Legislature(2005 - 2006)BUTROVICH 205

03/19/2006 01:00 PM RESOURCES


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01:00:02 PM Start
01:00:35 PM SB305
01:07:47 PM Chevron Alaska – John Zager, Manager, Alaska Division
01:38:31 PM Pioneer Natural Resources – Pat Foley, Manager, Lands and External Affairs
01:57:54 PM Anadarko Petroleum Corporation – Mark Hanley, Manager, Public Affairs for Alaska
02:28:55 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
= SB 305 OIL AND GAS PRODUCTION TAX
Heard & Held
-- Testimony <Invitation Only> --
Stakeholders: Explorers & Independents
Comments on Draft Committee Substitute
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                         March 19, 2006                                                                                         
                           1:00 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Thomas Wagoner, Chair                                                                                                   
Senator Ben Stevens                                                                                                             
Senator Fred Dyson (via teleconference)                                                                                         
Senator Bert Stedman                                                                                                            
Senator Kim Elton                                                                                                               
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Ralph Seekins, Vice Chair                                                                                               
Senator Albert Kookesh                                                                                                          
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Senator Gene Therriault                                                                                                         
Senator Gretchen Guess                                                                                                          
                                                                                                                                
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                                                                            
03/18/06       (H)       -- Meeting Canceled --                                                                                 
03/19/06       (S)       RES AT 1:00 PM BUTROVICH 205                                                                           
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
JOHN P. ZAGER, General Manager                                                                                                  
Chevron - Alaska Area                                                                                                           
Anchorage, AK                                                                                                                   
POSITION STATEMENT:  Testified that Chevron cannot support                                                                    
SB 305, Version Y; urged return to the original PPT terms while                                                                 
retaining a Cook Inlet provision.                                                                                               
                                                                                                                                
PAT FOLEY, Manager                                                                                                              
Lands and External Affairs                                                                                                      
Pioneer Natural Resources                                                                                                       
Anchorage, AK                                                                                                                   
POSITION STATEMENT:   Voiced  concerns about  SB 305,  Version Y;                                                             
said  the balance  is being  tipped to  the disadvantage  of some                                                               
investors as the bill evolves.                                                                                                
                                                                                                                                
MARK HANLEY, Manager                                                                                                            
Public Affairs for Alaska                                                                                                       
Anadarko Petroleum Corporation                                                                                                  
Anchorage, AK                                                                                                                   
POSITION STATEMENT:  Expressed concerns  about SB 305, Version Y;                                                             
cautioned that  there are  no credits to  compensate for  the tax                                                               
increase, making the economics worse for exploration.                                                                           
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR  THOMAS  WAGONER  called   the  Senate  Resources  Standing                                                             
Committee meeting to  order at 1:00:02 PM.   Members present were                                                             
Senators Ben  Stevens, Bert Stedman,  Kim Elton and  Chair Thomas                                                               
Wagoner;  Senator  Fred  Dyson (via  teleconference)  joined  the                                                               
meeting  in progress.    Also in  attendance  were Senators  Gene                                                               
Therriault and Gretchen Guess.                                                                                                  
                                                                                                                                
               SB 305-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                                
CHAIR WAGONER  announced SB 305 to  be up for consideration.   He                                                               
brought  attention   to  his  memorandum  to   members  regarding                                                               
amendments.   In  packets  and under  discussion  was a  proposed                                                               
committee  substitute  (CS),   Version  Y,  labeled  24-GS2052\Y,                                                               
Chenoweth, 3/16/06.   He noted that members  would hear testimony                                                               
that day from the companies known as explorers and independents.                                                                
                                                                                                                                
1:00:35 PM                                                                                                                    
SENATOR  BEN  STEVENS   pointed  out  that  page   11,  line  13,                                                               
subsection (e),  is a substantive  policy change that  allows the                                                               
transferable tax credit  to be used against  corporate income tax                                                               
liability.  He  reported he'd looked in all  other draft versions                                                               
and it  wasn't listed  in the  memo.  Line 13  - which  refers to                                                               
AS 43.20, the corporate  income tax chapter - isn't  in the House                                                               
version or  the governor's  version.  Nor  was it  discussed, and                                                               
he'd stumbled  across it.   He said he'd  like to find  out where                                                               
the language came from and how it got inserted.                                                                                 
                                                                                                                                
CHAIR WAGONER replied that he'd check to see where it came from.                                                                
                                                                                                                                
1:02:40 PM                                                                                                                    
SENATOR STEDMAN referred to page  11, lines 7-13, subsection (e).                                                               
He asked whether the intent is  still to have a maximum reduction                                                               
of 20  percent on the  tax due, so  that someone would  always be                                                               
paying at least 80 percent of  the taxes, regardless of what rate                                                               
was set.                                                                                                                        
                                                                                                                                
CHAIR WAGONER  opined that  the aforementioned  was in  the House                                                               
bill, not the Senate bill.                                                                                                      
                                                                                                                                
SENATOR STEDMAN  recalled that it was  in the original bill.   "I                                                               
thought  we   were  still  operating   under  that,"   he  added,                                                               
suggesting it  could be clarified later.   He noted that  it ties                                                               
in with the whole tax paragraph.                                                                                                
                                                                                                                                
