Legislature(2005 - 2006)BUTROVICH 205

03/20/2006 03:30 PM RESOURCES


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03:37:24 PM Start
03:38:21 PM SB305
05:25:15 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
= SB 305 OIL AND GAS PRODUCTION TAX
Heard & Held
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                         March 20, 2006                                                                                         
                           3:37 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Thomas Wagoner, Chair                                                                                                   
Senator Ralph Seekins, Vice Chair                                                                                               
Senator Ben Stevens                                                                                                             
Senator Fred Dyson                                                                                                              
Senator Bert Stedman                                                                                                            
Senator Kim Elton                                                                                                               
Senator Albert Kookesh                                                                                                          
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
OTHER MEMBERS PRESENT                                                                                                         
                                                                                                                              
Senator Gretchen Guess                                                                                                          
Senate Gene Therriault                                                                                                          
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                              
SENATE BILL NO. 305                                                                                                             
"An Act repealing  the oil production tax and  gas production tax                                                               
and providing  for a production tax  on the net value  of oil and                                                               
gas; relating to the relationship  of the production tax to other                                                               
taxes; relating to the dates  tax payments and surcharges are due                                                               
under AS  43.55; relating  to interest  on overpayments  under AS                                                               
43.55; relating  to the treatment  of oil and gas  production tax                                                               
in a  producer's settlement with  the royalty owner;  relating to                                                               
flared gas, and to  oil and gas used in the  operation of a lease                                                               
or property, under AS 43.55;  relating to the prevailing value of                                                               
oil or gas under AS 43.55;  providing for tax credits against the                                                               
tax  due under  AS 43.55  for certain  expenditures, losses,  and                                                               
surcharges; relating to statements  or other information required                                                               
to be filed  with or furnished to the Department  of Revenue, and                                                               
relating  to the  penalty for  failure to  file certain  reports,                                                               
under  AS 43.55;  relating to  the  powers of  the Department  of                                                               
Revenue, and  to the disclosure  of certain  information required                                                               
to be  furnished to  the Department of  Revenue, under  AS 43.55;                                                               
relating   to  criminal   penalties   for  violating   conditions                                                               
governing access to and use  of confidential information relating                                                               
to the  oil and gas  production tax;  relating to the  deposit of                                                               
money  collected by  the Department  of Revenue  under AS  43.55;                                                               
relating to  the calculation of the  gross value at the  point of                                                               
production of  oil or gas;  relating to the determination  of the                                                               
net value  of taxable oil  and gas  for purposes of  a production                                                               
tax on the net value of  oil and gas; relating to the definitions                                                               
of  'gas,' 'oil,'  and certain  other  terms for  purposes of  AS                                                               
43.55;  making  conforming  amendments;   and  providing  for  an                                                               
effective date."                                                                                                                
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB 305                                                                                                                  
SHORT TITLE: OIL AND GAS PRODUCTION TAX                                                                                         
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
02/21/06       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/21/06       (S)       RES, FIN                                                                                               
02/22/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/22/06       (S)       Heard & Held                                                                                           
02/22/06       (S)       MINUTE(RES)                                                                                            
02/23/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/23/06       (S)       Heard & Held                                                                                           
02/23/06       (S)       MINUTE(RES)                                                                                            
02/24/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/24/06       (S)       Heard & Held                                                                                           
02/24/06       (S)       MINUTE(RES)                                                                                            
02/25/06       (S)       RES AT 9:00 AM BUTROVICH 205                                                                           
02/25/06       (S)       -- Reconvene from 02/24/06 --                                                                          
02/25/06       (H)       RES AT 10:00 AM SENATE FINANCE 532                                                                     
02/25/06       (S)       Heard & Held                                                                                           
02/25/06       (S)       MINUTE(RES)                                                                                            
02/27/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/27/06       (S)       Heard & Held                                                                                           
02/27/06       (S)       MINUTE(RES)                                                                                            
02/28/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/28/06       (S)       Heard & Held                                                                                           
02/28/06       (S)       MINUTE(RES)                                                                                            
03/01/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/01/06       (S)       Heard & Held                                                                                           
03/01/06       (S)       MINUTE(RES)                                                                                            
03/02/06       (S)       RES AT 1:30 PM BUTROVICH 205                                                                           
03/02/06       (S)       Heard & Held                                                                                           
03/02/06       (S)       MINUTE(RES)                                                                                            
03/02/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/02/06       (S)       Heard & Held                                                                                           
03/02/06       (S)       MINUTE(RES)                                                                                            
03/03/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/03/06       (S)       -- Meeting Canceled --                                                                                 
03/04/06       (S)       RES AT 10:00 AM SENATE FINANCE 532                                                                     
03/04/06       (S)       Presentation by Legislative Consultants                                                                
03/06/06       (S)       RES AT 3:30 PM SENATE FINANCE 532                                                                      
03/06/06       (S)       Heard & Held                                                                                           
03/06/06       (S)       MINUTE(RES)                                                                                            
03/07/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/07/06       (S)       Heard & Held                                                                                           
03/07/06       (S)       MINUTE(RES)                                                                                            
03/08/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/08/06       (S)       -- Meeting Canceled --                                                                                 
03/09/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/09/06       (S)       -- Meeting Canceled --                                                                                 
03/10/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/10/06       (S)       -- Meeting Canceled --                                                                                 
03/11/06       (H)       RES AT 10:00 AM CAPITOL 106                                                                            
03/11/06       (H)       -- Meeting Canceled --                                                                                 
03/13/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/13/06       (S)       Heard & Held                                                                                           
03/13/06       (S)       MINUTE(RES)                                                                                            
03/14/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/14/06       (S)       Heard & Held                                                                                           
03/14/06       (S)       MINUTE(RES)                                                                                            
03/15/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/15/06       (S)       -- Testimony <Invitation Only> --                                                                      
03/16/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/16/06       (S)       -- Meeting Canceled --                                                                                 
03/17/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
03/17/06       (S)       Heard & Held                                                                                           
03/17/06       (S)       MINUTE(RES)                                                                                            
03/18/06       (H)       RES AT 10:00 AM CAPITOL 124                                                                            
03/18/06       (H)       -- Meeting Canceled --                                                                                 
03/19/06       (S)       RES AT 1:00 PM BUTROVICH 205                                                                           
03/19/06       (S)       Heard & Held                                                                                           
03/19/06       (S)       MINUTE(RES)                                                                                            
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
MARK SHARP                                                                                                                      
Fairbanks AK                                                                                                                    
POSITION STATEMENT: Opposed CSSB 305.                                                                                         
                                                                                                                                
