Legislature(2005 - 2006)BUTROVICH 205

03/18/2006 10:00 AM RESOURCES

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10:06:01 AM Start
10:06:37 AM SB305
10:08:57 AM Department of Revenue – Bill Corbus, Commissioner
10:14:32 AM Dr. Pedro Van Meurs, Consultant to the Governor
11:41:36 AM Department of Revenue – Robynn Wilson, Director, Tax Division and Dan Dickinson, Consultant
11:43:31 AM Department of Revenue – Robynn Wilson, Director, Tax Division
12:37:11 PM British Petroleum – Angus Walker, Commercial Vice President
12:45:38 PM Conocophillips Alaska – Brian Wenzel
01:54:08 PM Exxonmobil – Richard Owen, Production Manager
02:07:41 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
Major Producers Comments on Draft
Committee Substitute
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                         March 18, 2006                                                                                         
                           10:06 a.m.                                                                                           
MEMBERS PRESENT                                                                                                               
Senator Thomas Wagoner, Chair                                                                                                   
Senator Ralph Seekins, Vice Chair                                                                                               
Senator Ben Stevens                                                                                                             
Senator Fred Dyson (via teleconference)                                                                                         
Senator Bert Stedman (via teleconference)                                                                                       
Senator Kim Elton                                                                                                               
MEMBERS ABSENT                                                                                                                
Senator Albert Kookesh                                                                                                          
OTHER LEGISLATORS PRESENT                                                                                                     
Senator Gretchen Guess                                                                                                          
Senator John Cowdery                                                                                                            
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                                                                           
03/15/06       (S)       -- Testimony <Invitation Only> --                                                                      
03/16/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/16/06       (S)       -- Meeting Canceled --                                                                                 
03/17/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/17/06       (S)       Heard & Held                                                                                           
03/17/06       (S)       MINUTE(RES)                                                                                            
03/18/06       (H)       RES AT 10:00 AM CAPITOL 124                                                                            
WITNESS REGISTER                                                                                                              
DR. PEDRO VAN MEURS                                                                                                             
Consultant to the Governor                                                                                                      
Office of the Governor                                                                                                          
PO Box 110001                                                                                                                   
Juneau, AK 00911-0001                                                                                                           
POSITION STATEMENT: Commented on SB 305.                                                                                      
BILL CORBUS, Commissioner                                                                                                       
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT: Commented on SB 305.                                                                                      
DAN DICKINSON                                                                                                                   
Consultant to the Department of Revenue                                                                                         
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
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.                                                                                      
ANGUS WALKER, Commercial Vice President                                                                                         
BP Alaska                                                                                                                       
Anchorage AK                                                                                                                    
POSITION STATEMENT: Commented on SB 305.                                                                                      
BRIAN WENZEL, Vice President                                                                                                    
Finance and Administration                                                                                                      
ConocoPhillips Alaska                                                                                                           
Anchorage AK                                                                                                                    
POSITION STATEMENT: Supported SB 305; opposed CSSB 305(RES).                                                                  
RICHARD OWEN, Production Manager                                                                                                
ExxonMobil Alaska                                                                                                               
Anchorage AK                                                                                                                    
POSITION STATEMENT: Supported SB 305.                                                                                         
ACTION NARRATIVE                                                                                                              
CHAIR  THOMAS  WAGONER  called   the  Senate  Resources  Standing                                                             
Committee meeting  to order  at 10:06:01  AM. Members  present at                                                             
the call to order were  Senators Ralph Seekins, Ben Stevens, Fred                                                               
Dyson  (via teleconference),  Bert Stedman  (via teleconference),                                                               
Kim Elton and Chair Thomas Wagoner.                                                                                             
               SB 305-OIL AND GAS PRODUCTION TAX                                                                            
CHAIR WAGONER announced SB 305 to be up for discussion.  [In the                                                                
packets was a proposed committee substitute, (Version Y, labeled                                                                
24-GS2052\Y, Chenoweth, 3/16/06.]                                                                                               
10:06:37 AM                                                                                                                   
^Department of Revenue - Bill Corbus, Commissioner                                                                            
BILL  CORBUS,  Commissioner,   Department  of  Revenue,  informed                                                               
members that he strongly supported  the bill as it was originally                                                               
introduced with  the 20/20 scheme  and he strongly urged  them to                                                               
return  to  it.  It  would provide  badly  needed  incentive  for                                                               
increasing Alaska's  declining oil  production. He said  that the                                                               
TransAlaska Pipeline  (TAPS) is currently operating  at less than                                                               
half-capacity.   Production was once  at 2 million barrels  a day                                                               
and now  it's at 870,000 per  day and projected to  be 772,000 by                                                               
2016. Recent  investment and development has  been inadequate and                                                               
higher tax rates would further discourage new investments.                                                                      
He said  in the short-term, the  next five years, the  target has                                                               
to be known  reserves from existing fields and  records show that                                                               
existing producers  have done that  development. He  advised that                                                               
the legislature must not emphasize  short-term revenues from this                                                               
tax,  but must  look at  maximizing the  state's wealth  over the                                                               
long run  and the level  of investment  the state needs  will not                                                               
occur unless  there is  an enlightened  or balanced  tax climate.                                                               
The numbers show that 20/20 is the right mix.                                                                                   
10:08:57 AM                                                                                                                   
Thirdly, he  exhorted them to keep  their eye on the  prize - the                                                               
gas line. At  current prices, it would bring the  state more than                                                               
$100 billion over  the first 35 years of its  existence. It would                                                               
also extend the  life of TAPS beyond the year  2030 until the gas                                                               
runs out. He again urged the  committee to return to the original                                                               
20/20 scheme.                                                                                                                   
COMMISSIONER  CORBUS mentioned  that  Dr. Pedro  van Meurs  would                                                               
testify on  the problems in the  CS. He had been  a consultant to                                                               
the state  on oil  and gas  taxation issues  since 1996.  He also                                                               
mentioned  that  Robynn Wilson,  Director  of  the Tax  Division,                                                               
would  address  administration problems  within  the  CS and  Dan                                                               
Dickinson, its  former director who  was now a  consultant, would                                                               
address its tax policy problems.                                                                                                
10:10:39 AM                                                                                                                   
^Dr. Pedro van Meurs, Consultant to the Governor                                                                              
DR. PEDRO  VAN MEURS,  Consultant to  the Governor,  informed the                                                               
committee  that  many issues  in  the  proposed CS  required  his                                                               
attention. There  were so  many different ideas  in the  bill, it                                                               
was somewhat  difficult to grasp  the total concept. It  was even                                                               
difficult to  understand some clauses, such  as the progressivity                                                               
factor,  which wasn't  actually progressive.  He referred  to the                                                               
formula on  page 6, lines 4  and 5, and suggested  that oil would                                                               
need to be over  $1000 a barrel before the state  would get a 20-                                                               
percent tax.                                                                                                                    
DR. VAN MEURS  said the PPT bill  is the first step  in a process                                                               
that  people  hope   will  lead  to  a   stranded  gas  contract.                                                               
Department of  Revenue research  indicates that  there is  a very                                                               
important interaction  between the gas  line and the  state's oil                                                               
production.  If the gas line  goes forward, that will prolong the                                                               
life of  the fields  associated with TAPS.  It will  also provide                                                               
the opportunity for considerable additional oil development.                                                                    
10:14:32 AM                                                                                                                   
DR.  VAN MEURS  referred to  page  3 of  his handout  that was  a                                                               
repeat  of  Roger  Marks'  slide to  illustrate  the  point  that                                                               
without the  gas line, production  on the North Slope  may become                                                               
uneconomic or impossible after the  year 2030. The gas line would                                                               
add  significant  oil, as  well  as  particulate condensates  and                                                               
other possibilities.                                                                                                            
10:15:27 AM                                                                                                                   
DR.  VAN MEURS  said that  they are  potentially looking  at very                                                               
high revenues from  the gas line, depending on  the various price                                                               
levels, as  much as  $4 billion  a year at  very high  prices of,                                                               
maybe,  $7.50 -  at current  prices, maybe  $3 billion.  There is                                                               
enormous synergy between gas and oil.                                                                                           
10:17:11 AM                                                                                                                   
DR.  VAN  MEURS  said  the  combination  in  the  PPT  opens  the                                                               
possibility of presenting  a gas contract to  the legislature. He                                                               
said there  had been a  lot of  debate and evidence  presented to                                                               
them  on the  relation between  the tax  rate and  the amount  of                                                               
investment.  But he  said  the PPT  was a  modest  change to  the                                                               
overall government  take, not a  dramatic one, and he  didn't see                                                               
more   investment  occurring   over  that   rate  alone   saying,                                                               
"Nevertheless,  it  would  be  an  error to  say  that  there  is                                                               
absolutely no  relationship between  tax rate and  investment. Of                                                               
course there is a relationship between tax rate and investment."                                                                
The  legislature had  requested  him  to prepare  competitiveness                                                               
indexes at  $36 a  barrel. It showed  the competitiveness  of the                                                               
PPT  under  various fiscal  options  -  long  term -  and  didn't                                                               
include  the  $73  million  allowance.  This  is  how  large  oil                                                               
companies would look at it.  The table indicated that the numbers                                                               
clearly  change  under the  PPT  system  and not  under  Alaska's                                                               
current system.  Under his ranking  system the lower  the number,                                                               
the more competitive the system and  it showed that the 20/20 was                                                               
clearly more competitive than the  current system with this price                                                               
for the large companies. Other systems  in the world are far more                                                               
attractive -  the U.S. Gulf  of Mexico  or the UK,  for instance.                                                               
However, the PPT proposal improves  the competitiveness at 20/20.                                                               
At 25/20, there is a  slight improvement, but not significant. At                                                               
30/20, the PPT  becomes less attractive and at  30/15, it becomes                                                               
much less attractive.                                                                                                           
10:21:47 AM                                                                                                                   
DR. VAN MEURS  said these figures were not based  on any analysis                                                               
of a  specific investment,  but were generated  from the  math in                                                               
his report once he made  assumptions about field sizes, costs and                                                               
circumstances. His  conclusion was that definitely  there is some                                                               
relationship  between  tax  rate  and  level  of  investment.  He                                                               
summarized that  relationship on page  8 of his handout  with the                                                               
following comments.                                                                                                             
With  the   $73  million  tax-free  allowance   proposed  by  the                                                               
governor, new  investors who  come to Alaska  for the  first time                                                               
wouldn't  pay any  PPT on  their first  field. Consequently,  the                                                               
credits  under  the  PPT  would   always  make  the  system  more                                                               
favorable  for new  investors' first  investments no  matter what                                                               
the tax rate.  "And that was  a very important concept of the PPT                                                               
- to  encourage this  new investment, to  bring new  investors to                                                               
10:24:09 AM                                                                                                                   
DR. VAN  MEURS said, at the  same time, the reality  of the North                                                               
Slope production  is that any  increases in production  will come                                                               
from reserves that  have already been discovered.  "It take years                                                               
to explore; it takes years  to develop and fairly large resources                                                               
have  been  identified."  He  believed if  the  state  wanted  to                                                               
maintain production  or decline  it less,  then it  must increase                                                               
investment by larger oil companies.                                                                                             
At 25/20, he  believed the producers would invest  about the same                                                               
- about  $1 billion dollars a  year.  The system  is clearly more                                                               
competitive  under  the  20/20 and  logically,  investment  would                                                               
increase -  how much is difficult  to say. With 30/20,  the state                                                               
would  have less  investment;  with 30/15,  even  much less.  One                                                               
thing they  know is  that at  the current  level of  investment -                                                               
25/20 - production has declined.                                                                                                
     We know that for a fact  from the last five years. That                                                                    
     if you invest a billion  dollars a year, the production                                                                    
     declines. So,  I would say it  would also be a  fact, a                                                                    
     reasonable forecast  of the model I  developed, that if                                                                    
     you adopt 25/20, this decline  will continue. Will they                                                                    
     continue to invest?  Yes. As I said, my  belief is that                                                                    
     investment  will continue  on  a moderate  pace -  some                                                                    
     companies maybe  more than others  - but not  enough to                                                                    
     change the  decline rate. And  this is the  debate that                                                                    
     took   place  internally,   but   what   is  the   best                                                                    
     10:27:10 AM                                                                                                              
     And consequently,  the governor decided that  the 20/20                                                                    
     was the  best combination because he  believes strongly                                                                    
     that  we   need  to  stop   the  decline  of   the  oil                                                                    
     production.  We need  to do  whatever possible  to stop                                                                    
     that decline  and the total  revenues to the  state are                                                                    
     not  just how  much you  get per  barrel, but  also how                                                                    
     much barrels you produce. That is also logical.                                                                            
     So, the  20/20 is a system  that at least, based  on my                                                                    
     model,  would  result  in   more  investment.  You  can                                                                    
     reasonably forecast that; and  consequently, if we just                                                                    
     produce another  billion barrels more, or  two or three                                                                    
     billion  barrels   more,  over   the  next   30  years,                                                                    
     obviously,  at  current  prices,  that  means  tens  of                                                                    
     billions  of  dollars  more  for  the  government.  So,                                                                    
     consequently, there  is this important  balance between                                                                    
     investment and tax  rate. So, that is what  I'd like to                                                                    
     leave you  with. The evidence  that I presented  to you                                                                    
     in my  report before  and in  my subsequent  answers to                                                                    
     the legislators  clearly illustrate that there  is some                                                                    
