Legislature(2007 - 2008)BUTROVICH 205

10/23/2007 09:00 AM RESOURCES

Download Mp3. <- Right click and save file as

Audio Topic
09:05:38 AM Start
09:12:57 AM SB2001
07:27:12 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Industry and Associations
-- Testimony <Invitation Only> --
Public Testimony at 6:15 - Time limit
may be set
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                        October 23, 2007                                                                                        
                           9:05 a.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Senator Charlie Huggins, Chair                                                                                                  
Senator Bert Stedman, Vice Chair                                                                                                
Senator Lyda Green                                                                                                              
Senator Gary Stevens                                                                                                            
Senator Lesil McGuire                                                                                                           
Senator Bill Wielechowski                                                                                                       
Senator Thomas Wagoner                                                                                                          
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
COMMITTEE CALENDAR                                                                                                            
SENATE BILL NO. 2001                                                                                                            
"An Act  relating to  the production  tax on oil  and gas  and to                                                               
conservation  surcharges  on oil;  relating  to  the issuance  of                                                               
advisory  bulletins and  the  disclosure  of certain  information                                                               
relating to the  production tax and the  sharing between agencies                                                               
of certain information relating to  the production tax and to oil                                                               
and gas or  gas only leases; amending the State  Personnel Act to                                                               
place in  the exempt service  certain state oil and  gas auditors                                                               
and their immediate supervisors; establishing  an oil and gas tax                                                               
credit  fund and  authorizing payment  from that  fund; providing                                                               
for retroactive  application of certain statutory  and regulatory                                                               
provisions  relating to  the production  tax on  oil and  gas and                                                               
conservation  surcharges on  oil;  making conforming  amendments;                                                               
and providing for an effective date."                                                                                           
     HEARD AND HELD                                                                                                             
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: SB2001                                                                                                                  
SHORT TITLE: OIL & GAS TAX AMENDMENTS                                                                                           
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR                                                                                    
10/18/07       (S)       READ THE FIRST TIME - REFERRALS                                                                        
10/18/07       (S)       RES, JUD, FIN                                                                                          
10/19/07       (S)       RES AT 9:00 AM BUTROVICH 205                                                                           
10/19/07       (S)       Heard & Held                                                                                           
10/19/07       (S)       MINUTE(RES)                                                                                            
10/20/07       (S)       RES AT 8:00 AM BUTROVICH 205                                                                           
10/20/07       (S)       Heard & Held                                                                                           
10/20/07       (S)       MINUTE(RES)                                                                                            
10/21/07       (S)       RES AT 1:00 PM HOUSE FINANCE 519                                                                       
10/21/07       (S)       Sponsor Presentation:                                                                                  
10/22/07       (S)       RES AT 11:30 AM BUTROVICH 205                                                                          
10/22/07       (S)       Heard & Held                                                                                           
10/22/07       (S)       MINUTE(RES)                                                                                            
10/23/07       (S)       RES AT 9:00 AM BUTROVICH 205                                                                           
WITNESS REGISTER                                                                                                              
JOHN P. ZAGER, General Manager                                                                                                  
Chevron North America Exploration and Production                                                                                
POSITION STATEMENT: Spoke in opposition to the tax increases in                                                               
SB 2001.                                                                                                                        
PAT FOLEY, Manager                                                                                                              
Land and External Affairs                                                                                                       
Pioneer Natural Resources, Alaska, Inc.                                                                                         
POSITION STATEMENT: Spoke in opposition to the tax increases in                                                               
SB 2001.                                                                                                                        
KEN SHEFFIELD, President                                                                                                        
Pioneer Natural Resources, Alaska, Inc.                                                                                         
POSITION STATEMENT: Spoke in opposition to the tax increases in                                                               
SB 2001.                                                                                                                        
MARK HANLEY, Manager, Public Affairs                                                                                            
Anadarko Petroleum Corporation Alaska                                                                                           
POSITION STATEMENT: Spoke in opposition to the tax increases in                                                               
SB 2001.                                                                                                                        
MARILYN CROCKETT, Executive Director                                                                                            
Alaska Oil & Gas Association                                                                                                    
POSITION STATEMENT: Spoke in opposition to the tax increases in                                                               