CHRIS JOHANSEN                                                                                                                  
Fairbanks Chapter                                                                                                               
Alaska Support Industry Alliance                                                                                                
Fairbanks AK                                                                                                                    
POSITION STATEMENT:  Opposed CSSB 305.                                                                                        
                                                                                                                                
MARK AIMS                                                                                                                       
Fairbanks AK                                                                                                                    
POSITION STATEMENT:  Opposed CSSB 305.                                                                                        
                                                                                                                                
JUDY BRADY, Executive Director                                                                                                  
Alaska Oil and Gas Association (AOGA)                                                                                           
Anchorage AK                                                                                                                    
POSITION STATEMENT: Opposed CSSB 305.                                                                                         
                                                                                                                                
JIM WEEKS, Ultra Star Exploration                                                                                               
3111 C Street, STE 500                                                                                                          
Anchorage AK                                                                                                                    
POSITION STATEMENT:  Preferred option 2 for replacing the $73                                                                 
million allowance.                                                                                                              
                                                                                                                                
MERRICK PIERCE                                                                                                                  
POSITION STATEMENT:  Commented on CSSB 305                                                                                    
                                                                                                                                
TADD OWENS, Executive Director                                                                                                  
Resource Development Council (RDC)                                                                                              
Anchorage AK                                                                                                                    
POSITION STATEMENT: Opposed CSSB 305.                                                                                         
                                                                                                                                
JIM GILBERT, President                                                                                                          
Alaska Support Industry Alliance                                                                                                
Udelhoven Oilfield System Services Inc.,                                                                                        
Anchorage AK                                                                                                                    
POSITION STATEMENT: Opposed CSSB 305.                                                                                         
                                                                                                                                
PAUL LAIRD, General Manager                                                                                                     
Alaska Support Industry Alliance                                                                                                
Anchorage AK                                                                                                                    
POSITION STATEMENT: Opposed CSSB 305.                                                                                         
                                                                                                                                
MARY SHIELDS, General Manager                                                                                                   
Northwest Technical Services                                                                                                    
Anchorage AK                                                                                                                    
POSITION STATEMENT: Expressed dismayed at the dramatic changes                                                                
considered in CSSB 305.                                                                                                         
                                                                                                                                
                                                                                                                                
MAYNARD TAPP                                                                                                                    
Hot Construction Consultants                                                                                                    
Anchorage AK                                                                                                                    
POSITION STATEMENT: Opposed CSSB 305.                                                                                         
                                                                                                                                
CAROLINE HIGGINS                                                                                                                
Alaska Support Industry Alliance                                                                                                
Anchorage AK                                                                                                                    
POSITION STATEMENT:  Opposed CSSB 305.                                                                                        
                                                                                                                                
DOUG REYNOLDS                                                                                                                   
University of Alaska Fairbanks                                                                                                  
Fairbanks AK                                                                                                                    
POSITION STATEMENT:  Commented on the tax structure related to                                                                
CSSB 305.                                                                                                                       
                                                                                                                                
JIM SAMPSON, President                                                                                                          
AFL-CIO                                                                                                                         
Fairbanks AK                                                                                                                    
POSITION STATEMENT: Thanked the committee for the work done on                                                                
CSSB 305.                                                                                                                       
                                                                                                                                
MARK HYLEN, President                                                                                                           
Kakivik Asset Management                                                                                                        
Anchorage AK                                                                                                                    
POSITION STATEMENT:  CSSB 305 makes absolutely no sense.                                                                      
                                                                                                                                
LYNN JOHNSON, President                                                                                                         
Dowland-Bach Corporation                                                                                                        
Anchorage AK                                                                                                                    
POSITION STATEMENT:  CSSB 305 would damage the investment                                                                     
climate in the state.                                                                                                           
                                                                                                                                
