                                                                    
     Geological  Service  [USGS],  the  Minerals  Management                                                                    
     Service    [MMS]    and    the    Energy    Information                                                                    
     Administration [EIA].                                                                                                      
     Technically Economically Natural Gas:                                                                                      
     NPRA 10.6 Bbl 2.95 Bbl 59.7 Tcf                                                                                            
     Central North Slope 3.98 Bbl 0.88 Bbl 35 Tcf                                                                               
     Beaufort Sea 6.94 Bbl 1.79 Bbl Remainder plus                                                                              
     existing PBUANWR 10.40 Bbl 4.21 Bbl                                                                                        
     Total 32.38 Bbl 9.83 Bbl 200 Tcf +                                                                                         
     . NPRA -  The entire area is estimated  to contain 10.6                                                                    
     billion   barrels  of   technically  recoverable   oil.                                                                    
     Economically  recoverable  reserves   consist  of  2.95                                                                    
     billion  barrels  of  oil.1  (U.S.  Geological  Survey,                                                                    
     2002,  Petroleum Resource  Assessment  of the  National                                                                    
     Petroleum  Reserve in  Alaska (NPRA),  USGS Fact  Sheet                                                                    
     045-02, Table 3 and Figure 7).                                                                                             
     .  Central North  Slope -  The technically  recoverable                                                                    
     yet-to-be-discovered  barrels of  oil are  estimated at                                                                    
     3.98  billion.  Economically recoverable  reserves  are                                                                    
     set at  0.88 billion barrels (USGS,  2005, Economics of                                                                    
     Undiscovered Oil  and Gas in  the Central  North Slope,                                                                    
     Alaska, Open-File Rpt 2005-1276, Table 5)                                                                                  
     . Beaufort Sea - There  are 6.94 billion barrels of oil                                                                    
     technically   recoverable.   Economically   recoverable                                                                    
     reserves during the period  under consideration are set                                                                    
     at  1.79 billion  barrels, the  mean estimate  at lower                                                                    
     oil prices.  (Mineral Management Service,  Beaufort Sea                                                                    
     Planning Area  Oil and  Gas Lease  Sales 186,  195, and                                                                    
     202 OCS FEIS, 2003, MMS  2003-001, Appendix B, Table B-                                                                    
     . ANWR - There are  10.4 billion barrels of technically                                                                    
     recoverable  oil.   Economically  recoverable  reserves                                                                    
     consist  of 4.21  billion barrels.  (Energy Information                                                                    
     Administration, Analysis  of Oil and Gas  Production in                                                                    
     the Arctic  National Wildlife Refuge, March  2004, pg 5                                                                    
     and Table 1)                                                                                                               
     . Natural  Gas - Most  natural gas that  is technically                                                                    
     recoverable  is   considered  economically  recoverable                                                                    
     provided there  is a means  of transmission  to market.                                                                    
     Assuming  gas  flow  through a  pipeline  beginning  in                                                                    
     2015, the  period through  2046 production  totals 49.6                                                                    
     trillion  cubic feet.  Best  estimates  of natural  gas                                                                    
     reserves on the North Slope  far exceed this amount and                                                                    
     include:  proven  reserves  - 35  trillion  cubic  feet                                                                    
     within  Prudhoe  Bay  Field,  Pt.  Thomson,  and  other                                                                    
     fields (EIA,  March 2004), NPRA  - 59.7  trillion cubic                                                                    
     feet (USGS Fact Sheet  045-02); and, together with ANWR                                                                    
     and  offshore undiscovered  reserves  totals above  200                                                                    
     trillion  cubic feet  (USGS,  Conventional Natural  Gas                                                                    
     Resource  Potential,  Alaska  North  Slope,  2004,  Rpt                                                                    
     The   studies   also   set   ranges   for   technically                                                                    
     recoverable  oil  with  a  5  percent  and  95  percent                                                                    
     confidence  interval. These  wide ranges  are presented                                                                    
     below.  Economically recoverable  estimates were  based                                                                    
     on   2001   dollars   so   that   $23.50   equates   to                                                                    
     approximately $25.50 in 2005 dollars.                                                                                      
     Recoverable  oil volumes  will  vary by  price of  oil.                                                                    
     However,  higher valued  oil will  also be  higher cost                                                                    
     oil to  produce with  each increase in  price resulting                                                                    
     in  increased volume  strictly related  to the  cost of                                                                    
     Range of  Technically Recoverable Oil -  5th Percentile                                                                    
     Mean 95th Percentile:                                                                                                      
     NPRA 5.90 Bbl 10.6 Bbl 13.20 Bbl                                                                                           
     Central North Slope 2.87 Bbl 3.98 Bbl 5.85 Bbl                                                                             
     Beaufort Sea 3.56 Bbl 6.94 Bbl 11.84 Bbl                                                                                   
     ANWR 5.70 Bbl 10.40 Bbl 16.00 Bbl                                                                                          
3:54:03 PM                                                                                                                    
31.  How will  Net Profit  Share Leases  (NPSL's) be  affected by                                                               
this  legislation?  Will  the  gross  costs  of  exploration  and                                                               
development go  into the  Development Account  - or  those costs'                                                               
net of the credits and deductions?                                                                                              
     Production  taxes  are  currently deductible  for  NPSL                                                                    
     purposes. This  legislation is  not intended  to change                                                                    
     the deductibility of the  production tax. However, NPSL                                                                    
     leases are  administered by  the Department  of Natural                                                                    
     Resources, which  is better  equipped to  address these                                                                    
     questions  and which  we understand  is doing  so. Also                                                                    
     see Question 58.                                                                                                           
3:55:01 PM                                                                                                                    
33. Of the pre-PPT credit provisions (or claw back), what is the                                                                
cost to the state for legacy fields and what is the cost to the                                                                 
state for frontier regimes?                                                                                                     
     Also  see Question  20. The  assumption  made for  this                                                                    
     request is that the Pre-PPT  cost claw-back will be the                                                                    
     last adjustment  made to the tax.  All other deductions                                                                    
     and  credits  allowed  under the  PPT  will  have  been                                                                    
     exercised.  There  was  approximately $4.8  billion  of                                                                    