CHAIR WAGONER said  he'd check.  He announced  that Senator Dyson                                                               
was on teleconference.                                                                                                          
                                                                                                                                
1:04:16 PM                                                                                                                    
^Chevron Alaska - John Zager, Manager, Alaska Division                                                                        
                                                                                                                                
JOHN   P.  ZAGER,   General  Manager,   Chevron  -   Alaska  Area                                                               
("Chevron"),  noted  that  accompanying  him  was  Kevin  Tabler,                                                               
Manager,  Lands  and  Governmental  Affairs.   Mr.  Zager  called                                                               
attention  to  a handout  and  his  own  testimony March  1  that                                                               
Chevron would  support the  bill and key  terms as  written, with                                                               
one main concern:   the possible effect on Cook  Inlet, which has                                                               
a  very  different  nature  from  the North  Slope.    He'd  also                                                               
emphasized the  results when  adjustments are  made to  the bill.                                                               
Turning  to Version  Y, he  applauded its  recognition that  Cook                                                               
Inlet  cannot  support  an  additional tax.    However,  he  said                                                               
Chevron no  longer can support  the bill in its  entirety because                                                               
of substantive changes in many areas.                                                                                           
                                                                                                                                
He mentioned  the difficulty  of crafting one  bill to  fit every                                                               
asset in  Alaska, and suggested  this bill was  drafted primarily                                                               
with the  North Slope in mind.   Mr. Zager reminded  members that                                                               
his   previous  testimony   addressed  the   difficult  financial                                                               
position in  Cook Inlet, with issues  including production levels                                                               
at a fraction of what they  used to be; water production that has                                                               
risen to over  90 percent; and platforms that are  35 to 40 years                                                               
old,  which  adds  greatly  to  the  expense.    He  pointed  out                                                               
Cook Inlet has  less than 2 percent  of Alaska's  oil production,                                                               
and indicated it's the least  profitable.  In the overall scheme,                                                               
he suggested, it isn't a huge financial impact.                                                                                 
                                                                                                                                
He  referred  to  testimony   that  ConocoPhillips,  the  state's                                                               
largest producer, employs  about 900 people.  A  big component of                                                               
Chevron's expense is its employees  as well, Mr. Zager said, with                                                               
385 people,  including some full-time  contractors.   He remarked                                                               
that Chevron's  labor costs per barrel  are astronomically higher                                                               
than those of the North Slope producers.                                                                                        
                                                                                                                                
SENATOR GENE THERRIAULT joined the meeting at 1:07:47 PM.                                                                     
                                                                                                                                
MR. ZAGER highlighted  another unique aspect of Cook  Inlet:  its                                                               
value to  the Southcentral economy.   Fueling the economy  is the                                                               
gas  produced  there,  which  heats  homes  and  runs  the  power                                                               
generation.   He  said the  importance  of Cook  Inlet cannot  be                                                               
overemphasized in  providing that  service.  Mr.  Zager mentioned                                                               
power provided to the Kenai  Peninsula, where Chevron has roughly                                                               
300  employees, hires  contractors and  other service  companies,                                                               
and is the "anchor tenant" for the Kenai oil and gas business.                                                                  
                                                                                                                                
He  addressed the  codependent nature  of Cook  Inlet production,                                                               
with its small infrastructure supported  by the assets of Chevron                                                               
and others.  Once a  asset becomes uneconomic, the fixed overhead                                                               
costs will  be shared  among the few  remaining assets;  a domino                                                               
effect  will  drive the  remaining  assets  to become  even  more                                                               
uneconomic.   Examples include  shore bases  in the  Nikiski area                                                               
and onshore treating facilities on the  west side, as well as the                                                               
Cook Inlet pipeline.                                                                                                            
                                                                                                                                
He  reminded  members  that  during  previous  testimony  Chevron                                                               
presented a  couple of  options to consider  to help  Cook Inlet.                                                               
Noting that  Version Y considers  carving out the Cook  Inlet oil                                                               
production, Mr.  Zager remarked, "That  is a route we  could go";                                                               
he pointed out, however, that it's  not the only route to achieve                                                               
these end results.   He emphasized not increasing  the tax burden                                                               
for  Cook Inlet,  which is  already marginal,  and continuing  to                                                               
provide incentives for additional oil and gas development.                                                                      
                                                                                                                                
He  discussed  the  importance of  Cook  Inlet,  predicting  that                                                               
sometime  in  the next  decade,  if  there isn't  additional  gas                                                               
exploration,  the  legislature  will be  considering  whether  to                                                               
build  a state-subsidized  pipeline  to Cook  Inlet  in order  to                                                               
provide needed energy to that region.   Mr. Zager said he doesn't                                                               
see a viable  alternative to gas as the energy  source there.  If                                                               
not from there, it will have  to be obtained from somewhere else.                                                               
Depending  on whether  the main  pipeline has  been built,  there                                                               
could be difficult decisions about how to transport that gas.                                                                   
                                                                                                                                