TOM WALSH, Co-owner                                                                                                             
Petrotechnical Resources of Alaska                                                                                              
Anchorage AK                                                                                                                    
POSITION STATEMENT: Opposed changes made to SB 305.                                                                           
                                                                                                                                
                                                                                                                                
MATTHEW FAGNANI                                                                                                                 
President of Worksafe                                                                                                           
General Manager of NANA Oilfield Services                                                                                       
Anchorage AK                                                                                                                    
POSITION STATEMENT: Opposed CSSB 305 and supported SB 305.                                                                    
                                                                                                                                
FRANK WIESS, President                                                                                                          
Alaska Anvil Inc.                                                                                                               
Anchorage AK                                                                                                                    
POSITION STATEMENT: Opposed CSSB 305 and supported SB 305.                                                                    
                                                                                                                                
KEVIN RITCHIE                                                                                                                   
Alaska Municipal League                                                                                                         
Juneau AK                                                                                                                       
POSITION STATEMENT: Read AMS policy statement.                                                                                
                                                                                                                                
WAYNE STEVENS, President CEO                                                                                                    
Alaska State Chamber of Commerce                                                                                                
Juneau AK                                                                                                                       
POSITION STATEMENT: Expressed concern with CSSB 305.                                                                          
                                                                                                                                
DR. PEDRO VAN MEURS                                                                                                             
Consultant to the Governor                                                                                                      
Office of the Governor                                                                                                          
PO Box 110001                                                                                                                   
Juneau, AK 00911-0001                                                                                                           
POSITION STATEMENT: Provided information on the 2 for 1 system.                                                               
                                                                                                                                
BILL CORBUS, Commissioner                                                                                                       
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION  STATEMENT:   Governor Murkowski  strongly supports  the                                                             
20/20 system                                                                                                                    
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR  THOMAS  WAGONER  called   the  Senate  Resources  Standing                                                             
Committee meeting to  order at 3:37:24 PM.  Present were Senators                                                             
Kim Elton, Fred  Dyson, Bert Stedman, Ralph  Seekins, Ben Stevens                                                               
and  Chair   Thomas  Wagoner.  Senator  Albert   Kookesh  arrived                                                               
momentarily.                                                                                                                    
                                                                                                                                
               SB 305-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                              
CHAIR   THOMAS  WAGONER   announced   SB  305   to   be  up   for                                                               
consideration.  That   day  the   agenda  would   include  public                                                               
testimony, a  continuing presentation from  Dr. Van Muers,  and a                                                               
summary from Commissioner Bill Corbus.                                                                                          
                                                                                                                                
MARK SHARP, Fairbanks, said this  is the first serious attempt in                                                               
over 20  years to modernize  the oil  tax structure and  it's not                                                               
likely to be  addressed again for many years. With  this in mind,                                                               
he urged  members to:  1) separate the gas  line issues  and make                                                               
the  oil  tax  restructuring  the priority  of  this  legislative                                                               
session, 2) keep  it simple because  basing the tax  structure on                                                               
purported net profits  as proposed by Governor  Murkowski and the                                                               
industry majors will result in  revisiting past mistakes, 3) keep                                                               
existing court-tested  taxes in  place and establish  a graduated                                                               
progressive excess market price tax  based on the market price of                                                               
North Slope crude. He recommended  three tax brackets. Bracket 1:                                                               
market values  in excess of  $30 up to $40  per barrel tax  at 20                                                               
percent; Bracket 2: market values in  excess of $40 up to $50 per                                                               
barrel tax at  25 percent; Bracket 3: market values  in excess of                                                               
$50 per barrel tax at 30 percent.                                                                                               
                                                                                                                                
MR. SHARP said  that this taxing system is simple  and takes away                                                               
the industry's ability to manipulate  financial data and litigate                                                               
areas  that  are subject  to  interpretation  or challenge.  Most                                                               
important,  it  would ensure  that  Alaskans  receive their  fair                                                               
share of excess market  price. Establishing short-term incentives                                                               
to spur  exploration and increase  production is good  policy for                                                               
the  state   but  six  years  of   retroactive  kickbacks  isn't.                                                               
Promotion of  independent operators ought  to be a  primary focus                                                               
of the  negotiations and $73 million  per year in tax  credits to                                                               
the behemoth oil companies should not be a focus.                                                                               
                                                                                                                                
3:46:26 PM                                                                                                                    
CHRIS JOHANSEN, Fairbanks Chapter  of the Alaska Support Industry                                                               
Alliance,  said it's  apparent  that the  current  tax system  is                                                               
dysfunctional, but changes  ought to ensure that  Alaska gets its                                                               
fair  share. CSSB  305 doesn't  do that;  it would  stifle needed                                                               
investment, slow  production, and decrease good  jobs for Alaska.                                                               
Furthermore,  it  would  make  the  tax  structure  for  the  oil                                                               
industry  the   highest  in  the   country  but   other  resource                                                               
industries such  as fishing, mining, timber  and tourism wouldn't                                                               
share the burden. That simply isn't equitable.                                                                                  
                                                                                                                                