     capitalized investment  made by the industry  during in                                                                    
     the period 2001 through 2006.                                                                                              
     Using the  Department of Revenue price  forecast, which                                                                    
     has prices falling and remaining below $40 after 2008:                                                                     
     . Legacy Field Owners: $316.6 million                                                                                      
     . Frontier Field Owners: None.  Due to no production or                                                                    
     the inability  to generate revenues sufficient  to have                                                                    
     a tax  liability after other deductions  or credits are                                                                    
     Assuming a flat price of $45 for 2007-2050:                                                                                
     . Legacy Field Owners: $935 million                                                                                        
     . Frontier Field Owners: 15 million                                                                                        
     . Total $950 million                                                                                                       
     Assuming a flat price of $60 for 2007-2050:                                                                                
     . Legacy Field Owners: $936 million                                                                                        
     . Frontier Field Owners: 15 million                                                                                        
     . Total $951 million                                                                                                       
3:56:12 PM                                                                                                                    
49. What is the estimated economic impact to the state of the                                                                   
ability to sell tax credits?                                                                                                    
     He advised them to focus on  page 21 that had a summary                                                                    
     of costs  he used  in modeling  what happens.  The very                                                                    
     conservative estimate,  which is without a  gasline and                                                                    
     without  any   additional  fines,  no   additional  oil                                                                    
     outside  of the  department's forecast,  he sees  total                                                                    
     capital spending  at around $25  billion. On  the other                                                                    
     extreme, if the  gasline gets built and there  is a lot                                                                    
     of  additional exploration,  the number  would be  more                                                                    
     than twice that at $55 billion.                                                                                            
     The  next  question people  focused,  he  said, was  on                                                                    
     saturation and  what would happen  with the  credits in                                                                    
     the marketplace.  Will the credits  be used up  or will                                                                    
     they "go  begging," will the small  producer not really                                                                    
     get the  effect of the  credits, because they  can't do                                                                    
     anything with them. His analysis,  which used a $40 per                                                                    
     barrel price,  showed how much  of the  production tax,                                                                    
     itself, would  be reduced by  credits and  depending on                                                                    
     which scenario is used, it went  from a low of about 25                                                                    
     percent to  a high of  close to  40 percent, but  in no                                                                    
     case  did   he  find  that  the   market  would  become                                                                    
     saturated.  He said  the sensitivity  analysis was  run                                                                    
     with a  95 percent  production by  the majors  and room                                                                    
     was found  for them  to be used  even if  the producers                                                                    
     have most  of payments  and the  smaller users  have 25                                                                    
     percent of  the credits. Saturation might  occur if the                                                                    
     price was much lower than $40.                                                                                             
3:59:16 PM                                                                                                                    
54. Section 21, page 13, line 8 - why is this clause constrained                                                                
by Dec. 1, 2005?                                                                                                                
     This constraint is intended to avoid industry changing                                                                     
     cost allocations in contemplation of this legislation,                                                                     
     in order to avoid taxation.                                                                                                
4:00:20 PM                                                                                                                    
68. How is it possible that  any corporation gets triple the sale                                                               
price for  a commodity, having  invested capital at  the expected                                                               
lower  returns, and  then maintains  that they  need a  claw back                                                               
provision? Why should we offer it?                                                                                              
     a.  The  first part  of  this  question appears  to  be                                                                    
     intended to be answered by oil companies.                                                                                  
     b. We  should offer  a transition deduction  because we                                                                    
     are converting  from a  tax on  gross to  a tax  on net                                                                    
     value.  When measuring  net value,  it is  necessary to                                                                    
     allow deductions,  not only  for current  expenses, but                                                                    
     also  a deduction  for the  capital investment  that is                                                                    
     generating  the value.  For new  assets acquired  after                                                                    
     the PPT  is in  effect, a full  deduction for  the cost                                                                    
     the  capital   investment  is   allowed  in   the  year                                                                    
     acquired. Assets  acquired within  the last  five years                                                                    
     are  currently producing  taxable  oil and  gas, and  a                                                                    
     deduction   should   be   allowed   for,   in   effect,                                                                    
     depreciation on those assets.                                                                                              
4:01:09 PM                                                                                                                    
69. Please show us an international competitiveness rank and                                                                    
score for PPT under the following tax/credit scenarios, both                                                                    
overall and for new producers:                                                                                                  
a. 30/15                                                                                                                        
b. 30/20                                                                                                                        
c. 25/20                                                                                                                        
d. 20/20                                                                                                                        
     MR.  DICKINSON  explained  that  Dr.  Pedro  Van  Meurs                                                                    
     formulated  this  question that  has  as  its answer  a                                                                    
     bunch of tables. However, he  explained that he ran his                                                                    
     competitiveness  rankings,  basing  those on  the  four                                                                    
     different scenarios (above). His  analyses were for the                                                                    
     large  producer economics  and for  the new  investors.                                                                    
     The  conclusion is  that the  PPT puts  the state  in a                                                                    
     better  position internationally  among the  peers that                                                                    