     relationship between investment and tax rate.                                                                              
     As I  said, I don't  believe in dramatic  statements. I                                                                    
     don't  believe that  at 25/20  that the  oil industries                                                                    
     will  leave Alaska  and at  20/20 they  will all  storm                                                                    
     back. It  is not that  extreme. We  live in an  area of                                                                    
     uncertainty  -  that  investment patterns,  I  believe,                                                                    
     will be  modest. But, there  is clear evidence  that at                                                                    
     25/20  I  think  the  decline in  oil  production  will                                                                    
     continue,   because   investments  will   continue   at                                                                    
     approximately $1  billion a  year. At  20/20, logically                                                                    
     investment    should    increase   and    consequently,                                                                    
     production  will   decline  less   or  may   even  stop                                                                    
10:29:33 AM                                                                                                                   
DR. VAN MEURS said some provisions in the CS about Cook Inlet                                                                   
puzzled him and were meant to protect it somehow. And even                                                                      
though  he  understood  the  concern,   he  thought  carving  out                                                               
specific   areas   to  be   dealt   with   separately  would   be                                                               
counterproductive. First  of all, language did  not clearly apply                                                               
to oil  or to oil  plus gas and he  firmly believed that  even in                                                               
Cook   Inlet  there   are  further   possibilities  for   further                                                               
development and exploration.  The PPT was meant  to encourage and                                                               
reward  those  people  who  are willing  to  develop  the  fields                                                               
further and  willing to explore.  It would reward them  with very                                                               
significant tax credits. He persuaded:                                                                                          
     We need more exploration, not  just in the North Slope;                                                                    
     we also  need it  in Cook Inlet.  And carving  out Cook                                                                    
     Inlet from the main bill  does not serve the purpose of                                                                    
     seeing  more exploration.  In fact,  what I  sense from                                                                    
     the special  Cook Inlet provisions  is that we go  in a                                                                    
     harvesting  mode -  in  Cook Inlet.  We  don't want  to                                                                    
     explore  more;  we don't  want  to  develop more.  Just                                                                    
     leave us alone,  we have some profits  now. Let's just,                                                                    
     you know, enjoy it and  don't bother us. I think that's                                                                    
     the wrong approach. I believe  we should strive to also                                                                    
     increase activities  in Cook  Inlet and we  should also                                                                    
     reward investors in  the Cook Inlet region,  just as we                                                                    
     would do all across Alaska.                                                                                                
     10:32:45 AM                                                                                                              
     And  I  don't think  that  putting  Cook Inlet  in  the                                                                    
     harvesting  mode  is the  right  thing  to do.  I  also                                                                    
     believe that it would be  an unfair balance struck as a                                                                    
     result in  this proposal  between those who  operate in                                                                    
     Cook Inlet and those who operate in other areas.                                                                           
DR. VAN  MEURS said if  oil prices go  to very high  levels, Cook                                                               
Inlet  would not  be subject  to a  severance tax,  but companies                                                               
outside Cook  Inlet would and  he wasn't clear what  the proposal                                                               
entailed.  If  there are  very  high  prices,  he could  see  why                                                               
everyone  would want  to  share  in the  extra  benefit. He  also                                                               
didn't  think it  was  fair for  explorers in  Cook  Inlet to  be                                                               
assured of  no taxes while  explorers outside Cook Inlet  are put                                                               
on a  very tight rein  of only getting  either the 30  percent or                                                               
the 4,000 barrel exemption for seven years.                                                                                     
10:34:08 AM                                                                                                                   
DR.  VAN  MEURS  cautioned  that   a  complex  fiscal  system  is                                                               
difficult to administer  and is a disincentive  for investment to                                                               
begin with.   There is great virtue in simplicity  and clarity in                                                               
tax legislation.  Nations that made  simple tax laws  applying to                                                               
the whole  country get more  investment than nations that  try to                                                               
optimize every little corner and piece.                                                                                         
DR. VAN MEURS  asked the committee to reflect on  how the current                                                               
ELF system  on oil and the  new PPT for gas  would work together.                                                               
He asked how one would  distinguish between a development for oil                                                               
or one for gas and remarked  that how the whole geographic system                                                               
would have to be set up  to trace where investments were made. It                                                               
becomes  very  complex. He  strongly  urged  them to  not  divide                                                               
Alaska into pieces.                                                                                                             
10:36:35 AM                                                                                                                   
DR.  VAN MEURS  said there  seemed  to be  some misconception  on                                                               
promoting exploration in the CS.  He said the PPT already targets                                                               
massive   incentive  for   exploration,   particularly  for   new                                                               
investors. The  Expected Monetary Value  (EMV) column on  page 10                                                               
indicated  how  attractive  exploration  would  be.  It  compared                                                               
Alaska's  current system  with  the PPT  and  showed an  enormous                                                               
increase  in competitiveness,  such that  Alaska would  be almost                                                               
among the top in the  world in exploration incentive. Encouraging                                                               
more exploration  would be overdoing it  and there is no  need to                                                               
complicate the law further.                                                                                                     
10:40:02 AM                                                                                                                   
DR. VAN  MEURS referenced pages 11  and 12 of his  handout saying                                                               
there  is  a big  difference  between  promoting exploration  and                                                               
enhancing the economics  of small oil companies.  The proposed CS                                                               
seems  to  help  the  new small  companies  with  a  4,000-barrel                                                               
exemption  for  several  years,  but  that  is  not  what  is  so                                                               
important about  small companies.  He explained that  hundreds of                                                               
small companies have  operated in Alberta, Canada  for over fifty                                                               
years -  as small  companies; only  a few will  become big.  As a                                                               
small company,  they contribute to  the economy in terms  of jobs                                                               
for one  thing. They also  have a  roll in exploration  taking on                                                               
projects  that the  larger oil  companies  aren't interested  in.                                                               
That's why  the governor's bill included  permanent benefits, not                                                               
just one-time benefits,  for the small companies.  He stated that                                                               
permanent fiscal  policy for  small companies,  Alberta-style, is                                                               
good policy.  He thought the CS  confused exploration enhancement                                                               
with small company protection.                                                                                                  
10:42:34 AM                                                                                                                   
He  said the  governor's  bill  had options  to  the $73  million                                                               
allowance, but he advised making  it permanent protection for the                                                               
small companies reasoning if a  company becomes large, it can pay                                                               
the PPT,  but if it  struggles on and  stays small, it  will have                                                               
protection for the entire time period. He summarized:                                                                           
     The  PPT  bill  does everything  necessary  to  promote                                                                    
     exploration  - 20  percent tax  credits are  strong tax                                                                    
     credits by international  standards. The tradability of                                                                    
     the   losses  is   a   magnificent   feature  from   an                                                                    
     international  perspective.   That  will   attract  new                                                                    
     explorers. At  the same time  we like to  protect small                                                                    
     companies because of the contribution  they make to the                                                                    
     state and  the potential  contribution they  would make                                                                    
     to the state  in the long term - not  a one-time shot -                                                                    
     but as  a long-term strategy  - so that  very gradually                                                                    
     we build up these companies  to a permanent role in the                                                                    
     state. That was the spirit  of what was presented and I                                                                    
     don't discover that spirit in this substitute.                                                                             
10:44:48 AM                                                                                                                   
DR. VAN  MEURS commented on "State  Owned Assets," on page  13 of                                                               
the handout.  He cited AS  43.55.024(i)(3)(B) [in the  CS], which                                                               
stated that  no credits would be  provided for an asset  in which                                                               
the government participates  for 5 percent. He  reflected that he                                                               
knew  of no  assets in  which the  government participates  for 5                                                               
percent. So, it seems the clause was  put in there as a result of                                                               
statements the  Governor and  he had  made many  times -  that to                                                               
make this project go, there  must be state participation and risk                                                               
sharing.   He hoped to  demonstrate that to the  legislature with                                                               
ample evidence.                                                                                                                 
DR.  VAN MEURS  began  his  argument saying  we  live  in a  very                                                               
competitive world and this very  large gas project may be delayed                                                               
if the contract is not strong enough  to put it at the top of the                                                               
stack and in a rapid execution  mode. He believed that could only                                                               
be  achieved with  direct participation  of the  state. He  urged                                                               
members  to  delete  [the   5  percent  government  participation                                                               
provision] - to hear the evidence first and then follow up.                                                                     
SENATOR JOHN COWDERY joined the meeting at 10:47:27 AM.                                                                       
10:48:53 AM                                                                                                                   
SENATOR ELTON said  it seems there are two ways  for the state to                                                               
invest in  a gas  pipeline; one  is to  purchase an  equity share                                                               
(let's  assume  it's 20  percent)  or  to allow  credits  against                                                               
payments that otherwise  would come to the state. He  asked if it                                                               
uses credits  that don't give  a larger ownership share,  what is                                                               
the advantage to the state.                                                                                                     
10:50:18 AM                                                                                                                   
DR.  VAN  MEURS  agreed  that  the  participation  in  the  line,                                                               
particularly  taking  the  gas  in  kind,  is  a  very  important                                                               
methodology  for improving  the rate  of return  of the  project.                                                               
Providing a credit is another way  to improve the rate of return.                                                               
The  two  don't  have  to  go together;  they  are  two  separate                                                               
decisions.   It's important  not to preclude  any options  and to                                                               
maintain an open mind with regard  to how this gas line should be                                                               
structured.   He cautioned against  closing doors before  the new                                                               
law is integrated into the contract.                                                                                            
10:53:04 AM                                                                                                                   
SENATOR BEN  STEVENS agreed with  Dr. Van Meurs'  comments, which                                                               
related to Section  16 (i)(b) of the CS -  that it's a preemptive                                                               
strike on an  issue the legislature hasn't seen. It  is up to the                                                               
legislature to  make the  policy call when  the issue  arises and                                                               
it's not  up to consultants  and drafters to insert  a preemptive                                                               
clause.  He  also asked  Dr.  van  Meurs  to further  define  the                                                               
comparisons on  page 7 of the  handout. He asked why  the numbers                                                               
decrease from left to right.                                                                                                    
10:55:23 AM                                                                                                                   
DR. VAN  MEURS replied that  the decline  was caused by  the fact                                                               
that in  this type of  competitive rating analysis, you  rate all                                                               
of  the  fiscal systems  in  accordance  with the  rate-of-return                                                               
(ROR). For example, the best ROR  is 21 percent, then 19 percent,                                                               
et  cetera.  If you  change  fiscal  terms  for  any one  of  the                                                               
systems, you are  actually changing many of  the other variations                                                               
- because  suddenly the PPT  becomes more attractive  relative to                                                               
the current system.                                                                                                             
10:57:09 AM                                                                                                                   
SENATOR BEN STEVENS asked for  clarification on the comparison on                                                               
page 8.                                                                                                                         
DR.  VAN MEURS  answered that  it indicates  he expects  the same                                                               
level of investment for the  proposed system as under the current                                                               
fiscal terms.  He made a  simplifying assumption that if  the ROR                                                               
is the  same under the current  system and the new  system, there                                                               
was no argument for an investor  to invest more or less. However,                                                               
companies may disagree with his rating features.                                                                                
10:59:27 AM                                                                                                                   
SENATOR BEN  STEVENS asked why  he said the escalator  clause, on                                                               
pages 5-6 of the proposed CS, didn't have an accurate formula.                                                                  
DR.  VAN MEURS  replied  that he  didn't have  an  opinion on  it                                                               
because he didn't understand it.                                                                                                
CHAIR WAGONER answered that that language needed clarification.                                                                 
DR.  VAN  MEURS  responded  that  it would  have  a  huge  impact                                                               
potentially on his economic evaluation.                                                                                         
11:02:15 AM                                                                                                                   
SENATOR  GRETCHEN  GUESS said  she  enjoyed  reading his  report,                                                               
which talked  about exploration credits,  but not  production and                                                               
development credits. She asked:                                                                                                 
     Including production and development  both in the lease                                                                    
     expenditure  capital asset  that is  counted under  the                                                                    
     lease   expenditure    and   the    qualified   capital                                                                    
     expenditure,  are  production and  development  capital                                                                    
     expenditures in those two in these numbers?                                                                                
DR. VAN MEURS  replied no. The 20 percent  applies to exploration                                                               
as  well as  all capital-development  costs. The  reason is  that                                                               
actually  most of  the new  oil production  in Alaska  won't come                                                               
from new  discoveries, but from  oil that is  already discovered.                                                               
That  is why  it is  so  important to  grant the  20 percent  tax                                                               
credits  for development  of oil  that is  already discovered  as                                                               
well as for exploration. He explained:                                                                                          
     In the exploration analysis, people  don't just look at                                                                    
     the exploration  well. They also  look at  what follows                                                                    
     and, consequently, if  you see tax credits  all the way                                                                    
     through, then  you know that you  have better economics                                                                    
     for your  development and  if there's  better economics                                                                    
     for your  development, you  make the  exploration again                                                                    
     much more attractive. So, that's  the philosophy of the                                                                    
SENATOR GUESS thanked  him for his answer and went  to slide 7 on                                                               
the international  competitive model  and asked him  to reconcile                                                               
what  he just  said  about increasing  tax  credits helping  with                                                               
competitiveness  and his  testimony  was that  the state  doesn't                                                               
need any more tax credits in the bill.                                                                                          
11:05:41 AM                                                                                                                   
DR. VAN MEURS concurred with  her analysis and explained that the                                                               
reason, internationally, one is  careful with pushing tax credits                                                               