MARK AMES,  Fairbanks, asked the  committee to stop the  theft of                                                               
our  providential   land-based  provisions  and   suggested  that                                                               
legislators  have   allowed  themselves   to  be   influenced  by                                                               
international moguls including Dr Van  Meurs. He pointed out that                                                               
state resources  are to be  used for  the maximum benefit  of its                                                               
people so, for  all the right reasons,  consider the producership                                                               
of  the  state of  our  own  resources  for  our own  people.  In                                                               
conclusion he  asked members to  examine the six  published goals                                                               
of the  Alaska State  Historic Preservation  Plan related  to the                                                               
state's cultural and historical resources.                                                                                      
                                                                                                                                
JUDY BRADY,  Executive Director,  Alaska Oil and  Gas Association                                                               
(AOGA), gave  background information  on association  members and                                                               
said she  hopes the  industry will  be around  in 40  years. AOGA                                                               
companies have a vested interest in  exploring for oil and gas in                                                               
Alaska and  Alaska has  a vested interest  in their  success. The                                                               
half-empty oil pipeline is generating  concern among AOGA members                                                               
and although it's  unclear how many Alaskans  realize how serious                                                               
this  is   for  Alaska's  future,  legislators   do  realize  the                                                               
significance. That's  why the  CS is such  a surprise,  she said.                                                               
Legislatures  are asking  the right  questions to  understand the                                                               
consequences of the tax increase,  but somehow they are coming up                                                               
with answers that will have  major consequences on future oil and                                                               
gas production.                                                                                                                 
                                                                                                                                
The original  version of SB  305 bill would increase  the state's                                                               
production  taxes  by  $1  billion,  which  is  huge.  The  House                                                               
Resource Committee  CS doubles  that amount  and it  appears that                                                               
the Senate  Resource Committee  CS is  even higher.  AOGA members                                                               
have  said  they  could  reluctantly  work  within  the  original                                                               
legislation,  but  the current  CS  creates  a gridlock  that  is                                                               
completely  unacceptable. Consider  the  information provided  by                                                               
the  explorers  and producers  that  will  make the  decision  to                                                               
invest after this legislation is  passed. Legislators will ensure                                                               
Alaska's future revenues by doing  everything possible to make it                                                               
more competitive.                                                                                                               
                                                                                                                                
JIM WEEKS, Ultra Star Exploration,  Anchorage, said he'd seen two                                                               
proposals to  replace the $73  million allowance and  his company                                                               
prefers  the second,  which  eliminates the  $40  per barrel  oil                                                               
price  ceiling. If  the Legislature  is  willing to  grant a  $10                                                               
million/220,000 barrel  for a new  field exemption,  it shouldn't                                                               
matter how fast  the exemption is recovered  and industry prefers                                                               
it to be  sooner rather than later. He heard  the committee might                                                               
increase from  4,000 barrels per  day to 5,000 barrels,  which is                                                               
more consistent  with the  administration's initial  proposal and                                                               
is a  change he would  encourage He  questioned the need  for the                                                               
seven-year  time  limit  for using  exemptions  because  industry                                                               
would  do  everything feasible  to  use  them quickly,  but  well                                                               
productivity  and conservation  issues  might  require more  than                                                               
seven years to use the exemption.                                                                                               
                                                                                                                                
He  agreed that  the AOGCC  ought to  be the  referee to  resolve                                                               
disputes regarding what  constitutes an oil & gas  field or unit,                                                               
but he  asked that the  Legislature clarify the  intent regarding                                                               
the eligibility for the 4,000 barrels per day exemption.                                                                        
                                                                                                                                
MR.  WEEKS   suggested  establishing  a  fence   around  existing                                                               
producing  units   when  the   PPT  becomes   effective.  Current                                                               
production from  these units wouldn't  receive the  4,000 barrels                                                               
per  day exemption.  Peripherals outside  the fence  that confirm                                                               
commercial  hydrocarbons and  justify  unit  expansion should  be                                                               
eligible for  the tax exemption  and exploration  and development                                                               
credits.  Deeper  and   shallower  accumulations  drilled  within                                                               
existing units after  July 1, 2006 ought to also  be eligible. In                                                               
closing he  stated support for  Dr. Van  Meurs' "2 for  1 system"                                                               
that he summarized on March 18.                                                                                                 
                                                                                                                                
4:03:18 PM                                                                                                                    
MERRICK  PIERCE said  the attempts  to amend  SB 305  to increase                                                               
revenue is encouraging, but the  issue of losing revenue when oil                                                               
falls below $27  a barrel isn't being  adequately addressed. He'd                                                               
like to  see an effective date  of January 1, 2006  and more work                                                               
on the  effective rate. There  have been  a multitude of  oil tax                                                               
disputes  in the  last decade,  and he'd  like to  see a  summary                                                               
accounting of  what the  state claimed was  due, what  it settled                                                               
for  and the  difference between  the claim  and the  settlement.                                                               
Knowing  how much  overly complex  oil tax  legislation has  cost                                                               
will clarify  the importance of structuring  the production taxes                                                               
to avoid  such debacles in  the future. Another  issue associated                                                               
with overly complex  tax policies is that it  puts state auditors                                                               
in the  position of making  decisions that are worth  billions of                                                               
dollars.                                                                                                                        
                                                                                                                                