1:11:11 PM                                                                                                                    
MR. ZAGER  agreed with  many points made  by the  large producers                                                               
during the  previous day's  testimony with  regard to  Version Y.                                                               
He said  the balance  in the  original bill  - which  all parties                                                               
could  live with  - is  gone.   For one  thing, the  tax rate  is                                                               
raised from  20 to 25  percent, a clear disincentive  for further                                                               
investment.  In addition, changing  the April 1 commencement date                                                               
will  force producers  to guess  what taxes  they owe,  with high                                                               
interest  rates  and  punitive   penalties  for  guessing  wrong.                                                               
Furthermore, the  11 percent interest  rate tips the  balance too                                                               
far  in the  state's favor  with  regard to  audits; often  those                                                               
don't happen  for two years after  the event, and the  11 percent                                                               
would  be  charged  retroactively  for  something  unintentional.                                                               
This may  result in a  larger interest penalty than  the original                                                               
payment, Mr. Zager told members.                                                                                                
                                                                                                                                
He continued, noting the transitional  cap is greatly diminished.                                                               
Mr. Zager  pointed out  that in the  House bill  the transitional                                                               
cap  is  reduced by  about  80  percent a  year.    Version Y  is                                                               
slightly  more favorable,  since it's  allocated over  four years                                                               
instead  of  seven,  but  the   total  amount  is  reduced  in  a                                                               
proportion similar to that in the House bill.                                                                                   
                                                                                                                                
1:13:10 PM                                                                                                                    
MR. ZAGER  continued, saying the  standard $73  million deduction                                                               
appears to  be lost.  In  Version Y, to his  understanding, it is                                                               
replaced  with a  "capital  credit" for  exploration.   From  the                                                               
previous  day's  discussion,  however,  he  understood  that  the                                                               
exploration credit  would be deleted  from the bill,  bringing it                                                               
back to  a "20/20"  provision, with  no additional  incentive for                                                               
exploration and without the standard deduction.                                                                                 
                                                                                                                                
He turned  to the idea of  progressivity, saying it's new  to the                                                               
proposed CS in the  House as well as in the  Senate.  Noting that                                                               
there has  been quite  a bit  of discussion  about the  intent of                                                               
Version Y, Mr. Zager  said he'd read it to be  a 0.2 percent rise                                                               
for every $10 increase in price.   He surmised, however, that the                                                               
intent was 0.2 for every  dollar increase, the range contemplated                                                               
by the  House.  If  that is  a correct interpretation,  Mr. Zager                                                               
said,  it's   a  highly  significant  adjustment   to  the  bill,                                                               
especially starting at $40 a barrel  instead of $50 a barrel.  At                                                               
today's  prices of  around  $60, it  would be  a  29 percent  tax                                                               
instead of the 20 percent originally proposed by the governor.                                                                  
                                                                                                                                
He spoke  against the idea  that taking  away the high  price and                                                               
windfall would  result in  a lot  of extra  money that  should be                                                               
allocated differently.  From an  investor's standpoint, Mr. Zager                                                               
said,  it  is part  of  the  expected  value of  any  investment.                                                               
Offering commercial  fishing as an  analogy, where some  days are                                                               
much better than others, he likened  this to taking up to half of                                                               
the earnings on  those good fishing days -  which certainly would                                                               
affect a fisherman's desire to invest in the business.                                                                          
                                                                                                                                
He pointed out that in the  oil industry the cycle moves in years                                                               
or decades.  It is tempting to  look at good times with regard to                                                               
prices, such as now, and say  there are windfall profits.  In the                                                               
overall scheme, however,  Mr. Zager said investments  are made on                                                               
the  expected value,  distribution and  possible outcomes,  which                                                               
include higher-price  scenarios.  He cautioned  that changes with                                                               
regard to the aforementioned would affect investment decisions.                                                                 
                                                                                                                                
1:16:24 PM                                                                                                                    
MR. ZAGER reported that other  issues include tying escalation to                                                               
West  Texas  Intermediate (WTI).    He  mentioned selling  Alaska                                                               
North Slope  (ANS) crude,  saying in  his mind  there is  often a                                                               
"disconnect" of  $2 to  $6.   He questioned  having it  pegged to                                                               
something  that  doesn't directly  relate  to  the product  being                                                               
sold.  Furthermore, gas production  is being pegged to WTI, which                                                               
he said  is a  real stretch.   He suggested that  if gas  is sold                                                               
from the  North Slope  someday, it  will be tied  to a  Henry Hub                                                               
price;  gas  sold in  Cook  Inlet  usually is  under  longer-term                                                               
contracts, and not  at all tied to WTI.   Mr. Zager urged members                                                               
to consider these issues as they look at the bill's provisions.                                                                 
                                                                                                                                
He  said,  overall,  increasing   taxes  will  make  Alaska  less                                                               
competitive relative  to the original proposal,  perhaps relative                                                               
to  world  markets  and  certainly  relative  to  North  American                                                               
investments,  which are  usually given  a premium  as investments                                                               
because of their low  risk.  It will put Alaska  at the bottom of                                                               
the distribution for North American investments, he cautioned.                                                                  
                                                                                                                                
1:18:04 PM                                                                                                                    
MR.  ZAGER suggested  there is  a debate  between two  schools of                                                               
thought:   "Let's  get  the  most revenue  off  the  oil and  gas                                                               
business we  can now, while it's  still good" versus a  "grow the                                                               
pie" option in which a longer-term  view is taken, with effort to                                                               
invest  and keep  the  production coming.    Legislators have  to                                                               
decide which  way to  go.  The  first option  includes increasing                                                               
taxes as much as possible, and  will balloon state revenue in the                                                               
short term.   Mr. Zager said this puts an  onus on legislators to                                                               
be  good  stewards of  such  capital,  and  to ensure  it's  well                                                               
managed for future generations.                                                                                                 
                                                                                                                                