SB 2001.                                                                                                                        
TOM WILLIAMS, Chair AOGA Tax Committee, employee of BP                                                                          
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Spoke in opposition to the tax increases in                                                               
SB 2001.                                                                                                                        
PAUL LAIRD, General Manager                                                                                                     
Alaska Support Industry Alliance                                                                                                
POSITION STATEMENT: Spoke in opposition to the tax increases in                                                               
SB 2001.                                                                                                                        
JOHN SHIVELY, President                                                                                                         
Resource Development Council                                                                                                    
POSITION STATEMENT: Spoke in opposition to the tax increases in                                                               
SB 2001.                                                                                                                        
DONALD BENSON                                                                                                                   
Palmer, Alaska                                                                                                                  
POSITION STATEMENT: Spoke in favor of SB 2001.                                                                                
JERRY MCCUTCHEON                                                                                                                
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Spoke in favor of increased petroleum taxes.                                                              
LOWELL HUMPHREY,                                                                                                                
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Spoke in opposition to tax increases in SB                                                                
CHRIS HUMPHREY                                                                                                                  
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Spoke in opposition to tax increases in SB                                                                
DAVID LAWER, Senior Vice President and General Council                                                                          
First National Bank of Alaska                                                                                                   
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Spoke in opposition to tax increases in SB                                                                
JOE MATHIS, Owner                                                                                                               
Montana Creek Campground                                                                                                        
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Spoke in opposition to tax increases in SB                                                                
WILLIAM HARVEY                                                                                                                  
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Spoke in favor of a gross tax.                                                                            
RANDY SELMAN                                                                                                                    
Wasilla, Alaska                                                                                                                 
POSITION STATEMENT: Spoke in favor of the PPT.                                                                                
TOM LAKOSH                                                                                                                      
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Suggested an alternative taxing method.                                                                   
MARY NORDALE                                                                                                                    
Fairbanks, Alaska                                                                                                               
POSITION STATEMENT: Spoke on past auditing problems with the oil                                                              
and gas industry.                                                                                                               
CHUCK LOGSDON, Alaska Oil and Gas Association (AOGA),                                                                           
Palmer, Alaska                                                                                                                  
POSITION STATEMENT: Spoke in opposition to SB 2001.                                                                           
MAYNARD TAPP, Founder                                                                                                           
Hawk Construction Consultants                                                                                                   
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Spoke in opposition to SB 2001.                                                                           
TOM WALSH, Oil and Gas Industry Consultant                                                                                      
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Spoke in opposition to SB 2001.                                                                           
JOSEPH HEGNA, Vice President                                                                                                    
Oil and Gas Sector, MWH, Inc.                                                                                                   
POSITION STATEMENT: Spoke in opposition to SB 2001.                                                                           
LYNN JOHNSON, CEO and Co-Founder                                                                                                
Dowland-Bach Corporation                                                                                                        
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Spoke in opposition to SB 2001.                                                                           
ACTION NARRATIVE                                                                                                              
CHAIR  CHARLIE  HUGGINS  called  the  Senate  Resources  Standing                                                             
Committee  meeting  to order  at  9:05:38  AM. Senators  Huggins,                                                             
McGuire,  Green, and  Wielechowski were  present at  the call  to                                                               
order Stevens. Senators Wagoner and Stedman arrived soon after.                                                                 
Also in attendance were Senators Davis, Thomas, Hoffman, Elton,                                                                 
and French and Representatives Gardner and Buch.                                                                                
                SB2001-OIL & GAS TAX AMENDMENTS                                                                             
CHAIR HUGGINS announced the consideration of SB 2001. He noted a                                                                
memo from Kevin Banks correcting earlier statements.                                                                            
JOHN   P.  ZAGER,   General   Manager,   Chevron  North   America                                                               