     he ranks  than the  current system  does. This  is true                                                                    
     for the  larger producer economics and  especially true                                                                    
     for the new investor economics.                                                                                            
4:02:48 PM                                                                                                                    
SENATOR STEDMAN asked if anything  in his tables would put Alaska                                                               
at a competitive disadvantage.                                                                                                  
MR. DICKINSON replied  the short answer is no; but  the ones with                                                               
the  more ambitious  tax  credits  place the  state  in a  better                                                               
position than the ones that have  either the lower credits or the                                                               
higher tax rates.  He suggested that the overview on  page 32 was                                                               
the best way of looking at  that. No matter which scheme you look                                                               
at, things  look more  attractive to the  new small  investor and                                                               
lot of  that has to  do with their focus  on the credits  and the                                                               
allowance. The  large producers,  at 20/20,  you can  expect more                                                               
investment; at  25/20 you can  expect the  same and as  you start                                                               
going to  30 percent rates, you  can expect either less  and a 30                                                               
percent tax  rate coupled with only  a 15 percent credit  is much                                                               
less. The legacy fields would feel  the sting of the marginal tax                                                               
rate  more; the  new companies  would feel  the benefit  from the                                                               
4:05:48 PM                                                                                                                    
SENATOR  ELTON asked  if there  has been  some controversy  about                                                               
investment in the UK North Sea being treated differently.                                                                       
MR. DICKINSON  replied that he  would tiptoe around that  one. He                                                               
said  that UK  had made  some  dramatic changes  recently to  its                                                               
methodology  and just  weeks ago  essentially  doubled the  rate.                                                               
There is debate about its effects.                                                                                              
^Department of Revenue - Roger Marks and Cheri Nienhuis                                                                       
CHERI  NIENHUIS,  Petroleum   Economist,  Department  of  Revenue                                                               
(DOR), said that Roger Marks,  Petroleum Economist, DOR, was also                                                               
4:09:02 PM                                                                                                                    
She recapped  that she had  answered only question 70  that asked                                                               
for the  annual oil severance  tax amounts at various  prices and                                                               
for various scenarios.  When she answered it she  didn't have the                                                               
numbers presented beside  the chart. She had  also run additional                                                               
scenarios  with 15/20,  25/20, 15/25,  and 22.5/22.5.  The packet                                                               
contained all the runs.                                                                                                         
CHAIR WAGONER  said they have  the information and can  review it                                                               
4:14:31 PM                                                                                                                    
MS. NIENHUIS summarized  information at $40 a barrel  for a frame                                                               
of reference. She  compared severance tax revenues  that would be                                                               
collected from  2007 -  2030 with  the status  quo and  found for                                                               
15/25  that it  was  21  percent greater;  for  15/20  it was  36                                                               
percent greater; for 20/20 it  was 100 percent greater; 22.5/22.5                                                               
was 126  percent greater;  25/25 was  151 percent  greater; 25/20                                                               
was  165 percent  greater;  30/20 was  230  percent greater;  and                                                               
30/15 was 245 percent greater than the status quo.                                                                              
SENATOR  STEDMAN  asked if  she  was  more comfortable  with  the                                                               
analysis between the first 10 years  versus the last 10 years for                                                               
professional estimating values.                                                                                                 
MS. NIENHUIS replied that the reason  2030 is the time frame used                                                               
is because  that is the period  in which it is  believed the TAPS                                                               
would either shut down or the North Slope will shut down.                                                                       
She said the  House Resources committee also wanted  to know what                                                               
the  difference would  be in  annual severance  tax with  just an                                                               
incremental 1 percent change in both  the tax rate and the credit                                                               
rate. That  relevant chart was  70(i) and it compares  the status                                                               
quo with  a 19/20, 20/19, 20/20,  20/21, and 21/20. She  also ran                                                               
another graph  to illustrate the  difference between a  1 percent                                                               
tax rate  increase or decrease and  what a 1 percent  credit rate                                                               
increase or decrease  would amount to. She found a  1 percent tax                                                               
rate increase  impacts the  severance rate at  a $40  level quite                                                               
significantly by a 5 to 1  ratio. So every 1 percent tax increase                                                               
was equivalent  to about  a 5 percent  credit decrease.  "So, the                                                               
tax rate is  significantly more important based  on this analysis                                                               
than  is the  credit rate."  She added  that the  ratio decreases                                                               
closer to 2030 because of the projected decrease in production.                                                                 
MR. DICKINSON said that the  tax was very price sensitive because                                                               
the credit  is going to  be $1 of  spending whereas the  tax rate                                                               
would  be on  a $1  of profit.  So if  there were  $1 billion  of                                                               
spending a  year, at $20  oil with $5  profit, if you  double the                                                               
price, the size of the credit will still be precisely the same.                                                                 
MS. NIENHUIS  said that Daniel  Johnston also said that  it would                                                               
be a 5 to 1 ratio.                                                                                                              
4:18:33 PM                                                                                                                    
SENATOR BEN STEVENS remarked that  Mr. Johnston said the tax rate                                                               
was inelastic and the elasticity was in the credit rate.                                                                        
SENATOR  STEDMAN responded  that wasn't  right; he  said the  tax                                                               
rate is the sledge hammer and the credit is the tack hammer.                                                                    
SENATOR BEN  STEVENS agreed  with that, but  he thought  he heard                                                               
Mr. Johnston say  that the tax rate was inelastic  in relation to                                                               
investment. He said he would check on it.                                                                                       
4:19:59 PM                                                                                                                    
MS.  NIENHUIS continued  saying that  70(j) was  a summary  table                                                               
showing the effective  tax rate for all scenarios.  They were all                                                               
price  sensitive except  the status  quo. For  this example,  she                                                               
explained, the way the average  effective tax rate was calculated                                                               