He  acknowledged the  consultants' good  work in  coming up  with                                                               
reasonable expectations,  but pointed out that  they'll leave one                                                               
day  and everyone  else  must  live with  the  decisions.   After                                                               
legislators vote on behalf of  the Alaskan people, investors will                                                               
"vote"  with their  dollars over  the  coming years.   Mr.  Zager                                                               
noted that  with the  original bill, the  industry said  the huge                                                               
increase in  taxes, though tough  to swallow, was manageable  - a                                                               
position they aren't taking with the current version.                                                                           
                                                                                                                                
1:23:18 PM                                                                                                                    
MR. ZAGER  concluded by saying Chevron  cannot support Version Y.                                                               
He urged return to the original  PPT terms while retaining a Cook                                                               
Inlet  provision.   Chevron has  been  in Alaska  many years,  he                                                               
said,  and  intends  to  continue  with  active  exploration  and                                                               
production in the  state if a sound and stable  fiscal regime can                                                               
be offered.                                                                                                                     
                                                                                                                                
1:24:05 PM                                                                                                                    
SENATOR STEDMAN highlighted one  point of discomfort for Chevron:                                                               
the escalator  clause that provides  for a higher rate  as prices                                                               
advance.                                                                                                                        
                                                                                                                                
MR. ZAGER  said he'd only  referred to the incremental  effect on                                                               
the PPT  and not the total  government take.  He  recalled saying                                                               
at $60 a barrel - roughly where  it is now - he believed it would                                                               
be  a 29 percent  tax, rather  than  25 percent,  because of  the                                                               
escalator.  It'd be an additional 4 percent from $40 to $60.                                                                    
                                                                                                                                
SENATOR  STEDMAN agreed  it's a  substantial tax  change for  the                                                               
industry.   He pointed out  that under the current  scenario from                                                               
Econ One's  analysis, however,  with no  escalator and  at 25/20,                                                               
the government  take is 60;  with the escalator, it's  almost 62.                                                               
The current  system, by  contrast, puts  it at  under 53 percent.                                                               
Thus the biggest magnitude of  change is getting from the current                                                               
system up to 25/20 - and, under  the House version, to 20/20.  He                                                               
said  he wasn't  disagreeing  with Mr. Zager's  numbers, but  the                                                               
picture looks a little different when viewed in its entirety.                                                                   
                                                                                                                                
1:27:58 PM                                                                                                                    
SENATOR  STEDMAN  suggested Mr.  Zager's  point  about using  ANS                                                               
rather than WTI should be looked at by legislators.                                                                             
                                                                                                                                
1:28:40 PM                                                                                                                    
SENATOR THERRIAULT  referred to  the issue  of whether  the state                                                               
will act prudently  if it receives a  lot of money now.   He said                                                               
the legislature  has mechanisms for setting  extra revenue aside;                                                               
in fact, he is working  with Legislative Legal Services currently                                                               
on a mechanism to do that.                                                                                                      
                                                                                                                                
He asked whether Mr. Zager  agreed that the credit encourages the                                                               
industry to  specifically "grow  the Alaska  pie."   He suggested                                                               
the  current  system  makes  it  fairly  easy  for  companies  to                                                               
generate money and take it  wherever they want in their worldwide                                                               
operations in  order to get  the highest return; it's  a business                                                               
decision.  From  the Alaskan perspective, however,  the desire is                                                               
to  have the  industry reinvest  in  Alaska.   The PPT  is a  new                                                               
mechanism to provide incentive for that activity.                                                                               
                                                                                                                                
MR. ZAGER said he believes  that's right.  There'll be additional                                                               
incentives to  invest in  Alaska, but it  will still  be measured                                                               
against  a company's  worldwide portfolio,  which is  dynamic and                                                               
constantly changing.  Thus it's hard  to predict how it will look                                                               
five or ten years from now.                                                                                                     
                                                                                                                                
He addressed the  reinvestment credit, estimating it  will have a                                                               
positive  effect  on  reinvestment, especially  for  the  smaller                                                               
companies.   It's really a  risk-sharing mechanism.   He surmised                                                               
that  people's desire  to share  that  risk with  the state  will                                                               
depend  largely  on  their risk  tolerance  and  their  financial                                                               
positions.   Mr. Zager  said the trade-off  for sharing  the risk                                                               
up front is  giving up value  on the backside.   A lot  of bigger                                                               
companies are  probably willing to  make the investment  on their                                                               
own if  they can  be exposed to  the full range  of results.   He                                                               
pointed out that it was hard to answer specifically.                                                                            
                                                                                                                                
1:31:24 PM                                                                                                                    
SENATOR  STEDMAN  suggested the  issue  isn't  one of  trying  to                                                               
increase state  revenue to meet budgetary  requirements.  Rather,                                                               
it's the changing  global marketplace and how it puts  a value on                                                               
a commodity owned by Alaskans,  as well as the relationship among                                                               
producers  and governments  that are  in flux  around the  world.                                                               
The current  system was put in  place several decades ago  and is                                                               
structurally flawed,  he said, noting  there also is a  desire to                                                               
build a multibillion-dollar gas line.                                                                                           
                                                                                                                                