too high  is that it  exposes the state on  the down side.  If it                                                               
gives 30  percent credit on  everything when prices are  high and                                                               
everyone invests  and then the  price collapses, the state  is in                                                               
really bad  shape - "because now  you have all these  tax credits                                                               
and  suddenly no  income." He  said he  actually soul-searched  a                                                               
little bit about whether 20 percent  was already on the high side                                                               
and initially recommended 20/15.                                                                                                
Also, Alaska is contributing to  the capital of the investment by                                                               
implementing tax  credits and if they  are too high (the  term is                                                               
"gold-plating"), as  some nations  have done,  investments become                                                               
irrational and  become hard to  administer. That's why  there's a                                                               
balance  between tax  credits,  risk,  proper administration  and                                                               
investment  behavior. You  have to  strike a  balance and  that's                                                               
what he thought the 20/20 formula did.                                                                                          
11:10:32 AM                                                                                                                   
CHAIR WAGONER  referred to page  8 of  the handout and  asked how                                                               
the claw-back provision - for every  $2 invested by a company, it                                                               
can reach back  and get $1 -  would affect a 20/20 or  a 25/20 if                                                               
it were implemented for four or five years.                                                                                     
DR. VAN  MEURS answered  that a two-for-one  provision is  a more                                                               
creative way of getting something back for Alaska.                                                                              
     As  I mentioned,  the $1  billion  investment per  year                                                                    
     that  you have  seen over  the last  five years  is not                                                                    
     enough   to   stop   the  decline.   Consequently,   to                                                                    
     officially  enshrine  in  the legislation  the  concept                                                                    
     that yes,  if we  see $2  billion a  year, then  we are                                                                    
     willing to  give some extra  benefit for that  - rather                                                                    
     than -  as you did in  the law to just  reduce the claw                                                                    
     back.  And I  agree, if  you reduce  the claw  back, of                                                                    
     course,  the state  ends  up with  more  money and  the                                                                    
     companies end  up with less money.  That's obvious! But                                                                    
     my concerns is what benefit  other than this little bit                                                                    
     of  extra money  -  now, I  shouldn't  say little,  but                                                                    
     hundreds  of  millions  of dollars  for  most  Alaskans                                                                    
     sounds like  a lot of money.  I know that -  but in the                                                                    
     total scheme of things... this is a small component.                                                                       
He expounded that it is  more creative to structure the provision                                                               
so  that it  actually does  something for  Alaska -  and gives  a                                                               
reward,  especially  to  those companies  that  aren't  eager  to                                                               
increase  their  investment  under  the  new  fiscal  system.  He                                                               
believed  all companies  should be  eager to  increase investment                                                               
under the 20/20 system.                                                                                                         
11:14:14 AM                                                                                                                   
DR.   VAN  MEURS   suggested  that   while  it   would  encourage                                                               
investment,  it  would  also  increase the  state's  risk  for  a                                                               
limited  period of  time  -  such as  five  years. Investors  who                                                               
double  their   investment  in  Alaska  could   be  rewarded.  He                                                               
explained that  the claw-back proposal  has a limit  that applies                                                               
only  to  oil over  $40  a-barrel.  It  would be  an  interesting                                                               
feature to  have and  would express a  philosophy that  the state                                                               
wants to see.  He didn't think companies  would immediately start                                                               
doubling their investment.                                                                                                      
CHAIR  WAGONER   said  he  was  thinking   of  companies  already                                                               
producing here.                                                                                                                 
DR. VAN  MEURS agreed and  said those  would get an  extra reward                                                               
for enhancing production from existing fields.                                                                                  
11:16:39 AM                                                                                                                   
SENATOR  GENE  THERRIAULT  said  that  the  "sunk  cost"  to  the                                                               
companies  was basically  a giveaway  and  wouldn't impact  their                                                               
future decisions  and he favored  limiting it. However,  with the                                                               
new thought of two-for-one suggested  a little further work would                                                               
make  it useful  to the  state. He  thought it  would change  the                                                               
25/20  scenario  from  being  the  same  as  the  status  quo  to                                                               
increasing activity from the large producers.                                                                                   
11:19:50 AM                                                                                                                   
SENATOR  THERRIAULT  turned his  attention  to  page 13  and  the                                                               
troubling  aspect of  the state's  paying for  its percentage  of                                                               
ownership, as  well as  for some of  the partners'  ownership. He                                                               
asked Dr. Van Meurs if he  could somehow model the benefit to the                                                               
state of doing  so. He compared the claw back  to a bicycle built                                                               
for two.                                                                                                                        
     We're  willing  to get  on  the  bicycle and  help  our                                                                    
     partner pedal  to make investment, but  we're not going                                                                    
     to be  the drivers. We're  not going to be  holding the                                                                    
     handlebars. That's  going to have to  be the companies.                                                                    
     I  think   the  way   the  PPT  is   structured,  we're                                                                    
     encouraged to push on the pedals and so are they....                                                                       
11:22:59 AM                                                                                                                   
He  saw the  original problem  was  that the  companies might  be                                                               
reluctant  to get  on  board  the bicycle,  but  the look  back's                                                               
potential value to  the companies of up to $1  billion was a real                                                               
incentive for them to get on  the bicycle and start pedaling with                                                               
the state.                                                                                                                      
11:24:28 AM                                                                                                                   
CHAIR WAGONER asked that Dr. Van  Meurs hold his answer until the                                                               
following Monday so further work  could be done and other members                                                               
would be able to be present.                                                                                                    
11:24:57 AM                                                                                                                   
SENATOR STEDMAN  asked that the  same table on  page 7 be  run at                                                               
$46 a barrel oil for the following Monday.                                                                                      
DR. VAN MEURS  responded that major oil  companies don't forecast                                                               
at $46  a barrel, and  thus it wouldn't reflect  their investment                                                               
behavior. He believed the $26 -  $36 was the range used for long-                                                               
term  oil price  forecast  by  the major  oil  companies, but  he                                                               
agreed to generate that table for the committee's information.                                                                  
CHAIR WAGONER  asked Senator Stedman  whether he'd meant  for the                                                               
formula on page  6 to have .20 percent for  each $10-increment or                                                               
for each $1.                                                                                                                    
SENATOR STEDMAN replied that he  used Econ One's numbers and that                                                               
needed to be clarified.                                                                                                         
11:27:26 AM                                                                                                                   
SENATOR  ELTON asked  if he  was missing  something when  Dr. Van                                                               
Meurs  said there  is a  difference of  three points  under 30/20                                                               
resulting in  less investment  and when  there's a  difference of                                                               
five points the other way,  which would keep investment about the                                                               
DR. VAN  MEURS replied that  was a good  question.  He  used that                                                               
judgment because,  in his  rating, both  NPV [Net  Present Value]                                                               
and  are EMV  included.    He discounted  the  EMV  a little  bit                                                               
because it reflects investment in  fields that are already there,                                                               
not exploration.                                                                                                                
     If  I would  include the  EMV  kind of  fully, then  it                                                                    
     looks like the  figures are slightly better  for 25; if                                                                    
     you discount  for EMV, which I  have to do if  you only                                                                    
     look  at primarily  development fields,  then it  comes                                                                    
     out more or less as I have it here.                                                                                        
11:30:10 AM                                                                                                                   
SENATOR  ELTON asked  if the  20/20 zero  on page  7 was  with or                                                               
without the $73 million.                                                                                                        
DR. VAN MEURS replied 20/20  zero indicated that a large producer                                                               
wouldn't benefit anymore from the  $73 million because it already                                                               
took the allowance on a corporate basis.                                                                                        
11:30:38 AM                                                                                                                   
CHAIR WAGONER  returned to the  issue of Cook Inlet,  saying that                                                               
the  CS didn't  excluded  it  from the  PPT  -  just the  current                                                               
production. He  explained that the  Inlet has 20  producing units                                                               
and  those fields  are virtually  at the  end of  their lifespan.                                                               
The CS language  rolls those into one area and  maintains them at                                                               
the  their royalty  reduction level  that was  established a  few                                                               
years ago.   Placing a tax  on them would greatly  increase their                                                               
burden even  with oil  at $60  a barrel  and, "Things  will start                                                               
shutting down." Two platforms are  already shut down. The attempt                                                               
is to maintain that infrastructure.  The provision in the CS only                                                               
affects current  production of  oil; the PPT  applies to  all new                                                               
DR. VAN  MEURS replied that some  parts of the CS  were difficult                                                               
to  interpret  on short  notice  and  he  is  well aware  of  the                                                               
marginality  of  the fields  in  Cook  Inlet,  but he  wanted  to                                                               
structure the  PPT in a way  to achieve the more  exploration. By                                                               
excluding a certain  portion, as implied in this  draft, it would                                                               
become difficult  to administer  and without  necessary achieving                                                               
the  desired   results.  He  opined   that  perhaps   some  other                                                               
"wrinkles"  could  be  added  to  the  PPT  bill  to  obtain  the                                                               
provision's objectives.  He subscribed to the  philosophy that if                                                               
something is  good for Cook Inlet,  it should be good  for all of                                                               
Alaska. He urged them to keep the framework united.                                                                             
CHAIR WAGONER said  he wanted that infrastructure  up and running                                                               
for future production.                                                                                                          
DR. VAN MEURS totally agreed.                                                                                                   
11:35:46 AM                                                                                                                   
SENATOR GUESS requested a slide  of Dr. Van Meurs' assumptions on                                                               
what is  included and excluded  on costs, the  lease expenditures                                                               
and the qualified capital expenditures.                                                                                         
DR. VAN MEURS agreed to that.                                                                                                   
11:36:29 AM                                                                                                                   
SENATOR  BEN STEVENS  asked if  the  committee would  need a  new                                                               
draft before beginning with amendments.                                                                                         
CHAIR WAGONER said they would just  do a cleanup and then work on                                                               
SENATOR  BEN STEVENS  said the  reason he  asked was  because the                                                               
chair put a  timeline of Tuesday afternoon for  amendments due in                                                               
his office  and it would be  nice to have the  cleaned-up version                                                               
before then.                                                                                                                    
CHAIR WAGONER said they would get  an update on when the CS would                                                               
be cleaned up by drafting.                                                                                                      
CHAIR WAGONER called an at-ease from 11:38:29 AM to 11:39:27 AM.                                                            
11:39:32 AM                                                                                                                   
^Department of  Revenue - Robynn  Wilson, Director,  Tax Division                                                             
and Dan Dickinson, Consultant                                                                                                 
DAN  DICKINSON, Consultant  to the  Department  of Revenue,  came                                                               
forward with Robynn Wilson, Director, Tax Division to comment.                                                                  
MR.  DICKINSON  said  there  are  four  separate  tax  components                                                               
created [in the CS] - a tax on  Cook Inlet oil, which is based on                                                               
the old ELF system and a tax  on Cook Inlet gas and other Alaskan                                                               
oil based on the PPT; there is  also a tax on private royalty and                                                               
the  20  percent  of  each $10-increment.  Maybe  that  level  of                                                               
complexity was  appropriate, but what  struck him was  that folks                                                               
had not carefully identified which ones they were talking about.                                                                
11:41:36 AM                                                                                                                   
^Department of Revenue - Robynn Wilson, Director, Tax Division                                                                
ROBYNN WILSON,  Director, Tax Division,  Department of  Revenue -                                                               
said she would walk through the  bill and invite Mr. Dickinson to                                                               
add  comments. She  started  with  page 3,  line  18,  of the  CS                                                               
[version Y].  This section  levies the tax  and tries  to address                                                               
Cook Inlet properties, but the  language that is used talks about                                                               
"from each  lease or property  within a field or  unit...that was                                                               
in  production". Her  concern was  that there  could be  multiple                                                               
fields within a unit and if part  of a field is in production and                                                               
a new  one comes  on line  within the same  unit, how  that would                                                               
work together wasn't clear. The  clause "was in production" could                                                               
be applied to "lease", "property", "field" or "unit".                                                                           
Another definitions issue was that  "unit" is the equivalent of a                                                               
participating unit,  which is a  Department of  Natural Resources                                                               
definition; the  AOGCC looks  a pools  and Department  of Revenue                                                               
regulations look  at fields.  So, she asked  for more  clarity in                                                               
that language.                                                                                                                  
11:43:31 AM                                                                                                                   
MR. DICKINSON  brought attention back to  page 4, lines 10  - 23,                                                               
that  used the  existing definition  for "value  at the  point of                                                               
production (POP) for  oil only. He could see  three problems with                                                               
that. First, he  believed the DOR's definition  cleans up archaic                                                               
language for  oil, but he would  want to suggest that  having two                                                               
different  definitions apply  in two  different places,  that the                                                               
legislature thinks they mean something different. He explained:                                                                 
     As a matter  of legislative history, we  believe we are                                                                    
     not changing the point of  production and the fact that                                                                    
     we have the language in here  and need to put it in two                                                                    
     different places  might suggest otherwise.  [He offered                                                                    
     a handout  - see  packet]. The point  I'd like  to make                                                                    
     here is  the two definitions essentially  are going for                                                                    
     the  exact same  notion.  The  proposed definition  for                                                                    
     Cook  Inlet,  which is  our  existing  definition -  it                                                                    
     repeats this  several times, once  dealing with  on the                                                                    
     premises  and one  dealing off  the  premises. The  key                                                                    
     idea  is it's  the value  of the  oil where  it's first                                                                    
     metered or  measured by  an automatic  custody transfer                                                                    
     meter, a  tank gauge, or  other method approved  by the                                                                    