4:07:07 PM                                                                                                                    
TADD  OWENS,  Executive  Director, Resource  Development  Council                                                               
(RDC), expressed  concern with the  changes contemplated  in CSSB                                                               
305. It  targets the  one industry that  is responsible  for more                                                               
than  85  percent  in  general  fund revenue  and  seeks  to  add                                                               
hundreds of  millions of  dollars to  state coffers  that already                                                               
have  a surplus.  The  CS appears  to  concentrate on  short-term                                                               
revenues at the potential expense  of long-term investment, which                                                               
is  needed  to  slow  the   decline  of  oil  production.  Unless                                                               
additional investments  are made,  the decline will  continue and                                                               
state revenues  will fall  short of  projections. The  tax regime                                                               
that   the  Legislature   approves  will   directly  affect   how                                                               
attractive Alaska looks to the  industry, and the current CS will                                                               
place Alaska at a competitive disadvantage.                                                                                     
                                                                                                                                
4:11:31 PM                                                                                                                    
JIM  GILBERT, President,  Alaska Support  Industry Alliance,  and                                                               
President,  Udelhoven Oilfield  System Services  Inc., Anchorage,                                                               
said  every change  in CSSB  305 jeopardizes  oil development  in                                                               
Alaska and  that jeopardizes  every small  business owner  in the                                                               
state. Noting that  CSSB 305 would leave Alaska  with the highest                                                               
task  rate  and cost  structure  in  the  country, he  urged  the                                                               
committee  to   choose  sustainable   economic  growth   for  new                                                               
investments over unsustainable higher tax methodology.                                                                          
                                                                                                                                
4:13:33 PM                                                                                                                    
PAUL LAIRD,  General Manager,  Alaska Support  Industry Alliance,                                                               
Anchorage,  said   CSSB  305   discourages  new   investment  and                                                               
virtually guarantees continuing  North Slope production declines,                                                               
which  over  the  long  term   will  reduce  state  revenue  from                                                               
royalties, income  taxes, property taxes and  severance taxes. He                                                               
urged the committee  to rescind the increases  in government take                                                               
seen in the  CS and adopt the original bill  that is projected to                                                               
increase  revenue to  the state  by $1  billion annually  and can                                                               
serve as a catalyst to a North Slope gas line project.                                                                          
                                                                                                                                
4:17:35 PM                                                                                                                    
MARY  SHIELDS,  General  Manager, Northwest  Technical  Services,                                                               
expressed  dismay at  the dramatic  changes  being considered  in                                                               
CSSB 305.  She understands  the purpose of  the bill  is twofold.                                                               
First  it's to  obtain a  reasonable increase  in oil  production                                                               
taxes for  the state, particularly  when prices are  high. Second                                                               
it  is  to promote  and  provide  incentive for  new  investment.                                                               
However,  in its  current  form the  bill is  at  odds with  both                                                               
purposes.  It is  the Legislature's  responsibility  to foster  a                                                               
business climate  that attracts new  investment in the  state and                                                               
assures  that  current  investors   can  remain  engaged  in  the                                                               
business  of  developing  the  state. In  its  current  form  new                                                               
investors  will   be  discouraged  and  current   investors  will                                                               
reconsider future  plans. She  asked the  committee to  step back                                                               
and reconsider the Draconian changes that are proposed.                                                                         
                                                                                                                                
4:20:44 PM                                                                                                                    
MAYNARD  TAPP,  Hot  Construction  Consultants,  Anchorage,  said                                                               
although SB 305 should be  viewed as a resource development bill,                                                               
CSSB 305  looks like a  revenue bill.  He urged the  committee to                                                               
reframe the bill to make Alaska more competitive.                                                                               
                                                                                                                                
4:24:15 PM                                                                                                                    
CAROLINE  HIGGINS, Alaska  Support Industry  Alliance, Anchorage,                                                               
said she  is concerned  about sustainable  business opportunities                                                               
in the oil and gas  industry. Although it's generally agreed that                                                               
additional  investments in  the oil  industry are  necessary, the                                                               
proposed changes  to SB  305 jeopardize  any such  investment. If                                                               
CSSB 305 passes, Alaska would have  the highest tax rate and cost                                                               
structure  in  the country,  which  sends  a clear  message  that                                                               
Alaska  prefers  to collect  taxes  than  to attract  investment.                                                               
Reasonable  Alaskans  recognize the  need  for  oil and  gas  tax                                                               
reform, but  it must  also provide the  appropriate level  of tax                                                               
structure to maintain a healthy industry.                                                                                       
                                                                                                                                
4:26:36 PM                                                                                                                    
DOUG  REYNOLDS, University  of Alaska,  Fairbanks,  said at  over                                                               
$100 per barrel  you've got to have a high  marginal tax rate and                                                               
that won't  cause the oil  companies to leave the  state. Second,                                                               
don't use  the consumer  price index on  the switch.  The correct                                                               
index is a GDP price deflator so that you don't lose value.                                                                     
                                                                                                                                