SENATOR GRETCHEN GUESS joined the meeting at 1:32:54 PM.                                                                      
                                                                                                                                
SENATOR DYSON requested  that Mr. Zager provide  a rough estimate                                                               
of his company's profits in Cook  Inlet ten years ago, five years                                                               
ago  and  for  2005.     He  said  he  didn't  want  confidential                                                               
information, but  wanted to know  the trend and magnitude  of the                                                               
profits there.                                                                                                                  
                                                                                                                                
MR. ZAGER answered that he  didn't have the information with him.                                                               
Over  that   time  period,   however,  oil   production  declined                                                               
dramatically, although it's  offset by increased oil  prices.  He                                                               
said the company  is more profitable now than two  years ago, but                                                               
he couldn't say about five or ten years ago.                                                                                    
                                                                                                                                
1:34:42 PM                                                                                                                    
^Pioneer  Natural  Resources  -  Pat Foley,  Manager,  Lands  and                                                             
External Affairs                                                                                                              
                                                                                                                                
PAT FOLEY,  Manager, Lands and External  Affairs, Pioneer Natural                                                               
Resources ("Pioneer"),  highlighted the  common theme  heard from                                                               
investors and  ascribed to  by Pioneer:   the  governor's initial                                                               
proposal held  a balance they all  could accept, but as  the bill                                                               
has evolved, the  balance is being tipped to  the disadvantage of                                                               
many investors.                                                                                                                 
                                                                                                                                
He said  Pioneer is new to  Alaska, having been here  since 2003,                                                               
but has  jumped in  with both feet.   He cited  a project  in the                                                               
Beaufort  Sea,  a  $500 million  development  that  will  produce                                                               
50 million  to  90 million  barrels  of  the  state's  resources.                                                               
Slated to start up  in 2008, it should have a  peak rate of about                                                               
17,000 barrels a day - a  huge amount for a company like Pioneer,                                                               
but an average Kuparuk drill  site, relatively minor in the grand                                                               
scheme.    Mr. Foley  mentioned other  exploration  wells  and  a                                                               
development  project  in Cook  Inlet,  saying  Pioneer is  deeply                                                               
committed to the state.  He  suggested the state should foster an                                                               
environment that encourages new entrants.                                                                                       
                                                                                                                                
1:38:31 PM                                                                                                                    
MR.  FOLEY  discussed  risks,  noting  that  some  are  beyond  a                                                               
company's  control, but  some can  be controlled  by the  way the                                                               
state sets  its policy.  He  cautioned that as the  tax rate goes                                                               
up  and  investment  credit  is stripped  away,  the  climate  is                                                               
turning a bit cold.                                                                                                             
                                                                                                                                
1:40:25 PM                                                                                                                    
MR. FOLEY noted he'd previously  testified about the significance                                                               
of  the  $73  million  exemption  to  new  entrants  and  smaller                                                               
companies like  Pioneer.  He  encouraged members to  find another                                                               
mechanism to  replace it, since it's  no longer in the  bill.  He                                                               
pointed out  that at  high oil  prices, the  cost to  drill wells                                                               
increases for explorers.                                                                                                        
                                                                                                                                
1:42:21 PM                                                                                                                    
MR. FOLEY  referred to Senator  Ben Stevens' discussion  that day                                                               
of new language  in Version Y relating to a  company's ability to                                                               
use credits  against corporate income  tax.  Mr. Foley  said this                                                               
would greatly benefit a company  like Pioneer.  He also discussed                                                               
options  for   giving  or  transferring   credits,  as   well  as                                                               
broadening  the  pool  of  companies that  might  be  willing  to                                                               
purchase credits  beyond just  the large  oil producers.   Noting                                                               
that  companies  wrestle  with marginal  opportunities,  he  said                                                               
policies  like  PPT  will  have   a  huge  impact  on  decisions.                                                               
Pointing out that Pioneer employs  26 people in Alaska, Mr. Foley                                                               
emphasized  the need  to  craft  a fiscal  policy  that makes  it                                                               
easier for small companies.                                                                                                     
                                                                                                                                
1:45:47 PM                                                                                                                    
SENATOR  DYSON  asked  whether  Pioneer's  increase  in  drilling                                                               
expenses has been mostly from fuel costs.                                                                                       
                                                                                                                                
MR. FOLEY replied no.   The largest driver is the  day rate - the                                                               
money the  company pays for  drilling rigs, which are  in limited                                                               
supply.  He disagreed with the  idea that as oil prices increase,                                                               
the profit margin rises accordingly.   He suggested it's a little                                                               
out of phase.  People  might start large investment programs when                                                               
prices  go  high.   They'll  be  competing  for the  same  scarce                                                               
resources, and costs  will go up.  In response  to Chair Wagoner,                                                               
he agreed  to put  his remarks  in writing and  send them  to the                                                               
committee.                                                                                                                      
                                                                                                                                
CHAIR WAGONER called an at-ease from 1:49:43 PM to 1:53:02 PM.                                                              
                                                                                                                                
1:53:06 PM                                                                                                                    
^Anadarko Petroleum  Corporation -  Mark Hanley,  Manager, Public                                                             
Affairs for Alaska                                                                                                            
                                                                                                                                