     commissioner  in  a   condition  of  pipeline  quality.                                                                    
     That's  the current  definition and  if you  go, you'll                                                                    
     find that phrase in here  three separate times. What we                                                                    
     have  done  is  try  to rewrite  it  and  the  proposed                                                                    
     definition, which is the second  piece of this piece of                                                                    
     paper - and again, we  used all those same phrases, but                                                                    
     we tried  to tie them  together in  a way that  we felt                                                                    
     was more coherent - saying the  value of the oil at the                                                                    
     automatic custody transfer meter,  which in fact is the                                                                    
     universal  standard  in  Alaska, or  a  device  through                                                                    
     which the oil enters into  the facilities of a pipeline                                                                    
     carrier or  other transportation  carrier, again,  in a                                                                    
     condition of pipeline quality, or  in the absence of an                                                                    
     automatic custody  transfer meter. We need  to put this                                                                    
     language  in  so  we're  covered -  even  though  as  a                                                                    
     general rule this doesn't happen.                                                                                          
     The gross  value at the  point of production  means the                                                                    
     value of  the oil  at that  mechanism or  device, which                                                                    
     measures the quantity of oil  that has been approved by                                                                    
     the department  for that purpose through  which the oil                                                                    
     is  tendered or  accepted  in a  condition of  pipeline                                                                    
     quality  in the  facilities  of a  pipeline carrier  or                                                                    
     other transportation carrier or a field topping plant.                                                                     
MR. DICKINSON  said the  other tension  is, given  the definition                                                               
Ms.  Wilson  talked  about  earlier,  you  could  have  a  single                                                               
production facility  in which  an old  oil stream  and a  new oil                                                               
stream were coming in at the  same time. The department wanted to                                                               
avoid having two different systems  and two different definitions                                                               
of points of production because that could get awkward.                                                                         
11:47:07 AM                                                                                                                   
MS. WILSON  returned to her  testimony and  went back to  page 5,                                                               
line  27, where  the  CS indicated  that  the commissioner  shall                                                               
determine the  amounts of  royalties on  all fields  developed in                                                               
ANWR  and the  NPRA.  She  wasn't' sure  that  was the  drafter's                                                               
intent, since the commissioner doesn't  set royalty. She wondered                                                               
whether it needed to be "tax on royalty".                                                                                       
CHAIR WAGONER  replied that  it was  supposed to  be "tax  on the                                                               
MS. WILSON  said that needed  to be clarified and  also suggested                                                               
that level  of discretion  would be best  left to  statute rather                                                               
than to the commissioner.                                                                                                       
11:48:07 AM                                                                                                                   
MR. DICKINSON went  to page 6, lines  4 and 5, and  said his main                                                               
concern was  that it wasn't clear  if the tax referred  to net or                                                               
MS. WILSON agreed. Moving  on to page 7, lines 16  - 20, she said                                                               
Section 10  of the governor's bill  had a 90 percent  safe harbor                                                               
payment  scenario with  an annual  true  up and  she wasn't  sure                                                               
about the  purpose of  the yearly  true up.  Lines 16  -20 talked                                                               
about how interest on an  over-payment works. The governor's bill                                                               
talks about only  allowing interest from a date that  was 90 days                                                               
after the  March 31 true up.  Once a quarterly true  up is thrown                                                               
in,  the language  indicates  that interest  will  start 90  days                                                               
after the later of March 31 or the  90 days after the end of each                                                               
calendar quarter. That doesn't make sense.                                                                                      
11:50:53 AM                                                                                                                   
MS.  WILSON  moved  on  to   page  8,  line  21,  that  described                                                               
situations where  oil and  gas is  sold under  circumstances that                                                               
don't represent  prevailing value. Clarifying language  was added                                                               
to the governor's  bill. It read: "If  oil or gas is  not sold or                                                               
if oil or  gas is sold under circumstances that  do not represent                                                               
prevailing value". The  CS added a couple words  - "produced, but                                                               
not sold". Someone might question  why those words were not added                                                               
in front  of the  second clause, which  is "or if  oil or  gas is                                                               
sold  under   circumstances  that  are  not   prevailing  value".                                                               
One  could argue  if  it's  sold, obviously  it  would have  been                                                               
produced; she  suggested that  one can buy  or sell  anything and                                                               
advised taking that language out,  and added that would make that                                                               
language consistent with the governor's bill.                                                                                   
11:52:33 AM                                                                                                                   
MS. WILSON turned  to the section on credits, page  9, lines 10 -                                                               
12.  The CS  envisioned a  20  percent credit  for production  or                                                               
development (A) and a 30  percent credit for exploration (B). The                                                               
rest of (B)  says "a credit under this subsection  may be applied                                                               
only  against a  tax due  under  AS 43.55.011  - 43.55.160;"  She                                                               
interpreted that  to mean that  it's creditable only  against the                                                               
PPT, that it's  not creditable against the oil, the  spill fee or                                                               
the progressive  piece of the tax.  But the confusing part  is if                                                               
that  restriction was  only on  the 30  percent credit,  then the                                                               
subsection needs to  be sub-paragraphed. If the intent  is to put                                                               
that restriction on both, she said that is not clear.                                                                           
CHAIR  WAGONER interrupted  to say  that section  could be  taken                                                               
11:54:15 AM                                                                                                                   
MS. WILSON said, "Okay." She turned to  page 10, lines 2 - 6, and                                                               
asked if those could also come out.                                                                                             
CHAIR WAGONER replied, "Yes, Ma'm."                                                                                             
11:55:21 AM                                                                                                                   
SENATOR THERRIAULT asked if the  credits could be applied to what                                                               
is owed in the spill fund.                                                                                                      
MR.  DICKINSON replied  that he  believed the  intent is  to have                                                               
nothing creditable against the spill funds or vice versa.                                                                       
11:56:11 AM                                                                                                                   
MS.  WILSON moved  to page  11, lines  7 -  13, Section  (e) that                                                               
talked  about transferable  tax  credit  certificates to  another                                                               
person. The  governor's bill had an  80 percent limit on  the tax                                                               
that could  be offset by a  transferred credit. The CS  took that                                                               
out and  she didn't  think that  had been  mentioned yet.  On the                                                               
same page,  lines 14 - 22  say the commissioner may  repurchase a                                                               
transferable tax credit certificate.                                                                                            
CHAIR WAGONER said that was a drafting error and was coming out.                                                                
11:57:33 AM                                                                                                                   
MR. DICKINSON asked if lines 14 - 23 were coming out.                                                                           
CHAIR WAGONER nodded yes.                                                                                                       
11:57:52 AM                                                                                                                   
MS. WILSON moved on to page 12,  lines 16 - 20, that talked about                                                               
not taking tax  credit for expenditures and  paragraph (2) talked                                                               
about  abandonment  and used  "extended  period",  which was  not                                                               
defined  and  that  could  be  the  subject  of  litigation  with                                                               
taxpayers. She noted similar language on page 20, lines 26 - 31.                                                                
11:59:20 AM                                                                                                                   
MS. WILSON  went to page 12,  lines 22 - 24,  that indicated that                                                               
overall  a person  cannot take  a tax  credit for  an expenditure                                                               
incurred for  or directly  related to  a regulated  pipeline, but                                                               
the problem  she saw was  that it also says,  "regulated pipeline                                                               
per the  FERC or the RCA  or "similar regulatory body".  That may                                                               
be intended to mean a successor  agency, but that was not clear -                                                               
particularly  because   language  on   line  22  says   not  just                                                               
"pipelines",  but "facilities,  other  assets,  or services".  If                                                               
that is paired  with the idea of "similar  regulatory body", then                                                               
you  don't know  if  you're  dealing with  things  that might  be                                                               
regulated by DEC or some other entity.                                                                                          
CHAIR  WAGONER  said  that  had   already  been  covered  by  Mr.                                                               
12:00:46 PM                                                                                                                   
MR. DICKINSON  said he was going  to spend a lot  of time talking                                                               
about one  word - "or"  on page 16, lines  17 - 28.  He explained                                                               
that existing statute sets up  three criteria. The CS takes those                                                               
three criteria  and linked them  with an "or". They  have Section                                                               
(a)  in front  of  them and  he  passed out  Section  (b) of  the                                                               
current statue, which takes the three criteria and says:                                                                        
     If the department finds that  the conditions in (a)(1),                                                                    
     (a)(2), and (3)  of this section are  present, then the                                                                    
     department  shall  determine  the reasonable  costs  of                                                                    
The point  he wanted to  make is if they  are going to  insert an                                                               
"or"  in (a),  then insert  it in  (b), as  well. Not  doing that                                                               
would  change the  meaning in  ways  that he  didn't think  would                                                               
solve  an  existing  problem.  The  statute  says  the  costs  of                                                               
transportation  are the  actual  costs and  regulations have  127                                                               
pages on how to determine actual costs. He further elucidated:                                                                  
     The world  that was envisioned  by this statute  and by                                                                    
     the consultant is  a world in which  there are transfer                                                                    
     costs and  the consultant  says when you  have transfer                                                                    
     costs  and you  have affiliated  parties and  they sell                                                                    
     each other  things by the  transfer costs, you  can get                                                                    
     into  trouble. That's  absolutely correct!  But there's                                                                    
     no transfer cost.  In the early '80s  companies came to                                                                    
     us and  said gosh, here's  the costs that  our shipping                                                                    
     company charges  our production company. The  state was                                                                    
     not  interested -  either in  looking  at royalties  or                                                                    
     looking at  taxes of those.  What we  do is we  look at                                                                    
     actual  costs.   When  we   audit,  we're   looking  at                                                                    
     invoices. The  big issues that  arise are how  you take                                                                    
     the $100  million plus that  you take to buy  a tanker,                                                                    
     that  construct a  tanker, in  American shipyards  with                                                                    
     certain tax  benefits and you recapture  those over the                                                                    
     20  years in  which you  use that  tanker. That  is the                                                                    
     major issue.... I  think this notion of  trying to find                                                                    
     the  market  value  of services  or  equally  efficient                                                                    
     services, the kinds of things  that are in the statute,                                                                    
     the  rate,  that  the consultant  talks  about,  simply                                                                    
     aren't necessarily appropriate.                                                                                            
To  resolve this,  he suggested  leaving out  the "or"  - as  the                                                               
governor's bill had it or else change it in several places.                                                                     
SENATOR BEN  STEVENS asked if  it were  to be changed  in several                                                               
places, would that change the intent of the existing statute.                                                                   
MR. DICKINSON replied  yes and he strongly  recommended not doing                                                               
that, but it they chose to leave it in, to make it consistent.                                                                  
12:04:58 PM                                                                                                                   
MR. DICKINSON  moved on to page  19 and said the  consultant from                                                               
the  same firm  focused  on line  29 of  the  governor's bill  on                                                               
allowable  direct costs  and said,  if you're  going to  say just                                                               
allow  outlays of  capital assets,  folks  are going  to show  up                                                               
having  bought stock  in a  company and  ask for  a deduction.  A                                                               
better  definition  was needed  and  he  suggested the  following                                                               
     An expenditure when occurred to  acquire an item if the                                                                    
     acquisition   cost   is   otherwise   a   direct   cost                                                                    
     notwithstanding  that the  expenditure may  be required                                                                    
     to  be  capitalized rather  than  being  treated as  an                                                                    
     expense for financial accounting  or federal income tax                                                                    
12:06:25 PM                                                                                                                   
SENATOR BEN  STEVENS went to  page 17, lines  22 - 24,  where old                                                               
Section 20  of the governor's  bill was changed and  rewritten to                                                               
Section 25 in the CS and noted that line 22 had a big change.                                                                   
MR. DICKINSON  responded that the  governor's bill  proposed that                                                               
the department  could do one of  several things. One of  them was                                                               
to see if the DNR was looking  at the same set of transactions as                                                               
the DOR and  if so, to allow DOR to  incorporate those. Secondly,                                                               
they could set  up formulas that look at market  values (which is                                                               
where 150(b) would take  them). One of them is on  line 3 and the                                                               
second one starts on line 16. The  CS says in option one, you can                                                               
incorporate  DNR generated  values; but  the second  formula says                                                               
you may  not. So, you have  to look at other  things like indices                                                               
of  market  transportation.  He  understood  that  they  may  not                                                               
incorporate  a  royalty  value,  royalty  methodology,  value  or                                                               
royalty settlement agreement.  But lines 22 and 23  only refer to                                                               
the second kind of formula, not to the first.                                                                                   
SENATOR BEN STEVENS asked if they  were both at the discretion of                                                               
the commissioner.                                                                                                               
MR. DICKINSON replied yes.                                                                                                      
12:09:01 PM                                                                                                                   
MS.  WILSON moved  on  to page  20,  lines 26  -  31, beyond  the                                                               
abandonment  language.  This section  lists  things  for which  a                                                               
person cannot take an expense;  that includes abandonment in (m).                                                               
However,  that is  modified on  the top  of the  next page  where                                                               
language disallows  abandonment and reads, "(i)  or proportionate                                                               
to the  production of oil  or gas occurring before  the effective                                                               
date  of this  section;  or".  What that  means  to  her is  that                                                               
abandonment that  happens on April  1, 2006, which  would clearly                                                               
have  to  do  with  old  production,  would  be  disallowed,  but                                                               
abandonment  that happened  down the  road  on a  well that  just                                                               
started producing  in May  2006, that would  be allowed.  She saw                                                               
problems with  handling abandonment that happens  some time after                                                               
the effective date for a well  that was producing both before the                                                               
date and  after the date.  It suggested  to her that  somehow the                                                               
expense  had  to  be  split  up  between  the  old  and  the  new                                                               
CHAIR WAGONER said he would check on that.                                                                                      
MS.  WILSON  remarked  that  in   that  same  vein,  (i)  is  one                                                               