4:30:55 PM                                                                                                                    
JIM  SAMPSON,  President  of   the  AFL-CIO,  Fairbanks,  thanked                                                               
members for their  good work and reminded them  that Alaskans are                                                               
relying on them to do the right thing for the long term.                                                                        
                                                                                                                                
4:32:13 PM                                                                                                                    
MARK  HYLEN,  President,  Kakivik  Asset  Management,  Anchorage,                                                               
stated opposition to new taxes  on the industry because they will                                                               
affect jobs in the future. SB  305 was hard enough to swallow and                                                               
CSSB  305  makes  absolutely  no  sense.  Production  is  already                                                               
declining   and  the   proposed  changes   won't  encourage   the                                                               
investment   that's  necessary   to   promote  new   exploration.                                                               
Regardless  of how  much we  tax  industry, it  won't change  the                                                               
state's inability to have a  fiscal plan. The governor's bill was                                                               
a  first step  to  a  gas pipeline  and  the recommended  changes                                                               
jeopardize the gas line, jobs and the future of the state.                                                                      
                                                                                                                                
LYNN  JOHNSON,  President, Dowland-Bach  Corporation,  Anchorage,                                                               
said CSSB 305  would do a great deal of  damage to the investment                                                               
climate in  the state. CSSB 305  raises the tax on  industry more                                                               
than $2 billion  and appears to be about a  29 percent delta from                                                               
existing  taxes. The  short-term take  will increase  but in  the                                                               
long term, investment  in Alaska will decrease  as companies move                                                               
to  more lucrative  areas around  the world.  Production declines                                                               
will continue  and project and maintenance  dollars will continue                                                               
to  decrease;  thus  the  downward  spiral  for  investment  will                                                               
continue.                                                                                                                       
                                                                                                                                
TOM   WALSH,  Co-Owner,   Petrotechnical  Resources   of  Alaska,                                                               
Anchorage,  applauded  the committee  on  its  hard work  on  the                                                               
legislation, but  he opposed the  changes made to  the governor's                                                               
original bill.  He said this is  a complex issue and  we ought to                                                               
be  guided  by   two  simple  principles.  First,   tax  to  fund                                                               
government services; they  ought to be levied to  fund the public                                                               
purpose rather than to create  a surplus. Second, create the most                                                               
competitive   business  environment   possible  to   attract  new                                                               
investment.                                                                                                                     
                                                                                                                                
4:41:03 PM                                                                                                                    
SENATOR BERT  STEDMAN pointed out  that the state is  selling its                                                               
natural resources and using a tax system to collect.                                                                            
                                                                                                                                
4:41:39 PM                                                                                                                    
MATTHEW FAGNANI,  President of Worksafe  and General  Manager for                                                               
NANA Oilfield Services, Anchorage,  said CSSB 305 increases taxes                                                               
too much and  overtaxing an industry can have  an adverse effect.                                                               
In the  future capital spending  may be limited to  operation and                                                               
maintenance   and  not   exploration  and   development  of   new                                                               
technology.  He  asked  the  committee   to  focus  attention  on                                                               
increasing production levels  of North Slope oil  because it's in                                                               
Alaska's best interest that the  oil industry remains healthy. If                                                               
it isn't healthy,  it's doubtful that there can be  a healthy gas                                                               
economy. Let's  keep the  state moving forward  and not  kill the                                                               
golden goose. He said he supports the governor's original bill.                                                                 
                                                                                                                                
4:45:42 PM                                                                                                                    
FRANK WIESS,  President, Alaska Anvil Inc.,  Anchorage, expressed                                                               
concern with  CSSB 305 because it's  out of line with  the common                                                               
desire of  Alaskans to  be successful and  take advantage  of the                                                               
opportunities that Alaska offers to  those who work hard and take                                                               
reasonable risks.  He stated support for  the governor's original                                                               
bill.                                                                                                                           
                                                                                                                                
4:49:36 PM                                                                                                                    
KEVIN RITCHIE,  Alaska Municipal  League (AML), Juneau,  read the                                                               
AML policy  statement. It supports efforts  to equitably increase                                                               
revenue  from changes  to ELF  and thanks  legislators for  their                                                               
efforts in doing the best thing for everyone in the state.                                                                      
                                                                                                                                
4:50:52 PM                                                                                                                    
WAYNE  STEVENS,   President  &  CEO,  Alaska   State  Chamber  of                                                               
Commerce,  stated  support  for   the  revision  of  the  current                                                               
production tax  to a net profit  tax with tax incentives  for oil                                                               
and gas exploration and reinvestment.  However, the state chamber                                                               
is  concerned   about  the  impact   on  exploration   and  other                                                               
investment as  a result of the  higher tax proposed in  CSSB 305.                                                               
The long-term future for Alaskans  may be jeopardized in favor of                                                               
a  short  term, unsustainable  revenue  gain.  The state  chamber                                                               
suggests  that while  the  Legislature  considers increasing  oil                                                               
taxes,  it should  also consider  developing  a long-term  fiscal                                                               
plan.                                                                                                                           
                                                                                                                                