MARK  HANLEY,  Manager,  Public   Affairs  for  Alaska,  Anadarko                                                               
Petroleum   Corporation  ("Anadarko"),   reminded  members   that                                                               
Anadarko's  position on  the  original  bill was  that  it was  a                                                               
delicate balance,  a tenuous truce among  companies; it increased                                                               
taxes,  but  provided  some   downside  protection  and  improved                                                               
exploration economics.  Mentioning  forecasts for declining North                                                               
Slope production,  Mr. Hanley emphasized  that Anadarko  wants to                                                               
find more  oil and stop  that trend, a goal  shared by many.   He                                                               
pointed out  that the  total revenue  source from  new production                                                               
isn't  just from  production taxes  - it  includes royalties  and                                                               
corporate taxes as well.                                                                                                        
                                                                                                                                
He  presented a  slide from  Dr. Pedro  van Meurs'  report, chart                                                               
"11.20"  showing WTI  oil prices,  an  example of  a 150  million                                                               
barrel oil field.  Mr.  Hanley emphasized that even under today's                                                               
system  there   isn't  enough  drilling   on  the   North  Slope.                                                               
Production is declining and more is  needed.  The system needs to                                                               
improve   exploration  economics   beyond  the   current  system;                                                               
otherwise, there won't be additional investment - new fields.                                                                   
                                                                                                                                
He gave  Anadarko's view that at  $36 WTI, the 25/20  "with zero"                                                               
is worse than the current  system and won't provide incentive for                                                               
more exploration.  With the  $73 million, however, he pointed out                                                               
on the  slide that  the lines  converge.   Mr. Hanley  noted that                                                               
Anadarko's previous  testimony was  based on 20/20,  which wasn't                                                               
in Dr. van Meurs' chart.                                                                                                        
                                                                                                                                
He  countered  the idea  that  25/20  is  better than  20/20  for                                                               
exploration  -  an  idea  he   suggested  came  from  Econ  One's                                                               
testimony  indicating a  company's  economics are  better at  low                                                               
prices.  Mr.  Hanley acknowledged that the state  gets less money                                                               
at low  prices -  the "downside protection"  for companies  - but                                                               
explained, "At  the numbers  at which  we do  better, exploration                                                               
isn't better because it's not economic."                                                                                        
                                                                                                                                
1:57:54 PM                                                                                                                    
MR. HANLEY  emphasized that a  higher tax rate results  in poorer                                                               
economics  for exploration  and that  the $73  million is  highly                                                               
important to new or smaller companies.   Looking at the bill as a                                                               
whole, for his  company at 20/20, if the $73  million is reduced,                                                               
it's  like  raising  the  tax  rate to  25  percent.    Thus  the                                                               
$73 million  is   worth  about  5   percent  on  the   tax  rate.                                                               
Similarly, if  20/20 is raised  to 20/25  and the $73  million is                                                               
eliminated, it  equates to a 30  percent tax rate.   If those two                                                               
things happened,  most of his  company's projects would  be worse                                                               
economically than  under the current  system - and  thus Anadarko                                                               
would drill fewer wells.                                                                                                        
                                                                                                                                
He pointed  out that it's the  credits in the original  bill that                                                               
counter  the apparent  irony  of having  the  state receive  more                                                               
money  and  yet  still  have   exploration,  since  higher  taxes                                                               
generally mean less  activity.  The credits  do provide incentive                                                               
to invest, but also offset that tax increase.                                                                                   
                                                                                                                                
He explained that  25/25 is worse for  exploration economics than                                                               
20/20  because there  isn't a  one-to-one relationship.   Rather,                                                               
it's a  four- or  five-to-one relationship,  as he  recalled from                                                               
legislative consultant  Daniel Johnston's testimony.   Mr. Hanley                                                               
said if  something is being  taken away, something must  be given                                                               
back.  Thus there should be  a credit increase, although it's not                                                               
a  linear  relationship.    Somewhere   around  25/40  keeps  the                                                               
exploration economics the same, he suggested.                                                                                   
                                                                                                                                
2:01:00 PM                                                                                                                    
MR.  HANLEY  discussed progressivity.    Still  referring to  the                                                               
Dr. van  Meurs' slide,  he  offered  Anadarko's perspective  that                                                               
with a progressive tax rate,  the change from the existing system                                                               
would be  even greater, since it  takes more of the  "high side."                                                               
Where that high  side begins makes a difference.   Anadarko takes                                                               
a number  that is  its hurdle rate,  takes a low  rate to  see if                                                               
there is  even cash  flow at  that level, and  also takes  a high                                                               
rate  - companies  generally  play for  the high  side.   To  the                                                               
extent  there   is  a  progressive   tax  increase,   Mr.  Hanley                                                               
concluded,   it  does   affect  Anadarko's   decisions  regarding                                                               
exploration.                                                                                                                    
                                                                                                                                