modification  and  then  an alternate  modification  is  in  (ii)                                                               
saying abandonment  will not be  allowed if it  has to do  with a                                                               
regulated pipeline, if the tariff  takes into account abandonment                                                               
restoration obligations. Again, she  had similar problems and she                                                               
wasn't sure how to administer that and wanted clarification.                                                                    
12:11:55 PM                                                                                                                   
MS. WILSON  asked them to  keep their finger  on page 20,  but to                                                               
turn  to page  23, beginning  at  line 29,  where subsection  (l)                                                               
began (and went through page 25)  that said, "(l) For purposes of                                                               
making a  determination of direct  cost under (d)(2)(L)"  and she                                                               
asked them  to flip  back to  page 20 where  (d)(2)(L) has  to do                                                               
with  surcharges and  (d)(2)(M) has  to do  with abandonment  and                                                               
then asked them  to compare the two. She said  it looked like the                                                               
purpose  of the  subsection on  page  23, beginning  on line  29,                                                               
appears  to be  in  situations  where there  might  not be  arm's                                                               
length exchanges. So,  it doesn't make sense to refer  to page 20                                                               
(L) surcharges and  (M) abandonments. She thought  perhaps it was                                                               
mis-referenced and  was meant to  refer to  page 21, line  8, (N)                                                               
where it talks about non-arm's length transactions.                                                                             
MS. WILSON asked members to keep  that in mind and directed their                                                               
attention  to page  21, line  12,  to Section  (O), which  talked                                                               
about purchases  of businesses.  She asked them  to flip  to page                                                               
24,  line  2,  where  it  said: "(1)  the  department  may  adopt                                                               
regulations  incorporating  the concepts  of  the  26 U.S.C.  482                                                               
(Internal Revenue  Code)," and remarked  that that  section talks                                                               
about transfer pricing. She remarked,  "It is a really ugly audit                                                               
section.... I  mean we  could employ auditors  for years  on that                                                               
MS. WILSON said in addition to  Section IRC 482, line 3 [page 24]                                                               
allowed  the  department  to  look   at  IRS  Code  6662(e)  that                                                               
addressed substantial  valuation misstatement. It is  included in                                                               
IRC  Section   6662,  which  overall  addresses   "imposition  of                                                               
accuracy-related  penalties  on underpayments."  Section  6662(e)                                                               
particularly addresses  valuation misstatements. She  just didn't                                                               
know what they were doing with that section overall.                                                                            
12:16:17 PM                                                                                                                   
MS. WILSON moved on to page  24, line 13. This paragraph said the                                                               
producer  shall provide  contemporaneous documentation  available                                                               
at  the time  the document  was prepared.  So, if  the department                                                               
asks  for that  documentation and  the producer  fails to  comply                                                               
with that  request, they will be  liable for a penalty,  but what                                                               
sort of penalty is not addressed.                                                                                               
She noted that  line 14, Subsection (m), says  "The provisions of                                                               
this  subsection  apply  to  the purchase  or  acquisition  of  a                                                               
business  entity", then  it goes  on to  address particularly  an                                                               
acquisition that  is accounted  for under  IRC Section  338. That                                                               
section provides that where one company  sells the stock of a sub                                                               
to another  company, they can agree  that it will be  treated for                                                               
federal  tax purposes  as a  sale  of assets.  That has  specific                                                               
application under income  tax law having to do with  the basis of                                                               
those  assets and  she was  completely unclear  about why  it was                                                               
applied here.                                                                                                                   
12:18:40 PM                                                                                                                   
MS. WILSON  moved on to  page 25, lines  7 - 11,  that referenced                                                               
where a taxpayer  has taken a credit in one  year for a qualified                                                               
lease expenditure and  then that asset for  which the expenditure                                                               
was  made  is  subsequently  removed  from  the  state,  and  the                                                               
taxpayer  would have  to recapture  that credit.  She noted  this                                                               
paragraph had  no time limit,  so if the  asset was 80  years old                                                               
and was taken out to salvage  or whatever, the taxpayer still has                                                               
to recoup that.  She questioned whether that was  the intent. She                                                               
said that  concluded her  comments on  the proposed  CS, although                                                               
she might find a few other items.                                                                                               
12:19:52 PM                                                                                                                   
MR. DICKINSON  interrupted that he  had two  items to add  to the                                                               
list. He skipped back to page 21,  lines 20 - 22 that defined the                                                               
kinds  of  things a  producer  has  to  net against  their  lease                                                               
expenditures.  The  CS  added  the  following  condition  to  the                                                               
governor's  bill  regarding  a  producer  who  has  an  ownership                                                               
interest in a facility and they are paid for it:                                                                                
     subject  to a  management agreement  that provides  for                                                                    
     the producer to receive  a management fee determined by                                                                    
     whole or in part of  the income or gross revenue earned                                                                    
     by the production facility;                                                                                                
He was concerned about how expansively  that might be read if the                                                               
producer doesn't  have to have  any ownership interest  and asked                                                               
if  someone could  explain  what was  trying  to be  accomplished                                                               
Lastly,  language on  page 22  talked about  the kinds  of things                                                               
that have  to be "netted  out" when  arriving at net  value. This                                                               
referred  explicitly to  the transition  investment expenditures.                                                               
Line 18 says if they were  "a result of expenditures the producer                                                               
incurred on or after January 1,  2003, and before April 1, 2006,"                                                               
and  he suggested  deleting the  phrase "on  or after  January 1,                                                               
2003," -  the notion being if  you had something to  acquire five                                                               
years  ago, when  you  sell  it, it's  part  of  your net  outlay                                                               
calculation.   So,  selling   something  under   non-transitional                                                               
expenditures  goes  into your  calculation  and  it doesn't  make                                                               
sense to limit it to January 1, 2003.                                                                                           
12:22:05 PM                                                                                                                   
SENATOR GUESS referred  to page 25, lines 21 -  23, and said that                                                               
"ordinary and necessary"  was not defined anywhere.  She asked if                                                               
Ms. Wilson was  comfortable that 26 U.S.C. 6662  was clear enough                                                               
or that  the case  law around  it was clear  enough to  limit the                                                               
risk of litigation of the definition.                                                                                           
MS. WILSON  replied that quite a  body of court cases  exist that                                                               
address this and  she expected that would continue.  She said she                                                               
was much more  comfortable with a big body of  case law than with                                                               
setting a different standard that has no precedence.                                                                            
MR. DICKINSON added  that the standards they have set  have to be                                                               
"direct, ordinary,  and necessary". Merely meeting  a standard of                                                               
ordinary  and   necessary  doesn't   qualify  them  as   a  lease                                                               
CHAIR WAGONER said that concluded  the presentation and announced                                                               
a short break from 12:23:35 PM to 12:33:37 PM.                                                                              
CHAIR  WAGONER  announced  that  they  would  hear  from  British                                                               
Petroleum next.                                                                                                                 
12:34:02 PM                                                                                                                   
^British Petroleum - Angus Walker, Commercial Vice President                                                                  
ANGUS  WALKER,  Commercial Vice  President,  BP  Alaska, had  two                                                               
handouts, one  was entitled BP's  Presentation on SB 305  and the                                                             
other Addendum:  BP Presentation  on SB  305(PPT). He  said since                                                             
1999,  both   industry  and  the   Department  of   Revenue  have                                                               
consistently overestimated  production. This  was a  huge concern                                                               
to BP as he thought it was  for the state. He also concurred that                                                               
production had been  declining at the rate of 6  percent per year                                                               
with the  most recent DOR forecast  of 3 percent per  annum going                                                               
forward. He  mentioned the development  of Alpine  and Northstar.                                                               
[The teleconference transmission became unclear at this point.]                                                                 
12:37:11 PM                                                                                                                   
CHAIR WAGONER indicated that his testimony was breaking up.                                                                     
MR.  WALKER   continued  by  yelling  into   his  Blackberry.  He                                                               
referenced  the  second  graphic,  a  slide  of  the  latest  DOR                                                               
forecasts that indicate  the natural decline of  the fields would                                                               
be 15  percent per year. He  said that at the  current investment                                                               
level, $1  billion to  $1.5 billion per  year, that  decline will                                                               
continue be  around 6 percent. Significantly  more investment was                                                               
needed around  $2 billion  to $3  billion per  year, to  get that                                                               
line to  move in  the other direction.  He said  that legislators                                                               
needed to ask  themselves what it would take to  get that kind of                                                               
12:39:42 PM                                                                                                                   
CHAIR WAGONER  broke in to  say he was  hearing only half  of Mr.                                                               
Walker's comments.                                                                                                              
MR. WALKER  asked if they  could proceed with someone  else while                                                               
he found a different phone.                                                                                                     
CHAIR WAGONER said he would  proceed with ConocoPhillips and then                                                               
return to Mr. Walker.                                                                                                           
12:42:22 PM                                                                                                                   
^ConocoPhillips Alaska - Brian Wenzel                                                                                         
BRIAN  WENZEL,   Vice  President,  Finance   and  Administration,                                                               
ConocoPhillips  Alaska, presented  ConocoPhillips'  views on  the                                                               
proposed changes to SB 305.                                                                                                     
     Your  committee substitute,  if  enacted  into law,  is                                                                    
     going to  have a negative impact  on the attractiveness                                                                    
     of  Alaska  for   ConocoPhillips'  investment  dollars.                                                                    
     ConocoPhillips  absolutely  opposes  this  CS  and  any                                                                    
     proposal that  increases our industry's taxes  above $1                                                                    
     billon per year proposed by the governor's bill.                                                                           
     The  proposal before  us today,  although difficult  to                                                                    
     interpret  and  confusing   in  several  places,  might                                                                    
     increase oil  taxes by an  annual average of  more than                                                                    
     $2.4 billion.  If today's prices continue,  this is $24                                                                    
     billion over the next 10  years. The approach reflected                                                                    
     in  this committee  substitute is  clearly to  maximize                                                                    
     short-term state  revenue, while putting at  risk long-                                                                    
     term production, state revenues,  growth in the private                                                                    
     sector and  jobs. The CS  you are  considering destroys                                                                    
     the balance of the original bill.                                                                                          
     ConocoPhillips' view is that  our relationship with the                                                                    
     state  is one  in which  we are  partners that  share a                                                                    
     common,  all-important  goal -  maximizing  production.                                                                    
     For  the State  of  Alaska,  maximized production  will                                                                    
     naturally lead  to maximized  state revenues  and jobs.                                                                    
     We must  both strive to  find ways to  maintain current                                                                    
     production, mitigate  natural field  production decline                                                                    
     and,  where possible,  develop new  production. In  our                                                                    
     industry,  production projections  and reserves  can be                                                                    
     more  important the  current  cash  flow and  earnings.                                                                    
     This is because  we take a long-term view  about how to                                                                    
     create value in the  future regardless of our inability                                                                    
     to predict  prices. Alaska also  needs to take  a long-                                                                    
     tem  view  by focusing  on  how  to motivate  long-term                                                                    
     investment   and   increase  production   rather   than                                                                    
     extracting  incremental  short-term  revenue  increases                                                                    
     above  and beyond  the $1  billion already  accepted by                                                                    
     the industry.                                                                                                              
     We realize  you have developed this  revised bill after                                                                    
     listening to  the advice of various  consultants. If we                                                                    
     understand  your   consultants'  testimony,   they  are                                                                    
     suggesting  that you  can jettison  the balance  of the                                                                    
     original  proposal  and  adopt an  approach  like  that                                                                    
     reflected  in the  CS with  no  adverse consequence  on                                                                    
     investment.  Indeed,  they  suggest you  will  actually                                                                    
     increase investment in the state by doing so.                                                                              
     We also  have hired  a number  of consultants  and will                                                                    
     use their input as we lay  out for the House and Senate                                                                    
     Finance   committees   the    same   points   we   were                                                                    
     unsuccessfully  in demonstrating  to  you. However,  at                                                                    
     the end of  the day, neither your  consultants nor ours                                                                    
     must make  or live  with the decision  currently before                                                                    
     the Alaska State Legislature.  Similarly, none of these                                                                    
     consultants ever  has or ever  will make  an investment                                                                    
     decision  on behalf  of ConocoPhillips.  To the  extent                                                                    
     your consultants are  telling you that the  CS will not                                                                    
     have  a negative  impact on  ConocoPhillips' investment                                                                    
     decisions going  forward, I can  tell you they  are 100                                                                    
     percent wrong.                                                                                                             
     12:45:38 PM                                                                                                              
     Taking billions  of dollars for our  industry will have                                                                    
     a  negative   impact  on  investment.  Taking   away  a                                                                    
     significant portion of the upside  potential in a basin                                                                    
     with lead  times of a  decade or  more in an  area with                                                                    
     low   prospectivity  and   higher  costs   than  almost                                                                    
     anywhere  else  in  the world  will  negatively  affect                                                                    
     investment    and   consequently    negatively   affect                                                                    
     production, state revenues and  jobs. This is a natural                                                                    
     consequence of the action you are taking.                                                                                  
     Moreover,  the negative  effect on  our decision-making                                                                    
     and on  the decision-making of others,  will not result                                                                    
     just from the  increased tax burden you  are seeking to                                                                    
     impose. There is  also the question of  our and others'                                                                    
     confidence  in the  future investment  climate here  in                                                                    
     the  state. Adverse  changes in  the key  parameters of                                                                    
     the  originally   proposed  bill   will  result   in  a                                                                    
     fundamental shift  in the balance of  risks and rewards                                                                    
     of reinvestments  in Alaska. Unreasonable  changes like                                                                    
     those  imbedded   in  this  CS  will   cause  not  only                                                                    