CHAIR WAGONER closed public testimony.                                                                                          
                                                                                                                                
4:53:40 PM                                                                                                                    
DR. PEDRO VAN  MEURS, Consultant to the Governor,  said he'd been                                                               
asked to  give additional information  about the 2 for  1 system.                                                               
The  idea is  that companies  could recoup  investments from  the                                                               
last five  years over a seven-year  period. It would be  a normal                                                               
deduction  with recovery  taking  place only  when  the price  is                                                               
above  the established  floor. The  table on  slide 2  has a  $40                                                               
floor. It  shows an actual  price that  is higher than  the floor                                                               
for 5  years and  lower than the  floor, which  demonstrates that                                                               
for  2 years  there  would  be no  investment  recovery. In  this                                                               
example Company  A has past  investment of $1.8 billion  over the                                                               
last  five years.  It  shows increased  investment  in the  state                                                               
amounting  to  $5.4  billion  over  seven  years.  Under  the  $2                                                               
investment on a  $1 recovery ratio the company  would recover its                                                               
entire investment.                                                                                                              
                                                                                                                                
Company B invested $.5 billion in  the past and under the new tax                                                               
it invests $3.7 billion in the  next seven years. In this example                                                               
the company  would recover  100 percent of  the $.5  billion past                                                               
investment in the first three years.                                                                                            
                                                                                                                                
Company  C invested  $1.5 billion  in the  past and  $1.5 billion                                                               
over the  next seven  years. In this  scenario the  company would                                                               
only recoup  $550 million or  36.7 percent.  It would be  able to                                                               
get the full  benefit of the recovery of its  investment on the 2                                                               
for 1 ratio,  but it would recover nothing in  the years when the                                                               
actual price is below the $40 floor.                                                                                            
                                                                                                                                
The final column in the chart  shows the average tax credit. None                                                               
of  the  companies  achieve  the  50  percent  ideal.  Company  A                                                               
achieves  46.7  percent,  Company  B achieves  42.7  percent  and                                                               
Company C achieves 47.3 percent.                                                                                                
                                                                                                                                
4:58:17 PM                                                                                                                    
He suggested establishing  a firm cutoff date so that  at the end                                                               
of seven  years the opportunity  to recover the investment  is no                                                               
longer available. The idea behind  this is 1) to reward companies                                                               
that  have  been  strong investors  and  2) if  companies  really                                                               
intend to  double their investment,  this feature would  click in                                                               
and they  would have the benefit  of the recovery. That  is a way                                                               
to recover the  claw back in a way that  benefits Alaska. He said                                                               
he  agreed with  Senator  Therriault's  statement that  companies                                                               
make decisions on the cash flow going forward and not on costs.                                                                 
                                                                                                                                
5:00:28 PM                                                                                                                    
DR. VAN MUERS said he was also  asked to provide a $46 per barrel                                                               
rating. There  wasn't time  to prepare  the information,  but the                                                               
chart comparing $26  and $36 per barrel oil on  slide 3 indicates                                                               
the trend. Moving from $26 to  $36 and comparing the 20/20 system                                                               
to the Alaska  Current system you see that  the regressive Alaska                                                               
Current system improves  significantly. If the price  goes up the                                                               
profits increase rapidly, which is  what makes the Alaska Current                                                               
system  more  attractive  under  high  rather  than  low  prices.                                                               
Increase the  price to  $46 and the  system stays  regressive and                                                               
the profits expand rapidly.                                                                                                     
                                                                                                                                
The PPT is designed to be a  neutral system in that it combines a                                                               
regressive  royalty  with a  progressive  PPT.  Systems found  in                                                               
Norway  or Russia  normally deteriorate  if  the price  increases                                                               
because  of the  progressivity  - the  state takes  progressively                                                               
more. From  this you can  conclude that  at $46 the  proposal for                                                               
the 20/20 is less attractive  than the Alaska Current system. The                                                               
same scenario would apply under the 25/20 system.                                                                               
                                                                                                                                
He recapped  that the  higher the price  the less  attractive the                                                               
PPT is  relative to the Alaska  Current system and the  lower the                                                               
price  the more  attractive the  PPT  is relative  to the  Alaska                                                               
Current  system. If  prices are  higher  investment becomes  less                                                               
attractive, which is a concern except  for the fact that the long                                                               
term forecast for oil  is in the $30 to $40  range. He noted that                                                               
he used $36  per barrel for the main  conclusion about investment                                                               
attractiveness for that reason.                                                                                                 
                                                                                                                                
5:05:58 PM                                                                                                                    
DR. VAN  MUERS said slide  4 indicates the capital  costs subject                                                               
to a  20 percent tax  credit. They include:  geophysical surveys;                                                               
exploration  wells;   development  wells   (including  intangible                                                               
costs);  field  facilities  (tanks, separators,  etc.);  and  gas                                                               
processing  plants.  The  purpose  of  including  gas  processing                                                               
plants is to  ensure that if there is a  future gas line, smaller                                                               
companies would be in a  better bargaining position to get access                                                               
to the large company facilities or to build plants themselves.                                                                  
                                                                                                                                