2:03:03 PM                                                                                                                    
MR. HANLEY  addressed other concerns.   Regarding the progressive                                                               
rate itself,  he said  applying a gas-tax  increase based  on oil                                                               
price  isn't  proper.   The  two  shouldn't be  linked  directly.                                                               
Also, if  a price  is started  at a  certain level,  it's unclear                                                               
whether the tax is based on  gross revenues.  He pointed out that                                                               
the House version  bases the tax on  the gross, not the  net.  He                                                               
also  noted that  cost factors  have an  impact.   To the  extent                                                               
there is no  inflation adjustment on the base  number, Mr. Hanley                                                               
said, he believes there's an  assumption that costs wouldn't have                                                               
risen - when, in fact, those costs might have gone up.                                                                          
                                                                                                                                
2:05:06 PM                                                                                                                    
MR. HANLEY referred  to talk that the government take  is too low                                                               
currently.   He  cautioned that  investment also  is too  low, at                                                               
least with  respect to exploration,  and that higher  taxes won't                                                               
improve it.   He suggested it's only one factor  to consider.  He                                                               
showed an example, emphasizing that  not every field has the same                                                               
economics, since  some are farther  from the  infrastructure, for                                                               
instance.                                                                                                                       
                                                                                                                                
2:07:03 PM                                                                                                                    
MR. HANLEY noted  that there are a number of  little issues, some                                                               
of which  may be addressed  already.  He concluded  by expressing                                                               
concern  that the  tax  rate  is increasing  with  no credits  to                                                               
compensate for  it, making the  economics worse  for exploration.                                                               
"We want  to drill more wells,  not less," he added,  noting that                                                               
there are a  lot of marginal prospective areas  where an increase                                                               
in the economic viability would help.                                                                                           
                                                                                                                                
CHAIR WAGONER remarked,  "We'll see if we can tip  that the other                                                               
way."                                                                                                                           
                                                                                                                                
2:07:54 PM                                                                                                                    
SENATOR STEDMAN referred  to the escalator issue,  saying it's on                                                               
the  net, like  regular  PPT.   He added  that  the language  is,                                                               
regrettably,  a little  dysfunctional and  being worked  on.   He                                                               
provided details,  concluding that the intent  with the escalator                                                               
isn't so much to  grab the upside above the $40  range, but is to                                                               
keep  the state-  and federal-government  take from  ever getting                                                               
smaller as  the price rises  from $50 to $60  to $70 a  barrel in                                                               
the  future.   He  recognized that  it  impacts "marginally"  the                                                               
analysis on the upper end.                                                                                                      
                                                                                                                                
2:10:12 PM                                                                                                                    
SENATOR THERRIAULT urged care in  having the escalator applied at                                                               
the  trigger point.   He  gave an  example, stressing  that costs                                                               
might  rise  over time  -  despite  testimony that  technological                                                               
breakthroughs  help to  keep costs  down -  and that  the trigger                                                               
point could  keep rising and  never be  reached.  Turning  to Mr.                                                               
Hanley's remark  that investment  is too  low even  under today's                                                               
system,  he highlighted  his desire  for a  systematic change  to                                                               
encourage  companies to  invest their  dollars to  "grow Alaska's                                                               
pie" for the benefit of companies and the state alike.                                                                          
                                                                                                                                
MR. HANLEY  replied that he  thinks the  system has worked  as it                                                               
was  presented,  with  credits   that  can  encourage  additional                                                               
investment.   In  the  end,  however, his  company  looks at  the                                                               
economics in Alaska versus somewhere  else they might invest.  He                                                               
emphasized the need to keep the balance.                                                                                        
                                                                                                                                
2:13:41 PM                                                                                                                    
CHAIR WAGONER  recalled that at  the previous day's  hearing, one                                                               
of  the major  companies said  even 20/20  didn't provide  enough                                                               
incentive for  investment to keep  production at a  higher level.                                                               
He surmised  Mr. Hanley wasn't  insinuating that with  respect to                                                               
exploration.                                                                                                                    
                                                                                                                                
MR. HANLEY said no.  The  tax increase is on existing production,                                                               
which doesn't  get the  benefit of the  tax credits  for previous                                                               
investment  that was  made.   "Forget  the look-back  for just  a                                                               
minute," he  added.  He said  Anadarko has a foot  in both camps:                                                               
it  will probably  pay more  through the  existing production  at                                                               
Alpine, but also views itself as an exploration company.                                                                        
                                                                                                                                
2:14:57 PM                                                                                                                    
SENATOR ELTON referred  to page 7 of Dr.  van Meurs' presentation                                                               
the previous day.  He recalled  that Dr. van Meurs had suggested,                                                               
for  large companies,  25/20  provides  slightly less  investment                                                               
incentive than  the governor's  proposal; for  smaller companies,                                                               
however, there'd be more investment  no matter what rate was set.                                                               
Senator Elton asked where those assumptions might be wrong.                                                                     
                                                                                                                                
MR. HANLEY  replied that  he hadn't seen  the slide.   Generally,                                                               
however, the economics  go down as the tax rate  rises.  He noted                                                               
that the slide  he himself was showing was Dr.  van Meurs' chart.                                                               
Mr. Hanley pointed out that 20/20 would help, but not 25/20.                                                                    
                                                                                                                                
SENATOR   ELTON  agreed   to   share   the  aforementioned   with                                                               
Mr. Hanley.                                                                                                                     
                                                                                                                                