by  taking the  severance tax  liability and  dividing it  by the                                                               
gross well-head value  less the royalty. This makes  an apples to                                                               
apples comparison  with the  status quo  tax, which  is a  tax on                                                               
gross revenues, less royalties.                                                                                                 
4:21:04 PM                                                                                                                    
SENATOR  BEN  STEVENS found  Mr.  Johnston's  statement that  was                                                               
contrary to what MR. DICKINSON said.  On page 13 of his testimony                                                               
on March 6, "I believe there  is a strong evidence that producing                                                               
activities are relatively unaffected by  changes in the tax rates                                                               
unless they are dramatic."                                                                                                      
MR. DICKINSON  replied that he  said something different,  but he                                                               
had no opinion on the elasticity  issue, which is what happens if                                                               
you change one thing. He was  focused on a the mathematical point                                                               
that the  amount of the credit,  1 percent change in  the credit,                                                               
would not  have any  relationship to price,  whereas a  1 percent                                                               
change in the tax rate would be dependent on price.                                                                             
SENATOR BEN STEVENS said he understood now.                                                                                     
SENATOR STEDMAN recalled  that the point Mr.  Johnston was trying                                                               
to  make was  that at  a 20  or 25  percent tax  rate, he  didn't                                                               
expect a  significant change  in what the  majors produce  on the                                                               
North Slope.                                                                                                                    
4:24:00 PM                                                                                                                    
SENATOR ELTON said  Econ One added, what they  called, a historic                                                               
line of  12 percent for  the historic tax  rate. He asked  if she                                                               
agreed with that number.                                                                                                        
MS. NIENHUIS replied  that she hadn't looked at  it, but believed                                                               
it to  probably be accurate and  she referenced page 43  that had                                                               
the  effective tax  rates  for  the North  Slope  by field  since                                                               
MR. DICKINSON  added that she  was referencing page  43, question                                                               
30,  Table (a).  He  walked  them through  an  example. In  1988,                                                               
Prudhoe  Bay  was  1.6  million  of  the  2  million  barrels  of                                                               
production. In that year, the  Prudhoe ELF was 12.66 percent. The                                                               
only  other field  of  any major  size was  Kuparuk  at close  to                                                               
200,000 barrels a  day for 8.33 percent. If you  average them all                                                               
together, you  get something  in the 11  to 12  percent effective                                                               
tax  rate  range. Before  the  aggregation  decision and  with  1                                                               
million barrels  of production in  2004, Prudhoe  Bay represented                                                               
400,000  of that  although  50,000  of that  would  be gas  (and,                                                               
therefore,  not  part  of  the  ELF).   Alpine  and  North  Star,                                                               
combined only  produce as much  as Kuparuk that had  an effective                                                               
tax rate of 2 or 3 percent.                                                                                                     
He advised  if they are  asking for the  average tax rate  on the                                                               
North Slope, because of the ELF, you need to get the dates.                                                                     
4:27:57 PM                                                                                                                    
SENATOR BEN  STEVENS thanked  him for  that explanation.  He said                                                               
the reason  it stayed so high  was because it included  the years                                                               
of  massive production.  The chart  that was  presented yesterday                                                               
went back  to 1977 at the  beginning of production, but  they can                                                               
only  accurately use  charts 10  years out.  If you  go 10  years                                                               
forward, you  should just  go only 10  years back.  Mr. Dickinson                                                               
just   said  that   the  historical   effective  rate   would  be                                                               
dramatically different depending  on the number of  years it went                                                               
back.  So, he  asked to  see the  numbers for  average historical                                                               
rate in 10-year increments.                                                                                                     
MR.  DICKINSON responded  that made  sense and  he could  produce                                                               
SENATOR STEDMAN  pointed out that  Econ One's figures  were based                                                               
on a forward projection of ELF on status quo.                                                                                   
MR. DICKINSON agreed with that and so did Senator Ben Stevens.                                                                  
4:31:29 PM                                                                                                                    
SENATOR BEN STEVENS  said he was trying to  clarify that included                                                               
in the historical  numbers were years when the state  was at full                                                               
capacity and production.                                                                                                        
     And I think  if we ever got to that  again, those would                                                                    
     be the  numbers we  should use,  but we're  not talking                                                                    
     about full capacity and  full production; we're talking                                                                    
     are  talking  about  maintaining  existing  production,                                                                    
     which is  one half or less  than 40 percent of  what it                                                                    
     was  at one  point. So,  I think  that we  have to  use                                                                    
     historical figures  in context of where  we're going to                                                                    
     go into the future.                                                                                                        
MR.  DICKINSON observed  that  Econ One  pointed  out that  these                                                               
rates are not historically unprecedented.                                                                                       
     What  is historically  unprecedented  is  the level  of                                                                    
     support  that the  Governor suggested  we  make to  the                                                                    
     industry  in the  future  work going  on  on the  North                                                                    
     Slope.  And I  think if  you look  at when  these rates                                                                    
     were at this rate, it  was Prudhoe Bay. Prudhoe Bay was                                                                    
     the entire story with Kuparuk...                                                                                           
4:32:58 PM                                                                                                                    
MS. NIENHUIS moved  on to question 71. Please  show the corporate                                                               
take  chart on  page  24  of Mr.  Marks'  presentation given  the                                                               
following tax/credit scenarios:                                                                                                 
a. 25/20                                                                                                                        
b. 30/20                                                                                                                        
c. 30/15                                                                                                                        
d. 15/20                                                                                                                        