     ConocoPhillips,  but also  other investors  to question                                                                    
     not  whether, but  when, Alaska  will again  change its                                                                    
     fiscal  regime  and   impose  unfair  and  unreasonable                                                                    
     burdens  on  those  who  have  taken  great  risks  and                                                                    
     invested  billions of  dollars to  develop the  state's                                                                    
     It is irrelevant whether that  future change will be in                                                                    
     the  state's  production  tax, its  property  tax,  its                                                                    
     corporate  income  tax  or  in  the  creation  of  some                                                                    
     entirely new tax. The point  is that investors will now                                                                    
     need to consider another is  significant risk in making                                                                    
     their  economic decisions  in Alaska  -  the risk  that                                                                    
     Alaska will  not approach future fiscal  policy changes                                                                    
     in a  reasonable manner that recognizes  the commitment                                                                    
     and contribution of companies like ConocoPhillips.                                                                         
     When you are  considering how to finalize  this CS, I'd                                                                    
     encourage  you to  ask  yourselves,  is Alaska  getting                                                                    
     enough industry  investment today?  If you  don't think                                                                    
     there's enough investment today,  how can raising taxes                                                                    
     lead  to  more   investment?  Granted,  the  investment                                                                    
     incentives for  exploration can  be expected  to garner                                                                    
     some  additional production,  but  that  will be  years                                                                    
     away. The additional production  we need to tem decline                                                                    
     of  the   next  several   years  can  only   come  from                                                                    
     additional  investment around  existing infrastructure.                                                                    
     Raising  taxes on  existing infrastructure  as you  are                                                                    
     doing in the CS can only deter that investment.                                                                            
12:48:20 PM                                                                                                                   
MR.  WENZEL drew  the  committee's attention  to  the handout  on                                                               
satellite fields  developed over  the last  10 years.  He pointed                                                               
out  that there  are only  four  fields greater  than 50  million                                                               
barrels. In Alaska,  prospectivity is low and costs  are high. He                                                               
cautioned the  state about looking at  other comparable countries                                                               
and determining that its government  take should be equivalent to                                                               
them because of the low prospectivity  and the high cost. He also                                                               
pointed out that some of the  largest investors are also the ones                                                               
who  are developing  the new  fields;  it's not  coming from  new                                                               
investors into  Alaska. Even in  the future, the State  of Alaska                                                               
should  not  expect the  list  to  change dramatically  with  new                                                               
names.  He  said  the  production   would  come  from  the  known                                                               
resources  today  and  further  developing  them  and  mitigating                                                               
decline in the already discovered big fields.                                                                                   
12:49:54 PM                                                                                                                   
MR. WENZEL returned to his written testimony, saying:                                                                           
     From our quick  review of your CS, it  appears that you                                                                    
     have  changed   nearly  every  key  parameter   in  the                                                                    
     original  bill in  a  decidedly  one-sided manner  that                                                                    
     benefits   the  state   and  is   at  the   expense  of                                                                    
     ConocoPhillips   and  the   other  major   North  Slope                                                                    
     producers.  You have  destroyed the  balance previously                                                                    
     represented in the bill.                                                                                                   
     Through the  CS, you propose to  not only significantly                                                                    
     increase  the base  PPT rate  to 25  percent, but  also                                                                    
     further increase that  tax rate on the  industry at all                                                                    
     prices above  $40. At current prices,  depending on how                                                                    
     we  interpret the  unfinished language  in the  CS, the                                                                    
     additional surcharge will result  in anywhere from $1.8                                                                    
     to  $2.4  billion  in  annual  tax  liability  for  the                                                                    
     industry  over  the  current  system.  This  change  is                                                                    
     neither fair  nor reasonable to existing  investors and                                                                    
     will be viewed as  unfair and unreasonable by potential                                                                    
     future investors.                                                                                                          
     You have severely reduced  the intended transition plan                                                                    
     such   that  investors   with  large,   recent  capital                                                                    
     investment   projects,   which   haven't   even   begun                                                                    
     producing  yet are  penalized for  apparently investing                                                                    
     in Alaska too early and  being too optimistic about the                                                                    
     future of Alaska. I want  to emphasize this point. This                                                                    
     CS  penalizes   the  very  companies  that   have  been                                                                    
     investing,  creating  jobs  and building  the  resource                                                                    
     base in the state of Alaska.                                                                                               
     You   have    provided   for    differentially   higher                                                                    
     exploration  tax  credits,  but   as  one  of  the  few                                                                    
     companies  who  have  actually applied  of  exploration                                                                    
     credits under  the current statue, our  experience that                                                                    
     that, in  fact, current regulation  effectively reduces                                                                    
     the value  of these  credits to 70  percent or  less of                                                                    
     their stated value. Further,  these credits only affect                                                                    
     about 4  percent of the  DOR's expected  future sources                                                                    
     of production and investment in Alaska.                                                                                    
     12:51:41 PM                                                                                                              
     Finally,  you have  moved the  effective  date of  this                                                                    
     bill  back to  a date  that is  completely impractical.                                                                    
     The  necessary  regulations,  procedures  and  computer                                                                    
     systems cannot possibly be adopted  and put in place by                                                                    
     April 1of  this  year, which means that  production tax                                                                    
     payers  in  Alaska will  have  to  guess at  their  tax                                                                    
     liability and  make unsupported payments  of tax  in an                                                                    
     uncertain attempt to avoid punitive interest costs.                                                                        
     Unfortunately, we are unable  to precisely quantify the                                                                    
     dollar impact form the CS  due to the short turn-around                                                                    
     time and the  fact that many of the  key parameters are                                                                    
     apparently  still subject  to change.  However, in  our                                                                    
     view,  these   changes  from  the  original   bill  are                                                                    
     completely inconsistent  with the  goals of a  fair and                                                                    
     reasonable    fiscal    policy,   increase    long-term                                                                    
     investment in  Alaska and a vibrant,  secure Alaska oil                                                                    
     industry.  We  urge  you to  reconsider  the  long-term                                                                    
     impact of  this bill on future  production, Alaska jobs                                                                    
     and the  future of  the State  of Alaska  generally. We                                                                    
     urge you not  to move this bill out  of committee until                                                                    
     it can  be re-crafted  with a more  balanced, long-term                                                                    
     perspective. Thank you for considering our views.                                                                          
12:52:53 PM                                                                                                                   
SENATOR ELTON turned to page  2 of Mr. Wenzel's written testimony                                                               
to his comment  that government take would amount  to $24 billion                                                               
over  the next  10 years  and asked  him what  the industry  take                                                               
would be - using the same assumptions.                                                                                          
MR. WENZEL answered that he didn't have that number with him,                                                                   
but said that no doubt, the industry would make significant                                                                     
SENATOR  ELTON  asked that  information  to  be provided  to  the                                                               
12:54:09 PM                                                                                                                   
SENATOR  BEN   STEVENS  asked  how  many   people  ConocoPhillips                                                               
employed in Alaska.                                                                                                             
MR. WENZEL replied about 900 employees.                                                                                         
SENATOR BEN  STEVENS asked  what effect he  thought the  CS would                                                               
have on maintaining that number.                                                                                                
MR. WENZEL  said this CS wouldn't  immediately change employment.                                                               
But in the  long term, positions would be  lost through attrition                                                               
and  management would  not approve  as many  projects. He  stated                                                               
that is not their goal in Alaska.                                                                                               
12:55:29 PM                                                                                                                   
SENATOR COWDERY  asked if he  had an  estimate of the  numbers of                                                               
subcontractors ConocoPhillips has.                                                                                              
MR. WENZEL replied that he had no estimate of subcontractors.                                                                   
12:56:06 PM                                                                                                                   
SENATOR GUESS  referred to Dr.  van Meurs' testimony that  the CS                                                               
incentivizes exploration too much and asked him to comment.                                                                     
MR.  WENZEL replied  that  as the  state's  leading explorer,  he                                                               
would  not agree  that the  state is  incentivizing too  much. It                                                               
would  not   meet  all  of   ConocoPhillips'  needs   to  improve                                                               
production and mitigate production in current facilities.                                                                       
SENATOR GUESS  said she  understood that  both the  original bill                                                               
and the  CS provide  that all production  and development  in the                                                               
lease expenditures  are depreciated  in the  first year;  and yet                                                               
Mr.  Wenzel  testified that  this  legislation  does nothing  for                                                               
current production. She asked why he said that.                                                                                 
MR. WENZEL  answered that a  couple of things  come to mind.   He                                                               
mentioned the  transition effect.   Also, much of  the investment                                                               
that  goes into  facilities  to maintain  current production  are                                                               
repair and  replacement dollars,  which don't qualify  as capital                                                               
expenditures. "In our view those  investments are as important as                                                               
your capital expenditures...." His other  concern was that the CS                                                               
severely  limits the  transition  program in  the original  bill.                                                               
ConocoPhillips has  two projects underway, but  not yet producing                                                               
- Fjord  and Nanook.  If Alaska  goes forward  with this  sort of                                                               
approach,  it wouldn't  get credit  for the  several hundreds  of                                                               
millions  of dollars  spent on  those projects  and that  says to                                                               
investors   that  they   should  have   waited  and   done  their                                                               
investments later.                                                                                                              
1:00:18 PM                                                                                                                    
SENATOR  BEN STEVENS  looked at  page 2  of Mr.  Wenzel's written                                                               
testimony where  he said production projections  and reserves are                                                               
more important  than current cash  flow and earnings.  He related                                                               
that to  his statement on page  6 about being too  optimistic for                                                               
the  future  and asked  whether  the  company remains  optimistic                                                               
about Alaska.                                                                                                                   
MR. WENZEL replied yes, optimistic and committed.                                                                               
SENATOR BEN STEVENS asked if this CS would dim his optimism.                                                                    
MR. WENZEL replied yes.                                                                                                         
1:01:50 PM                                                                                                                    
CHAIR WAGONER  said he didn't see  this bill being too  much more                                                               
punitive than the  governor's bill. He asked  what the governor's                                                               
bill would do for his outlook on Alaska.                                                                                        
MR. WENZEL  respectfully disagreed that  the CS is not  much more                                                               
punitive. The  governor's bill stated  additional taxes  would be                                                               
$800 million per year and the  CS could be easily over $2 billion                                                               
per year. The governor's bill  proposed a significant increase in                                                               
tax liability, but  that was looked at in the  context of all the                                                               
things the  company expects to  do in the  future and it  felt it                                                               
could step up to that level of investment.                                                                                      
1:02:59 PM                                                                                                                    
SENATOR  THERRIAULT  asked  if   he  was  quantifying  the  total                                                               
additional governmental take in the  $800 million - $1 billion or                                                               
the total shift from the producers.                                                                                             
MR.  WENZEL  replied  that was  the  incremental  additional  tax                                                               
liability over the current system.                                                                                              
SENATOR THERRIAULT said the federal  government picks up 30 to 35                                                               
percent also.                                                                                                                   
MR. WENZEL responded no, those were just production tax numbers.                                                                
1:03:53 PM                                                                                                                    
SENATOR GUESS went  back to her previous  question on production.                                                               
Maintenance would  be a lease  expense because it's  an operating                                                               
expense, not  a capital  expense. But if  you replace  a "widget"                                                               
that would be a capital expense.                                                                                                
MR.  WENZEL  replied  that  he   didn't  have  enough  accounting                                                               
knowledge, but  he understood that  it would have to  extend life                                                               
of  field.   He  wasn't  sure   what  that  meant,   but  capital                                                               
expenditures  would  allow the  company  to  bring on  additional                                                               
production,  extend  the  life  beyond  what  they  expected,  et                                                               
cetera, as opposed to simply repairing or replacing equipment.                                                                  
SENATOR  GUESS  asked  if  they   needed  to  repair  or  replace                                                               
something to keep current production  or increase it, would those                                                               
come under capital assets in this bill.                                                                                         
MR. WENZEL replied that he wasn't convinced of that.                                                                            
1:05:33 PM                                                                                                                    
SENATOR  SEEKINS said  he thought  those would  be operation  and                                                               
maintenance expenses  in a  different category.  As he  looked at                                                               
information from  multiple consultants and experts  in the field,                                                               
the 20/20  program, as  laid out  by the  governor with  the look                                                               
back  provisions  and  the  $73  million  floor  on  taxes  would                                                               
increase taxes  in terms  of the  effective tax  rate of  about 6                                                               
percent. If  all other factors were  the same and then  the state                                                               
adopted a 25/20  program, it would be increased  by about another                                                               
2.5  percent. He  asked if  that was  a good  characterization of                                                               
what he said.                                                                                                                   
MR.  WENZEL replied  that the  CS results  in an  additional $1.8                                                               
billion to $2.4 billion in tax burden.                                                                                          
SENATOR SEEKINS asked if that was  the result of the 25/20 versus                                                               
20/20 or did  he use a progressivity number at  the $40-range and                                                               
then back out all the credits.                                                                                                  
MR. WENZEL answered  yes and he included all elements  of this CS                                                               
including the change in the effective date.                                                                                     
SENATOR  SEEKINS  asked  he  agreed with  the  estimate  of  $250                                                               
million for the changed effective date (of one quarter).                                                                        