2:18:16 PM                                                                                                                    
SENATOR THERRIAULT explained  that the calculations on  page 7 of                                                               
the  Dr.  van Meurs'  presentation  related  to whether  expected                                                               
rates  of  return  would  change  enough  to  alter  a  company's                                                               
investment decisions.   It's not an exact  science, and companies                                                               
have  different  expected rates  of  return.   He  indicated  the                                                               
chairman was working  on language for a  different mechanism with                                                               
respect to the $73 million,  which is important to companies like                                                               
[Anadarko].                                                                                                                     
                                                                                                                                
He  said there  is  a  possibility somewhere  in  the process  of                                                               
considering additional  incentives on  pure exploration.   Noting                                                               
that  Anadarko's investment  over the  last five  years has  been                                                               
substantial,  Senator Therriault  asked  whether  Mr. Hanley  had                                                               
given  thought to  the "two  for one"  or a  multiple to  capture                                                               
previous  investment  dollars,  and whether  this  would  provide                                                               
adequate incentive for investing.                                                                                               
                                                                                                                                
MR. HANLEY indicated he'd rather have  four for one.  He reported                                                               
that Anadarko  has invested  hundreds of  millions of  dollars in                                                               
the last few  years; he cited examples of  two [satellite fields]                                                               
at Alpine  that haven't come on  line yet.  He  acknowledged that                                                               
two for one  is better than nothing, and stated  the intention of                                                               
continuing to  invest.  However,  he said the  original look-back                                                               
approach is  preferable.  But  if not that, anything  his company                                                               
can  do to  get  credit for  money it  has  spent, and  decisions                                                               
already made, would be helpful.                                                                                                 
                                                                                                                                
SENATOR THERRIAULT recalled that Dr.  van Meurs' criticism of the                                                               
look-back was that it's "all sunk  costs to the company" and that                                                               
if the credit mechanism is  to shape future investment decisions,                                                               
the state should get something out of it too.                                                                                   
                                                                                                                                
MR.  HANLEY said  it  would  be helpful,  and  his company  would                                                               
rather have it than nothing.   However, he believes it would have                                                               
a minor impact on whether his  company goes forward.  For the two                                                               
satellite  fields, he  pointed out,  it  hadn't been  anticipated                                                               
that they'd  ever pay  a severance  tax.  Thus  he views  this as                                                               
quite  a large  tax increase.   Some  fields aren't  economically                                                               
viable if they have to pay a severance tax, he noted.                                                                           
                                                                                                                                
2:23:45 PM                                                                                                                    
MR.  HANLEY referred  to testimony  by ConocoPhillips  about what                                                               
decisions  it would've  made two  years  ago if  the company  had                                                               
known there'd be  a new system.  Similarly,  Mr. Hanley indicated                                                               
he feels  Anadarko is getting  the worst  of both worlds  for its                                                               
two satellite fields, since the company might have waited.                                                                      
                                                                                                                                
2:24:34 PM                                                                                                                    
SENATOR  STEDMAN returned  to  the comparison  of  oil prices  at                                                               
25 percent versus 20 percent tax,  each with a 20 percent credit.                                                               
He recalled  that Mr. Hanley had  said 25/20 isn't better  at low                                                               
oil prices.   Senator Stedman  also recalled that  one consultant                                                               
was  zeroing in  on the  value of  the credit  mechanism, because                                                               
under  either  scenario  the  explorers   wouldn't  be  paying  a                                                               
PPT tax.                                                                                                                        
                                                                                                                                
MR. HANLEY  replied by  emphasizing that  25/20 isn't  better for                                                               
exploration.  At  those low prices, the  projects aren't economic                                                               
and his company wouldn't be drilling  any of those wells.  To the                                                               
extent  25/20 versus  20/20 at  very  low prices  might cost  his                                                               
company less  money than under  the existing system,  however, it                                                               
could.  Thus the consultants weren't absolutely incorrect.                                                                      
                                                                                                                                
2:26:15 PM                                                                                                                    
SENATOR STEDMAN returned to pricing for gas versus oil.                                                                         
                                                                                                                                
CHAIR WAGONER  responded that an  amendment suggested by  Dr. van                                                               
Meurs, which  the House  put in,  addresses that.   He  said he'd                                                               
provide a copy.                                                                                                                 
                                                                                                                                
MR. HANLEY  replied he thinks  that's the approach.   Eventually,                                                               
when  there's gas  production, there  must be  someplace such  as                                                               
Henry Hub to work back from  to get the wellhead value.  However,                                                               
basing  a  gas-tax  increase  on what  happens  with  oil  prices                                                               
doesn't make sense.  "I  think they've figured out something," he                                                               
added.                                                                                                                          
                                                                                                                                
2:27:56 PM                                                                                                                    
CHAIR WAGONER informed members that  Mr. Robert Mintz, Department                                                               
of Law, was working with Dr.  van Meurs on some language that the                                                               
committee would  receive Monday; it  would relate to the  "two to                                                               
one" changes and the different escalator  for gas.  He noted that                                                               
on Monday  they also would  hear from  the public and  could pose                                                               
questions to Dr. van Meurs.  He held SB 305 over.                                                                               
                                                                                                                                
There being  no further  business to  come before  the committee,                                                               
Chair Wagoner  adjourned the Senate Resources  Standing Committee                                                               
meeting at 2:28:55 PM.                                                                                                        

Document Name Date/Time Subjects