e. 25/25                                                                                                                        
f. 15/25                                                                                                                        
g. 22.5/22.5                                                                                                                    
She said  this chart  was slightly different  and has  the status                                                               
quo presented  next to the PPT  under each of the  scenarios. Mr.                                                               
Marks used the EIA forecast, which  is an average of $57 a barrel                                                               
through 2040.                                                                                                                   
MR. MARKS corrected her saying, "I think it's 20/50."                                                                           
MS. NIENHUIS  said the charts  were high  volume and most  of the                                                               
costs remained the same. They  showed primarily the difference in                                                               
the state  take (royalties, corporate  income tax,  severance tax                                                               
and  property tax  (which stays  fairly steady  throughout)), but                                                               
also the difference in the federal  tax and the difference in the                                                               
corporate take.                                                                                                                 
4:35:03 PM                                                                                                                    
MR.  DICKINSON  explained that  the  royalty  and production  tax                                                               
stays the same, but the  modeling shows increase in the severance                                                               
tax and  with the diminution  in both federal take  and corporate                                                               
MS.  NIENHUIS  said   that  was  correct.  For   25/20  with  the                                                               
cumulative revenues  were $580 billion (gross  revenues), the PPT                                                               
produces about 28 or 29 percent  for the corporate take. There is                                                               
a fairly  large difference between the  severance tax collections                                                               
in the two scenarios between status quo and the PPT.                                                                            
4:36:10 PM                                                                                                                    
The  next  slide considered  30/20  and  has the  corporate  take                                                               
significantly down to $155 billion  from the previous one of $164                                                               
billion, a higher state take  overall and a commensurate decrease                                                               
in federal tax. This is due  to the fact that severance taxes are                                                               
deductible for federal  tax purposes. Since the  severance tax is                                                               
higher in the  PPT than under the status quo,  that has an effect                                                               
on the federal tax, as well.                                                                                                    
The  next  chart  showed  the  same  information  for  the  30/15                                                               
scenario. It has  slightly less in the way of  corporate take and                                                               
slightly more in the way of severance tax.                                                                                      
The next one,  15/20, was a little different. Even  at that rate,                                                               
the severance  tax is  significantly higher  than the  status quo                                                               
and a fairly high corporate take, as well.                                                                                      
The next  was 25/25 had  significantly more severance  tax, about                                                               
four times more than the status quo.                                                                                            
The next one  was 15/25 showed the corporate take  to go up quite                                                               
a  bit, but  the federal  tax was  not that  much different  than                                                               
under the  status quo. The severance  tax was up over  the status                                                               
Lastly,  22.5/22.5 was  close  to  the 20/20  in  terms of  total                                                               
revenues to  each entity. Close  to 30 percent of  gross revenues                                                               
to the corporations and about $55 billion to severance tax.                                                                     
4:39:30 PM                                                                                                                    
72. Please  show the  price point  where DOR  estimates corporate                                                               
profit margins hit:                                                                                                             
a. 15 percent                                                                                                                   
b. 20 percent.                                                                                                                  
     MS. NIENHUIS said the question  was made in the context                                                                    
     of the presentation of these  charts and she understood                                                                    
     the  question  to  be  show  where  on  the  chart  the                                                                    
     corporate take  is 15  and 20  percent. That  would not                                                                    
     necessarily represent  a profit;  that would be  the 15                                                                    
     percent of the gross  revenues. So, actually the profit                                                                    
     would  be   minus  the  Opex   and  the   Capex  costs,                                                                    
     transportation  and et  cetera.  It's true  that $20  a                                                                    
     barrel is  a problem for  the state no matter  what tax                                                                    
     system you  go with.  In Chart 72(a)(1)she  showed that                                                                    
     $20.15 per barrel was the  price at which the corporate                                                                    
     take  is 15  percent; it  shows  the state  take to  be                                                                    
     quite low  at that  amount. For clarification  she said                                                                    
     the  total cumulative  revenues of  this chart  is $100                                                                    
     billion including costs.                                                                                                   
     4:41:36 PM                                                                                                               
     At a high  volume scenario the same  corporate take has                                                                    
     some additional  costs associated  with it  because the                                                                    
     high volume scenario has the  heavy oil that would come                                                                    
     on line as well as the  gasline. The price at which the                                                                    
     corporate take is 15 percent  under this scenario would                                                                    
     be $27 per  barrel ANS. It showed  a cumulative revenue                                                                    
     of $283 billion.                                                                                                           
     The next question was price  does the corporate take go                                                                    
     to 20 percent  under the low volume  scenario without a                                                                    
     gasline  and  she showed  that  it  would be  $24.50  a                                                                    
     barrel  ANS.  The  state takes  less  revenue  at  this                                                                    
     amount than under the status quo.                                                                                          
     She used  another high volume  scenario to  answer what                                                                    
     price  would the  ANS per  barrel  have to  be for  the                                                                    
     corporate take to be 20  percent. She got an average of                                                                    
     $32 per barrel ANS.                                                                                                        
4:43:45 PM                                                                                                                    
90. Please show the cumulative production tax from 2007-2030                                                                    
under the PPT given the following tax/credit scenarios:                                                                         
a. 25/20                                                                                                                        