MR.  WENZEL  replied that  figure  was  roughly correct  for  the                                                               
SENATOR SEEKINS said  they are all put together, it  looks like a                                                               
pretty big  chunk, but  no one  has provided  him with  the total                                                               
impact of all the  things that would come out of  that in the CS.                                                               
He  asked for  a graphic,  as simple  as possible,  of the  total                                                               
impact of the CS.                                                                                                               
MR.  WENZEL said  he would  attempt to  provide that,  but making                                                               
estimates about other companies  would be difficult. He suggested                                                               
that he ask the administration, as well.                                                                                        
1:10:02 PM                                                                                                                    
CHAIR  WAGONER asked  when  Mr. Wenzel  said  an additional  $1.8                                                               
billion to  $2.4 billion, if he  meant in addition to  the status                                                               
quo or in addition to the governor's bill.                                                                                      
MR. WENZEL replied in addition to the status quo.                                                                               
SENATOR  GUESS added  that  the difference  she  saw between  the                                                               
original bill  versus the CS is  that the state gets  more of the                                                               
upside, but  with more  risk - because  of the  credit structure.                                                               
She asked what price range those estimates used.                                                                                
MR. WENZEL replied that estimate was based on today's prices.                                                                   
CHAIR WAGONER asked what would  be the additional money under the                                                               
governor's bill.                                                                                                                
MR. WENZEL  replied that he  concurred with  the administration's                                                               
numbers  of $800  million  to $1  billion more  to  the state  at                                                               
today's prices.                                                                                                                 
CHAIR  WAGONER said  the adjusted  credits and  the additional  5                                                               
percent,  which  is   really  only  about  2   percent  in  total                                                               
government take would result in  an additional $1 billion to $2.4                                                               
billion from the industry.                                                                                                      
MR. WENZEL replied yes.                                                                                                         
1:12:13 PM                                                                                                                    
SENATOR BEN  STEVENS asked  how he calculated  the PPT  rate with                                                               
the escalator to get that number  - at current prices. He thought                                                               
the  government take  would  go up  more  significantly than  the                                                               
chair just stated.                                                                                                              
MR.  WENZEL replied  that  he  didn't know  the  exact rate,  but                                                               
today's  price  was  $59  or  so. He  said  there  are  different                                                               
interpretations of how the progressivity would work.                                                                            
SENATOR BEN STEVENS asked if the CS was 29/20 at current rates.                                                                 
MR. WENZEL replied  that was correct, but the 29  percent was the                                                               
nominal rate before any credit.                                                                                                 
1:14:01 PM                                                                                                                    
SENATOR SEEKINS  asked what ConocoPhillips'  long-term projection                                                               
was on the price of oil.                                                                                                        
MR.  WENZEL  respectfully  declined  to answer  saying  that  was                                                               
proprietary information.                                                                                                        
SENATOR SEEKINS  asked with  $40 as  a starting  point and  a 2.5                                                               
percent incline that  would put the tax at 25/20  at $60 a barrel                                                               
and  with all  other elements  being the  same, would  that be  a                                                               
punitive rate.                                                                                                                  
MR.  WENZEL answered  that he  was  not sure  "punitive" was  the                                                               
appropriate  term, but  he believed  it  was too  high and  would                                                               
result in less investment over the  long term compared to a 20/20                                                               
1:16:13 PM                                                                                                                    
SENATOR  BEN STEVENS  said he  thought Mr.  Wenzel's rate  of the                                                               
escalator was  inaccurate, because  it was  pegged to  West Texas                                                               
International (WTI) crude. Yesterday's  WTI was $63 and typically                                                               
ANS is less.                                                                                                                    
SENATOR ELTON  said Dr. Van Meurs  used $36 a barrel  oil for his                                                               
competitive index  rating on investment  and said that  the 25/20                                                               
would  result  in  the  same   level  of  investment  as  is  now                                                               
occurring. He asked Mr. Wenzel if  he used $36 a barrel, would he                                                               
come to the same conclusion.                                                                                                    
MR. WENZEL  replied no. He  suggested that legislators  listen to                                                               
the  consultants,  but also  consider  whether  a consultant  who                                                               
doesn't invest  in Alaska knows best  what is going to  happen at                                                               
20/20 or at 25/20. He suggested  listening to what the people who                                                               
are making those  investments are saying and he said  it would be                                                               
potentially "less" than the "same."  He reiterated that the 20/20                                                               
scenario was a good balance.                                                                                                    
1:19:11 PM                                                                                                                    
CHAIR WAGONER asked  whether Senators Stedman and  Dyson, both on                                                               
teleconference, had questions.                                                                                                  
SENATOR STEDMAN didn't.                                                                                                         
SENATOR DYSON  asked why  at today's much  lower tax  rates there                                                               
hasn't been more investment.                                                                                                    
MR.  WENZEL  replied that  was  one  of ConocoPhillips'  concerns                                                               
also. He  questioned whether  this was  the right  environment to                                                               
increase the tax burden.                                                                                                        
SENATOR  DYSON  said  he'd  conclude,  then,  that  taxes  aren't                                                               
perhaps even a significant portion of  the issue. He asked if Mr.                                                               
Wenzel  would  prefer  them  to  drop  the  tax  rate  below  the                                                               
governor's recommendation.                                                                                                      
MR. WENZEL  said he  would encourage legislators  to look  at all                                                               
possibilities  to  find the  best  mix  that would  motivate  the                                                               
activity  and behavior  the state  wanted. He  couldn't say  that                                                               
fiscal policy completely effected investment or non-investment.                                                                 
1:22:17 PM                                                                                                                    
SENATOR DYSON  asked how much  investment might increase  using a                                                               
15/30 scenario.                                                                                                                 
MR.  WENZEL  replied that  he  didn't  have estimates  for  that,                                                               
although ConocoPhillips' level of  investment would definitely be                                                               
greater. The  focus of the company  is not on prices,  but rather                                                               
on opportunities to increase production.                                                                                        
1:23:26 PM                                                                                                                    
SENATOR STEDMAN  asked to  get total  numbers for  the government                                                               
and industry take so they could be compared.                                                                                    
CHAIR  WAGONER asked  if ConocoPhillips  would invest  more under                                                               
the governor's bill at 20/20.                                                                                                   
MR. WENZEL  replied yes, under the  long term. But more  than the                                                               
current system -  he said it would be difficult  to quantify. The                                                               
20/20  proposal  has  real  potential  for  a  gas  pipeline;  it                                                               
represents something  that provides common ground  to go forward.                                                               
Also, 20/20 stands on its own as a fair balance.                                                                                
CHAIR WAGONER  asked if governor's  proposal at 25/20 would  be a                                                               
pipeline deal-breaker.                                                                                                          
MR.  WENZEL  replied  that   ConocoPhillips  didn't  control  the                                                               
decisions  for all  three companies.  Getting to  20/20 was  very                                                               
1:28:27 PM                                                                                                                    
CHAIR WAGONER thanked Mr. Wenzel  for his testimony and said they                                                               
would go back to Angus Walker from BP.                                                                                          
MR. WALKER returned  to page 2 of his written  testimony and took                                                               
up where he left off:                                                                                                           
     Whilst  development  of   Alpine,  Northstar,  and  the                                                                    
     Prudhoe   Bay   satellites   between  2000   and   2002                                                                    
     successfully  flattened North  Slope  production for  a                                                                    
     number  of years,  2005 saw  decline return  to the  6-                                                                    
     percent rate  that has characterized this  basin in the                                                                    
     past. Unfortunately  for all of  us, there are  no more                                                                    
     fields of  Alpine or Northstar's magnitudes  waiting to                                                                    
     be developed.                                                                                                              
1:34:25 PM                                                                                                                    
MR. WALKER  presented a graphic addressing  the current situation                                                               
under three  different scenarios  that showed with  no investment                                                               
the  natural decline  of the  fields would  drop. At  the current                                                               
level of investment  of $1 billion to $1.5 billion  per year, the                                                               
decline would be  around 6 percent a year. The  latest DOR spring                                                               
forecast translated into an approximate  3 percent decline, which                                                               
is the status quo. He said:                                                                                                     
     However, the  3 percent  decline cannot be  met without                                                                    
     significant additional  investment in  the order  of $2                                                                    
     billion   to  $3   billion  per   year.  Unless   those                                                                    
     investments  are  made,  history  will  repeat  itself,                                                                    
     decline will continue  at the current rate  and the DOR                                                                    
     will  be  revising  its production  forecast  down  yet                                                                    
     The real  question for  you to  be asking  industry and                                                                    
     the  consultants  is  'What would  it  take  to  double                                                                    
     investment in the Alaska North Slope?'                                                                                     
     Encouraging new exploration  is good, but it  is a fact                                                                    
     acknowledged  by  all  who   have  testified  that  the                                                                    
     resources   expected    to   be    discovered   through                                                                    
     exploration will likely be  significantly less than the                                                                    
     resources we  already know about.  It is  investment in                                                                    
     these known  resources that offers the  greatest chance                                                                    
     of stemming the decline of  ANS production. As you look                                                                    
     at incentives  for exploration,  you must  not overlook                                                                    
     incentives for  investments, which  are more  likely to                                                                    
     The tax regime, which  you approve will directly impact                                                                    
     how attractive  Alaska is for investment  and that will                                                                    
     translate into what  the future decline will  be. It is                                                                    
     in the  interest of  all, industry  and Alaska,  that w                                                                    
     focus o  growing the pie  rather than  increasing state                                                                    
     take  from a  declining  pie. [He  explained a  graphic                                                                    
     illustrating his point.].... The  point I'd really like                                                                    
     to make here is this is not just about severance tax.                                                                      
MR.  WALKER  said  the  status  quo of  a  6-percent  decline  is                                                               
happening under the  current tax system. The 20/20  proposal is a                                                               
big  tax  increase on  the  industry  and  is a  disincentive  to                                                               
investment rather an incentive and  he predicted a bigger decline                                                               
with it.                                                                                                                        
SENATOR ELTON  followed up, referring  to page 2 of  Mr. Walker's                                                               
written testimony.   He asked  whether Mr. Walker  was suggesting                                                               
that an additional  $2 billion to $3 billion  investment per year                                                               
was needed to  get to the 3-percent decline level  and that 20/20                                                               
made things difficult. He didn't  understand how investment would                                                               
double under  the new proposal  if they couldn't get  there under                                                               
MR. WALKER answered that he was correct.                                                                                        
     There is  no prospect  of getting to  $2 billion  or $3                                                                    
     billion per year of investment  under the new proposal,                                                                    
     because we  couldn't get there  under ELF. In  fact our                                                                    
     belief is  that the  new proposal causes  an additional                                                                    
     burden  on  industry  and will  yield  a  decline  rate                                                                    
     higher than  6 percent,  rather than  one that  is less                                                                    
     than 6 percent.                                                                                                            
SENATOR  ELTON followed  up  that  the only  way  to  get to  the                                                               
production level  needed for  the 3-percent decline  was to  go a                                                               
tax recipe that is less severe than the existing ELF.                                                                           
MR. WALKER replied  that was correct.  He would  talk later about                                                               
1:38:04 PM                                                                                                                    
SENATOR BEN  STEVENS tried to  elucidate by asking Mr.  Walker if                                                               
he was speaking to the CS as proposed.                                                                                          
MR. WALKER replied that he  hadn't addressed the CS. He clarified                                                               
that the governor's 20/20 proposal  increased tax on industry and                                                               
thus was a disincentive. He  advocated rather than increasing the                                                               
tax burden on industry, to reduce it to stimulate investment.                                                                   
Returning  to  Senator  Elton's  question  about  the  investment                                                               
required to get to a 3-percent  decline; it is a total investment                                                               
of $2 to $3 billion per year, not incremental.                                                                                  
1:39:52 PM                                                                                                                    
MR. WALKER  said the state  could collect zero severance  tax and                                                               
get  a better  outcome  than collecting  high  severance tax  and                                                               
having less resource development. He said:                                                                                      
     The   size   of  the   pie   is   the  most   important                                                                    
     consideration.  Maximizing the  value of  resources for                                                                    
     Alaskans means maximizing  state revenue and maximizing                                                                    
     production. Resources  left in the ground  are simply a                                                                    
     wasted  opportunity. This  should be  the focus  of our                                                                    
     deliberation. Alaska needs  more investment, more jobs,                                                                    
     more production, not higher taxes.                                                                                         
     The good news for Alaska is  that you have a huge known                                                                    
     resource base  on the North  Slope and the bad  news is                                                                    
     that  it  is  going  to  be  technically  difficult  to                                                                    
     extract and it  is one of the most  expensive places in                                                                    
     the world to produce oil and gas.                                                                                          
     Assuming the  new 20/20 is  put in place,  Alaska would                                                                    
     also  become the  area in  the United  States with  the                                                                    
     highest marginal  tax rate. And  needless to  say, this                                                                    
     introduces one more  barrier to attracting investments.                                                                    
     Incorporation  of  a  yet higher  tax  rate  at  higher                                                                    
     prices is yet another take  from industry and creates a                                                                    
     bizarre fiscal  regime being  regressive at  low prices                                                                    
     and  progressive at  high prices  -  thus reducing  the                                                                    
     space for  industry and creating  yet more  barriers to                                                                    
     attracting investments.                                                                                                    
MR.  WALKER'S next  graphic indicated  U.S.  marginal tax  rates.                                                               