5:07:57 PM                                                                                                                    
Slide 5  addresses a  Cook Inlet feature,  which provides  a tax-                                                               
free  allowance  for  each  company   based  on  barrels  of  oil                                                               
equivalent per day.  In order to ensure that it  would only apply                                                               
to  small  companies,  the  amount  of  the  allowance  could  be                                                               
determined on the basis of the following formula:                                                                               
               BOEPD = 5000 - (Prod - 5000) X 0.1                                                                               
The amount cannot be more than 5000 or less than 0.                                                                             
                                                                                                                                
The formula  provides a  sliding scale so  that the  incentive is                                                               
reduced gradually  as companies  become successful. A  company at                                                               
55,000 barrels per  day wouldn't have the benefit,  but a company                                                               
at 10,000 or  15,000 would have a  significant benefit. Companies                                                               
like  Anadarko or  Chevron would  still  see a  benefit to  their                                                               
operations  while trying  to establish  in  Alaska. This  feature                                                               
solves the  concern expressed  about the Cook  Inlet region  in a                                                               
way  that would  be equitable  to all  producers in  Alaska. This                                                               
would apply  to oil and to  gas so there  would have to be  a gas                                                               
oil conversion  factor, which  is typically 6  mcf per  barrel of                                                               
oil. He suggested that it be  drafted in a way that the allowance                                                               
doesn't create an automatic loss carry forward feature.                                                                         
                                                                                                                                
5:12:50 PM                                                                                                                    
CHAIR WAGONER  suggested adding  that any  company that  has been                                                               
currently producing  oil or  gas in the  state would  qualify for                                                               
the 2 for 1 on prior investments.                                                                                               
                                                                                                                                
DR.  VAN MEURS  replied the  idea  of the  2  for 1  is that  any                                                               
company that is willing to  double its investment in Alaska ought                                                               
get the benefit.                                                                                                                
                                                                                                                                
5:13:35 PM                                                                                                                    
SENATOR FRED DYSON asked for a recap of the chart on slide 3.                                                                   
                                                                                                                                
DR.  VAN  MEUR  said  the   lower  the  number,  the  higher  the                                                               
competitiveness  and   the  higher  the  number   the  lower  the                                                               
competitiveness.                                                                                                                
                                                                                                                                
5:14:52 PM                                                                                                                    
SENATOR  KIM  ELTON  asked  if  there  is  an  advantage  to  the                                                               
companies that have  been players in Alaska and  receive a credit                                                               
as opposed  to companies  that might come  and don't  qualify for                                                               
the credit.                                                                                                                     
                                                                                                                                
DR.  VAN MEURS  replied the  idea is  to reinvigorate  and expand                                                               
activity  in  companies that  have  been  in  Alaska. For  a  new                                                               
company there  isn't the same  incentive, but it's  believed that                                                               
new companies  would be  attracted by  the governors  $73 million                                                               
feature or the  5,000 barrel per day allowance in  the Cook Inlet                                                               
feature.                                                                                                                        
                                                                                                                                
5:17:24 PM                                                                                                                    
SENATOR  RALPH SEEKINS  referenced slide  4  and asked  if a  gas                                                               
processing plant is  included as a capital cost  under PPT, would                                                               
be included later in  a cost used to determine a  gas tariff in a                                                               
pipeline.                                                                                                                       
                                                                                                                                
DR. VAN MEURS  replied the gas processing plants are  part of the                                                               
field  operations  because  the  idea  is to  process  gas  to  a                                                               
marketable form.  A gas treatment  plant would  not be part  of a                                                               
gas  processing  plant.  The  distinction  is  that  on  the  gas                                                               
treatment plant would likely be  a FERC regulated tariff. That is                                                               
what causes  problems for  the small companies  to get  access to                                                               
the  plants, which  is  why incentives  are  good. Companies  are                                                               
given  help   on  gas  processing   plants  to  get   the  needed                                                               
infrastructure on the  North Slope to get access  to the pipeline                                                               
and to also give other producers access to the pipeline.                                                                        
                                                                                                                                
5:21:43 PM                                                                                                                    
SENATOR   SEEKINS   strongly   recommended  including   the   two                                                               
aforementioned concepts in a future CS.                                                                                         
                                                                                                                                
5:22:23 PM                                                                                                                    
SENATOR BERT  STEDMAN stated the belief  that the 2 for  1 credit                                                               
ought to be non-saleable.                                                                                                       
                                                                                                                                
CHAIR WAGONER said he believes that  Dr. Van Muers has it written                                                               
that way.                                                                                                                       
                                                                                                                                
MR. BILL CORBUS, Commissioner, Department  of Revenue (DOR), said                                                               
the  governor   and  his  administration  strongly   support  the                                                               
original 20/20  rate. He noted  that incentives are  badly needed                                                               
to  encourage  oil  production  and  recommended  the  following:                                                               
1) don't  emphasize short-term  revenues, 2) maximize  the wealth                                                               
of the state over the long run  and 3) keep your eye on the prize                                                               
which is the gas pipeline.                                                                                                      
                                                                                                                                
There being  no further  business to  come before  the committee,                                                               
Chair Wagoner adjourned the meeting at 5:25:15 PM.                                                                            

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