b. 30/20                                                                                                                        
c. 30/15                                                                                                                        
d. 15/20                                                                                                                        
e. 25/25                                                                                                                        
f. 15/25                                                                                                                        
g. 22.5/22.5                                                                                                                    
h. A summary chart showing all above scenarios                                                                                  
i. A summary table showing all above scenarios                                                                                  
     Her first  slide started  with 25/20  and a  low volume                                                                    
     scenario; the  crossover point  was $24.  The crossover                                                                    
     point for 20/20 was $26.50 per barrel.                                                                                     
     4:44:38 PM                                                                                                               
     The  low  volume scenario  for  30/20  had a  crossover                                                                    
     point  at $22  a barrel  ANS. It  rises fairly  steeply                                                                    
     past $25 a barrel.                                                                                                         
     The  low  volume scenario  for  30/25  had a  crossover                                                                    
     point  of $21  a barrel.  For 15/20,  it was  at $34  a                                                                    
     barrel. She  said that several  of the  scenarios don't                                                                    
     generate much  revenue at prices  below $25 -  $35. The                                                                    
     scenario for  25/25 had a  crossover at $25.  At 15/25,                                                                    
     the crossover  point was at  $36 per barrel.  The 20/20                                                                    
     stays high above the 15/25.  The crossover on 22.5/22.5                                                                    
     was $26 a barrel and it behave very like the 20/20.                                                                        
     The last  slide addressed  question 90(i),  which shows                                                                    
     what  the  cumulative  tax revenues  would  be  at  the                                                                    
     different prices in the graphs she just presented.                                                                         
4:47:40 PM                                                                                                                    
ROGER MARKS,  Petroleum Economist,  DOR, commented on  the status                                                               
quo  $20-dollar  column in  question  90(i)  indicates the  state                                                               
would get  only $123 million per  year in revenues with  which to                                                               
cover its budget and at that  point it would have bigger problems                                                               
then having  chosen the wrong  combination of taxes  and credits.                                                               
He advised  that worrying about  how much  money you lose  at the                                                               
low end  under $20 is probably  not a real fruitful  exercise and                                                               
it was  pathetic. That doesn't  mean prices couldn't be  $20; but                                                               
it does  underscore the need  for broad-based taxes. At  $20, the                                                               
state would  need more than  the oil  industry to keep  it afloat                                                               
and  the CBR  (Constitutional  Budget Reserve)  would  be just  a                                                               
pleasant memory especially if the prices  were low for as long as                                                               
a couple of years.                                                                                                              
4:50:14 PM                                                                                                                    
MR. DICKINSON jumped back to page  34, questions 73, 74, 76. They                                                               
all  related  to the  Cook  Inlet  analysis. The  first  question                                                               
analyzes it under  the proposal. The second question  is how much                                                               
does  the  $73 million  allowance  play  in  that and  the  third                                                               
question is what happens to a new player. His answer was:                                                                       
     If  we   look  under  the  current   analysis  and  the                                                                    
     assumption - and this is the  big one in the Cook Inlet                                                                    
     - What  happens to gas  prices if you assume  that they                                                                    
     move towards world prices, then,  in fact, you will see                                                                    
     the  folks that  have gas  paying a  PPT. If  you don't                                                                    
     move towards world  prices and you stay in the  $2 - $3                                                                    
     range, then you  will find the folks that  have the gas                                                                    
     are  not   paying  the  PPT.  So,   fundamentally,  the                                                                    
     question here  is not so  much a PPT question  as right                                                                    
     now  there's one  contract  between  Enstar and  Unocal                                                                    
     that uses  world pricing, if  you will, or  US pricing.                                                                    
     Most  other contracts  are at  much  lower rates.  Cook                                                                    
     Inlet has  been isolated  for markets.  Essentially you                                                                    
     have  ConocoPhillips selling  on  a  world market,  but                                                                    
     aside from that  it's been internal use  and the prices                                                                    
     reflect that.                                                                                                              
MR. DICKINSON contended that if they go to world prices in                                                                      
around the $7 range, the ELF would not be appropriate at                                                                        
that point and the PPT would have to be there.                                                                                  
Moving on the second question:  What happens when the $73 million                                                               
allowance  comes   in.  He   analyzed  this   specifically  going                                                               
backwards, which  brings with  it the  assumption of  low prices.                                                               
Without the allowance  there would be a small  increase; with the                                                               
allowance they would  see about the same or a  diminishing of the                                                               
take.  His  finally conclusion  was  with  just the  $73  million                                                               
allowance and isolating Cook Inlet,  at low prices they would see                                                               
a significant production tax being paid under the PPT.                                                                          
4:53:23 PM                                                                                                                    
76. Model a newcomer to the  Cook Inlet that explores for, finds,                                                               
develops and  sells gas.  What will their  taxes look  like under                                                               
the status quo and the PPT?                                                                                                     
     It  is  impossible to  answer  this  question with  any                                                                    
     accuracy because of the  numerous assumptions one would                                                                    
     have  to  make. Generally,  a  newcomer  to Cook  Inlet                                                                    
     would spend  at least a  couple of years  exploring for                                                                    
     gas,  and  during  this   time,  would  presumably  not                                                                    
     produce any gas and in  fact may not realize any income                                                                    
     from these  operations. So for the  years of exploring,                                                                    
     the newcomer  would not  pay any  tax under  either the                                                                    
     status quo  or the  PPT system.  Under the  PPT system,                                                                    