With the  PPT at 20/20, the  marginal tax rate in  Alaska will be                                                               
61  percent, significantly  higher than  any other  place in  the                                                               
United  State. When  you add  more taxes  at higher  prices, that                                                               
adds additional hurdles to investment. He concluded:                                                                            
     To maximize the  value of the resources  in the ground,                                                                    
     the legislature  should be focused on  maximizing North                                                                    
     Slope   production   by  attracting   investment.   The                                                                    
     priority  for   the  State  of  Alaska   should  be  to                                                                    
     encourage  investment to  help  industry develop  those                                                                    
     known  resources, not  to make  it  more difficult  and                                                                    
     risky than it already is.                                                                                                  
1:42:53 PM                                                                                                                    
MR. WALKER  drew attention  to the  United Kingdom  [see handout]                                                               
and said  he couldn't  agree more with  Daniel Johnston  who said                                                               
that reducing taxes virtually  created and subsequently sustained                                                               
an  economic boom  in the  UK. He  read a  quotation from  Daniel                                                               
     Ordinary  measures of  government taken  throughout the                                                                    
     1990s made the United  Kingdom government appear rather                                                                    
     crazy  and irresponsible....  The  'gross benefits'  to                                                                    
     the  UK government  go way  beyond direct  tax revenues                                                                    
     and royalties received from the  upstream sector of the                                                                    
     petroleum   industry.  The   economic  impact   of  the                                                                    
     industrial hyperactivity in the  UK sector or the North                                                                    
     Sea,  a direct  result of  the 'lenient'  terms of  the                                                                    
     1990s  is   difficult  to  measure.   Furthermore,  the                                                                    
     activity in the UK started  in the late 1980s and early                                                                    
     1990s  when the  UK government  dropped the  ring fence                                                                    
     for the  75 percent Petroleum Revenue  Tax (PRT) before                                                                    
     government  take, as  it  is  ordinarily measured,  was                                                                    
     drastically reduced.  The UK  offshore became  the most                                                                    
     active  offshore province  in the  world. Reducing  the                                                                    
     government  take  in  the following  years  managed  to                                                                    
     sustain  that  boom.  Activity and  employment  in  the                                                                    
     British petroleum sector is healthy and robust....                                                                         
     The  actions  of  the  UK during  the  1980  and  1990s                                                                    
     provide  an excellent  role  model  for any  government                                                                    
     hoping to attract investment. Let  us please not forget                                                                    
     the   urgent  need   to   stem   decline  and   attract                                                                    
     significantly more  capital (about twice what  is being                                                                    
     spent today to the North Slope).                                                                                           
     In order  to maximize  the value of  Alaska's resources                                                                    
     we believe you should be  adopting tax rates lower than                                                                    
     those proposed by the governor.  In so doing, you would                                                                    
     maximize investment,  maximize production  and maximize                                                                    
     jobs  for Alaskans.  You would  also take  an important                                                                    
     step  towards creating  a healthy  oil business,  which                                                                    
     ill be the foundation for gas.                                                                                             
     We  recognize the  burden on  your shoulders  in making                                                                    
     these decisions. There are many  people advising you to                                                                    
     increase  taxes,  which   will  indeed  increase  state                                                                    
     revenue, but  for how long?  One year - two  years? But                                                                    
     at what cost to future production?                                                                                         
MR. WALKER said that BP hadn't  had the opportunity to review the                                                               
CS, but could  not support the substantial increase  in take from                                                               
the industry. The base tax rate  of 25 percent was too high given                                                               
Alaska's  urgent  need to  attract  large-scale  capital to  stem                                                               
decline. Alaska needs a competitive  fiscal regime to attract the                                                               
investment required.                                                                                                            
1:47:21 PM                                                                                                                    
MR. WALKER  said the change in  the effective date meant  the tax                                                               
would  be  implemented  before it  was  enacted;  the  transition                                                               
provisions   have   been   significantly   reduced   making   the                                                               
implementation unfair  for its  investors. He  urged them  not to                                                               
adopt the CS.                                                                                                                   
1:49:28 PM                                                                                                                    
CHAIR  WAGONER noted  there  were no  questions  and thanked  Mr.                                                               
Walker for his presentation.                                                                                                    
1:50:21 PM                                                                                                                    
^ExxonMobil - Richard Owen, Production Manager                                                                                
RICHARD OWEN, Production Manager,  ExxonMobil Alaska, said he was                                                               
Vice President, ExxonMobil Alaska  Production, gave the following                                                               
     I am  here today to express  ExxonMobil's concerns with                                                                    
     the  proposed  Committee  Substitute  to SB  305.    On                                                                    
     February 28,  I testified  about our key  concerns with                                                                    
     SB   305   as   originally  proposed.   These   changes                                                                    
     exacerbate  the concerns  I described  on February  28.                                                                    
     Specifically, I  will make comments  on two  areas: the                                                                    
     proposal  to  change the  tax  rate;  and the  proposal                                                                    
     around reduced transition provisions.                                                                                      
     SB 305, as originally  proposed, represented a dramatic                                                                    
     tax  increase   on  the   industry.  As   I  previously                                                                    
     testified,  we expressed  concern that  the higher  tax                                                                    
     rate  included  in  the  bill  could  prevent  some  of                                                                    
     Alaska's  challenged  resources from  being  developed.                                                                    
     We  understand the  Committee is  now considering  even                                                                    
     higher tax rates.                                                                                                          
     Too high  a tax rate discourages  investment. Companies                                                                    
     are willing  to accept the risks  of long-term, capital                                                                    
     intensive  investments when  there  is a  corresponding                                                                    
     opportunity for  upside potential through a  variety of                                                                    
     factors,  such   as  increased  production   or  higher                                                                    
     prices.  When  you limit  or  reduce  the benefit  that                                                                    
     Companies  can achieve  from  the  upside factors,  you                                                                    
     reduce   the   attractiveness   of   those   investment                                                                    
     opportunities.  The proposal  to  increase the  already                                                                    
     high base tax  rate and then further  increase that tax                                                                    
     rate  as oil  prices  rise, does  reduce  or limit  the                                                                    
     upside   potential  and   will   result  in   Companies                                                                    
     recalibrating investment  decisions. Reduced investment                                                                    
     will  result in  reduced resource  recovery, diminished                                                                    
     state  revenues  and  fewer  employment  opportunities,                                                                    
     with  a  resultant  negative   impact  on  the  state's                                                                    
     economy.  Again, let me  reemphasize this point.  While                                                                    
     higher taxes  may bring in  additional revenues  in the                                                                    
     short-term, any reduction  in investment and subsequent                                                                    
     production will significantly  impact those revenues in                                                                    
     the longer term.  We believe  the focus of the tax bill                                                                    
     should be to encourage investment and grow production.                                                                     
     ExxonMobil  is concerned  with  the significant  change                                                                    
     from the  ELF-based system  to the  PPT system  and the                                                                    
     need for  sufficient transition provisions  to mitigate                                                                    
     the   adverse   impact   on  recent   investments.   We                                                                    
     understand the Committee  is considering reducing those                                                                    
     transition  provisions.  While   the  benefits  from  a                                                                    
     typical oil  and gas investment  take many years  to be                                                                    
     realized,   the  Administration's   proposed  five-year                                                                    
     transition into  the higher tax PPT  system represented                                                                    
     a  reasonable  transition. The  Committee  Substitute's                                                                    
     proposed  transition  provisions  do  not  sufficiently                                                                    
     address the  significant increase  in tax  burden these                                                                    
     past investments will now have to bear.                                                                                    
     1:54:08 PM                                                                                                               
     Despite  our   concerns  with  SB  305   as  originally                                                                    
     proposed, we  are prepared to  move forward  under that                                                                    
     system  since  it  sought  to   provide  a  balance  of                                                                    
     revenues to the  state and producers across  a range of                                                                    
     oil   prices,   provided   sufficient   incentive   for                                                                    
     producers  to  undertake  exploration  and  development                                                                    
     risks,  and included  reasonable transition  provisions                                                                    
     for  past   investments.  And,  most   importantly  for                                                                    
     ExxonMobil, oil  fiscal contract terms  consistent with                                                                    
     the   Administration's  proposal   would  provide   the                                                                    
     predictability and durability  necessary to advance the                                                                    
     gas project to the next phase.                                                                                             
     It is important that the  quality of the resources, the                                                                    
     risks undertaken by  a producer, and the  impact on the                                                                    
     state's  overall investment  climate  be factored  into                                                                    
     the  design of  the  tax system.  While industry  needs                                                                    
     predictably  and   durability  under  which   to  gauge                                                                    
     investment  decisions,   the  attractiveness   of  that                                                                    
     predictably and durability  is lost if it  comes at too                                                                    
     high a cost.                                                                                                               
     As  I  mentioned   earlier,  the  Committee's  proposed                                                                    
     substitute exacerbates our  key concerns regarding both                                                                    
     tax  rates  and  transition provisions.  We  urge  this                                                                    
     Committee to support SB 305 as originally proposed.                                                                        
     Thank  you again  Mr. Chairman  for the  opportunity to                                                                    
     testify today.                                                                                                             
1:55:29 PM                                                                                                                    
CHAIR WAGONER asked  if he heard Dr. van Meurs'  testimony on the                                                               
two-for-one credits for the look back.                                                                                          
MR. OWEN replied yes.                                                                                                           
CHAIR WAGONER asked what his reaction to that kind of incentive.                                                                
MR. OWEN replied that the  transitional arrangement was trying to                                                               
transition past investments that  will incur significantly higher                                                               
tax burden  than was originally  foreseen when they  shortly come                                                               
on line. Those  transition arrangements, while they  are based on                                                               
capital investments in  the past are simply trying  to reduce the                                                               
significantly increased  tax burden of those  revenue streams. He                                                               
favored the original proposal.                                                                                                  
CHAIR WAGONER asked what effect  the 20/20 proposal would have on                                                               
the positive side to maintain  current levels of production or to                                                               
stop the decline.                                                                                                               
MR.  OWEN answered  that the  original 20/20  provided a  balance                                                               
between  the tax  rate the  credit rate.  It provided  incentives                                                               
that allow ExxonMobil to go ahead with those investments.                                                                       
1:58:06 PM                                                                                                                    
SENATOR SEEKINS asked if Dr.  Van Meurs' competitive rating index                                                               
indicating that the 20/20 was  more favorable than the status quo                                                               
was a reasonable assumption.                                                                                                    
MR. OWEN answered  that was very good question.  The 20/20 system                                                               
as proposed,  based on  the kinds of  opportunities that  Dr. Van                                                               
Meurs  was  looking  at,  improved  the rate  of  return  of  the                                                               
projects  by shrinking  the pie.  It offset  some of  the upfront                                                               
investment and  reduced the stream  going forward by  20 percent.                                                               
One confusing  part of the  picture is  that it was  dealing with                                                               
average scenarios, not specific opportunities.                                                                                  
2:00:53 PM                                                                                                                    
SENATOR SEEKINS referred to Dr.  Van Meurs' page 8 that indicated                                                               
what  he thought  would be  a level  of investment.  He suggested                                                               
that under  20/20, both large  producers and new  investors would                                                               
increase  investment  and   asked  if  he  thought   that  was  a                                                               
reasonable assumption.                                                                                                          
MR.  OWEN replied  that he  would  make the  same observation  as                                                               
before,  that it  was  based on  an average  of  projects, not  a                                                               
specific project. It  was dominated by the rate  of return, which                                                               
used  date   from  previous  charts.  His   characterization  was                                                               
correct,  but if  you  look at  the broader  scale,  some of  the                                                               
projects didn't  look as  attractive as they  might under  an ELF                                                               
system, where a producer would  be paying zero severance tax. The                                                               
pie is shrunk, but there is a better cash flow for a while.                                                                     
2:03:06 PM                                                                                                                    
SENATOR GUESS asked the same  question she asked ConocoPhillips -                                                               
that the CS provided increased  credits and Dr. Van Meurs thought                                                               
it provided too many and she asked him to comment on that.                                                                      
MR. OWEN  replied that he hadn't  enough time to look  at the CS.                                                               
High credits,  by their  very nature,  do provide  incentive. The                                                               
governor's proposal balanced a lot  of these components. While it                                                               
increased taxes, it provided the basis to move forward.                                                                         
2:04:54 PM                                                                                                                    
SENATOR BEN STEVENS commented that  he interpreted Dr. Van Meurs'                                                               
statements about  over-incentivizing exploration to refer  to the                                                               
clause that included a 20  percent for traditional production and                                                               
development  and 30  percent for  exploration. He  also mentioned                                                               
that  the  25  percent  increased the  state's  exposure  on  the                                                               
2:05:55 PM                                                                                                                    
SENATOR THERRIAULT asked whether Mr. Owens supported the 20/20.                                                                 
MR. OWEN answered yes and specified that he did not oppose the                                                                  
governor's bill.                                                                                                                
2:07:19 PM                                                                                                                    
CHAIR WAGONER  thanked Mr. Owen  for his testimony  and announced                                                               
that SB 305  would be held over. There being  no further business                                                               
to  come  before  the  committee, he  adjourned  the  meeting  at                                                               
2:07:41 PM.                                                                                                                   

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