     the newcomer  would have earned capital  credits in the                                                                    
     first couple  of years that  they could either  hold or                                                                    
     sell, as well as any  loss carry-forwards they may have                                                                    
     accrued. The question  is if they are  selling at world                                                                    
     market prices,  they will use those  capital credits up                                                                    
     very  quickly. If  they are  selling in  the $3  range,                                                                    
     those credits will  give them a shield for  a number of                                                                    
     years. After the credits have  been used and monetized,                                                                    
     they still  have the  $73 million. So  if a  player was                                                                    
     generating  less than  that,  as they  do  in the  Cook                                                                    
     Inlet, they are covered and not paying additional tax.                                                                     
4:54:24 PM                                                                                                                    
78.  Could we  look  at  (1) a  standing  offer  to purchase  tax                                                               
credits  for  10   percent  of  their  face  value   -  with  the                                                               
implication that  the department could  treat that as  a receipts                                                               
funded  program  so  that  the  legislature  would  not  have  to                                                               
authorize  the purchase  amount  and (2)  "Alaska  bucks" -  i.e.                                                               
allow  credit certificates  to be  used in  lease sales  or other                                                               
lease acquisition activities as cash.                                                                                           
     He  answered  that  basically   rather  than  having  a                                                                    
     buyback, the  state would  make the  credit refundable.                                                                    
     The state  could set a  limit on the refund.  The total                                                                    
     credits are going to represent  between 25 - 30 percent                                                                    
     of  the revenues,  so if  some of  those are  purchased                                                                    
     rather than taken,  the net effect on the  state is the                                                                    
     same.  The notion  here  was why  let  a market  player                                                                    
     intervene and get 10 or 15 cents on the dollar.                                                                            
     If  value is  added  to  them by  allowing  them to  be                                                                    
     reinvested or  used for a  lease sale or make  them 110                                                                    
     percent, that is a policy  call by the legislature. How                                                                    
     equal  it wants  the people  who are  bidding to  be is                                                                    
     another  issue.  Perhaps  they  would  want  to  incent                                                                    
     someone who  has worked here before  versus someone who                                                                    
     is coming  up for the  first time. He advised  to steer                                                                    
     clear of having any incentives  built in to the process                                                                    
     of  acquiring  the  leases and  they  have  focused  on                                                                    
     getting them on the process of developing those.                                                                           
4:56:58 PM                                                                                                                    
79. Could we  draft up alternative standards  for the anti-hiving                                                               
provision so the legislature can choose.                                                                                        
     ROBERT  MINTZ, Assistant  Attorney General,  Department                                                                    
     of Law,  answered if  multiple entities  take advantage                                                                    
     of  the allowance,  that means  that  one entity  would                                                                    
     have  to be  producing and  it would  have to  get some                                                                    
     kind  of  benefit in  return  for  that. That  was  the                                                                    
     trigger  for  the  approach that  the  department  will                                                                    
     disallow  an allowance  deduction  if it  finds that  a                                                                    
     benefit  attributable  to  a  producer's  allowance  is                                                                    
     shared  with  or  enjoyed  by  another  producer.  This                                                                    
     concept might be  more effective if it  were adopted as                                                                    
     a  supplement to,  rather than  a  substitute for,  the                                                                    
     current language in proposed AS 43.55.160((j).                                                                             
4:59:46 PM                                                                                                                    
MR. DICKINSON said  question 81 was a request to  share the model                                                               
and he declined to do  that, but fundamentally, his experience is                                                               
that this model is not user-friendly  and only a handful of folks                                                               
know how to use it. He vowed  to help people get answers to their                                                               
5:00:34 PM                                                                                                                    
Skipping ahead,  he went to  a sequence  of questions on  what is                                                               
the meaning of progressive tax.  What is proportional and what is                                                               
     Black Law Dictionary  said that a progressive  tax is a                                                                    
     tax  structured   so  that   the  effective   tax  rate                                                                    
     increases  more than  proportionally  as  the tax  base                                                                    
     increases.  Clearly how  the tax  base is  measured has                                                                    
     caused some  confusion. The tax  base could be  the net                                                                    
     or the  gross. The  confusion has  arisen in  trying to                                                                    
     restate the  PPT, which is a  tax on the net,  in terms                                                                    
     of gross  to make it comparable  to the ELF. On  one of                                                                    
     them,  estimates for  capital  costs would  have to  be                                                                    
     made,  and  the department  has  actuals  on the  gross                                                                    
     going backwards.                                                                                                           
SENATOR STEDMAN asked what his conclusion was.                                                                                  
MR.  DICKINSON  replied,  "A  progressive tax  is  one  in  which                                                               
wherever you  measure your base,  and as your base  changes, does                                                               
the  rate change  more  quickly than  the base  -  not nearly  in                                                               
proportion to it."                                                                                                              
5:02:36 PM                                                                                                                    
SENATOR STEDMAN asked if they  were looking at percentage changes                                                               
of the total pie as the dollar value went up.                                                                                   
MR. DICKINSON replied that he believed  it could be measured as a                                                               
change in  the percentage or  as a  change in the  total dollars.                                                               
"The main thing is you need  to be consistent about which one you                                                               
are  measuring as  the total  of one  goes up,  the total  of the                                                               
other goes up more quickly."                                                                                                    
SENATOR STEDMAN said he didn't necessarily agree with that.                                                                     
CHAIR WAGONER said he would let the two of them get together                                                                    
later on that issue.                                                                                                            
MR. DICKINSON responded that he has seen folks do it both ways.                                                                 
5:04:03 PM                                                                                                                    
93. What is the meaning of the term "marginal tax rate," which                                                                  
is the rate of tax applied to the last dollar of the tax base?                                                                  
     He  explained that  according  to  WG&L Tax  Dictionary                                                                    
     (2004),  a  marginal tax  rate  is,  "The rate  of  tax                                                                    
     applied  to   the  last  dollar   of  the   tax  base."                                                                    
     Therefore, if a tax is  based on net income, a marginal                                                                    
     tax rate  is measured based  on the last dollar  of net                                                                    
     income.  This is  most often  found in  income tax  law                                                                    
     such as  AS 43.20.011  where the  top marginal  rate is                                                                    
     9.4 percent and this tax  rate is applied to amounts of                                                                    
     Alaska corporate taxable income over $90,000.                                                                              
5:04:33 PM                                                                                                                    
94. What is the meaning of the term "effective tax rate?"                                                                       
     In general, whenever there are  several factors at play                                                                    
     this  measure  cuts  through   all  their  effects  and                                                                    
     typically  divides the  tax paid  by some  measure. For                                                                    
     example,  an  income tax,  the  effective  tax rate  is                                                                    
     normally  expressed  as  the  actual  income  tax  paid                                                                    
     divided by taxable income, expressed as a percentage.                                                                      
     For example:                                                                                                               
     Gross income: $100                                                                                                         
     Less deductions: ($90)                                                                                                     
     Net income: $ 10                                                                                                           
     Tax at 20 percent: $ 2                                                                                                     
     Less credits: (1)                                                                                                          
     Tax due: $1                                                                                                                
     He explained  that in this  example, the  effective tax                                                                    
     rate is 10 percent, which  compares the $1 tax due with                                                                    
     the  taxable income  of $10.  In Question  30, earlier,                                                                    
     the effective  production tax  rate was  the percentage                                                                    
     of  gross revenue  without  taking exploration  credits                                                                    
     into account.                                                                                                              
5:06:24 PM                                                                                                                    
95.  Please   differentiate  the  definition   of  "exploration,"                                                               
"development," and "production."                                                                                                
     He noted that,  in general, the bill  provides the same                                                                    
     tax treatment to oil  and gas exploration, development,                                                                    
     and production.  In other words, it  generally makes no                                                                    
     difference whether  an expenditure is  for exploration,                                                                    
     or  for  development, or  for  production,  and it  was                                                                    
     therefore  not felt  necessary to  define the  terms in                                                                    
     the  bill.  The  terms  exploration,  development,  and                                                                    
     production are addressed  in FASB (Financial Accounting                                                                    
     Standards Board) Current Text Standards say:                                                                               
     Exploration   involves  identifying   areas  that   may                                                                    
     warrant examination  and examining specific  areas that                                                                    
     are considered to have prospects  of containing oil and                                                                    
     gas  reserves.   Exploration  costs   include  drilling                                                                    
     exploratory  wells  and  exploratory-type  stratography                                                                    
     test wells.  The principal  types of  exploration costs                                                                    
     include  costs   are  topographical,   geological,  and                                                                    
5:07:22 PM                                                                                                                    
SENATOR ELTON  asked he would  have thought lease costs  would be                                                               
an exploration cost.                                                                                                            
MR. DICKINSON responded  that he didn't believe  lease costs were                                                               
considered  exploration   costs.  Lease  acquisition   costs  are                                                               
usually separate and distinct from exploration costs.                                                                           
5:07:59 PM                                                                                                                    
ROBYNN  WILSON,  Director,  Tax  Division,  DOR,  said  that  Mr.                                                               
Dickinson was correct.                                                                                                          
MR. DICKINSON added that development  costs are what is necessary                                                               
to get  the reserves, delineate  them, figure out what  is there,                                                               
provide the facilities for getting  them up, treating extracting,                                                               
gathering,   storing.   The   kinds    of   costs   for   typical                                                               
infrastructure  costs  would  be   road  building,  power  lines,                                                               
drilling,  platforms, the  casing,  the  tubing, the  equipments.                                                               
Once that  development has occurred  and the investment  has been                                                               
made,  the last  category  is production  and  that involves  the                                                               
actual  lifting to  the surface,  gathering it,  storing it,  and                                                               
getting   to   market.   Production   costs,   operating   costs,                                                               
maintenance costs,  replacement like labor to  operate the wells,                                                               
repairs, maintenance,  material, supplies  and the  fuel consumed                                                               
to operate the wells.                                                                                                           
5:08:32 PM                                                                                                                    
SENATOR ELTON said  he mentioned something that  was not included                                                               
in the written answer  - getting it to market is  not listed as a                                                               
production cost.                                                                                                                
MR. DICKINSON replied that he  meant getting it ready for market,                                                               
typically an E&P  that would turn it over to  a midstream company                                                               
that  would have  transportation.  Senator Elton  was correct,  a                                                               
pipeline would not be considered production.                                                                                    
There being  no further questions  to come before  the committee,                                                               
CHAIR WAGONER adjourned the meeting at 5:10:10 PM.                                                                            

Document Name Date/Time Subjects