Exploration and  Production, said it  is a pleasure  to represent                                                               
the independent producers. He said  Chevron is the fourth largest                                                               
producer and  the third  largest operator  in Alaska.  Chevron is                                                               
the largest operator  in Cook Inlet, operating  10 platforms with                                                               
8  producing,  he  said.  "We  are  mostly  100  percent…working-                                                               
interest  owners  at  Granite Point  with  ExxonMobil  owning  75                                                               
percent  of one  platform." In  McArthur River,  Chevron partners                                                               
with  Pacific   Energy  Resources   and  has  about   52  percent                                                               
ownership. Chevron  also has gas  fields that it operates  on the                                                               
east and  west sides. It  is a joint-venture owner  with Marathon                                                               
on  the  Kenai  Peninsula.  There  are  about  500  employees  or                                                               
contractors and  most are  on the Kenai  Peninsula, he  noted, so                                                               
Chevron is  one of  the largest private  employers on  the Kenai.                                                               
Chevron  is unique  in having  a  balance of  production in  Cook                                                               
Inlet  and the  North Slope.  Production in  Cook Inlet  is about                                                               
23,000 barrels of oil equivalent--two  thirds is gas. Most of the                                                               
people work supporting the oil  production. He said the platforms                                                               
are continuously staffed  with 10 to 15  employees. Production in                                                               
Cook Inlet  is about  15-16,000 barrels per  day. Costs  are very                                                               
high  because  of the  percentage  of  water,  he said.  On  some                                                               
platforms, the direct operating expense is over $40 per barrel.                                                                 
SENATOR  WIELECHOWSKI  asked  the  lifting costs  on  the  legacy                                                               
fields for the North Slope.                                                                                                     
MR. ZAGER said  he believes it may be in  the teens. Chevron also                                                               
has  interest in  the North  Slope-about 15,000  barrels per  day                                                               
through the small  working interest in Prudhoe  Bay, Kuparuk, and                                                               
Endicott.  Chevron  is  in  the   early  stages  of  dramatically                                                               
increasing its  capital investment in  Alaska. If prices  were to                                                               
drop,  those  assets  would be  severely  challenged  to  operate                                                               
profitably, he stated.                                                                                                          
CHAIR HUGGINS asked if he was talking about oil or gas.                                                                         
MR. ZAGER said  the gas production is primarily  onshore and more                                                               
profitable. The cost challenges are about oil.                                                                                  
9:12:57 AM                                                                                                                    
MR.  ZAGER said  Chevron is  beginning a  wide-spread exploration                                                               
program  this  winter  on  the  North  Slope.  It  is  the  first                                                               
exploration there since the early  1990s, and he envisions a two-                                                               
winter exploration program in the white hills.                                                                                  
CHAIR HUGGINS asked about Chevron's decision to invest.                                                                         
MR. ZAGER  said, "These decisions  were made to invest  using PPT                                                               
[profits-based  petroleum  production tax  of  2006]  as our  tax                                                               
assumption."  For some  projects, Chevron  took initial  steps in                                                               
2005, "but when  we actually made the  go/no-go decision sometime                                                               
in the last  10 to 12 months,  we were assuming that  PPT was our                                                               
tax regime."                                                                                                                    
9:14:32 AM                                                                                                                    
CHAIR HUGGINS said  if the decisions were spurred by  the PPT, it                                                               
seems like a short decision cycle.                                                                                              
MR.  ZAGER said  Chevron has  an  annual capital  budget, and  it                                                               
develops projects  over a  period of time.  Generally it  uses "a                                                               
three-year plan  that is pretty  firm and  then we extend  it out                                                               
for a period beyond that just  to get a longer look." As projects                                                               
come into the inventory, Chevron  has a five-stage process. Stage                                                               
one  is identifying  viable opportunities.  Stage 2  is comparing                                                               
and selecting  the options, and  the third stage is  refining the                                                               
option and being ready for  investment. Stage 4 is execution, and                                                               
stage 5 is looking back. In  2005, the North Slope project was in                                                               
stage 1, and during  the last 12 months it was  put into stage 3,                                                               
so it is in the budget and ready to be approved.                                                                                
9:16:04 AM                                                                                                                    
SENATOR  WIELECHOWSKI asked  when Chevron  requested the  permits                                                               
for the North Slope exploratory wells.                                                                                          
MR. ZAGER said  he doesn't have the exact  date, certainly within                                                               
the last 12 months or so.                                                                                                       
SENATOR  WIELECHOWSKI said  that DNR  and  DOR said  the PPT  had                                                               
little to do with Chevron's decision on those new wells.                                                                        
MR. ZAGER said "a nucleus" of  those leases was acquired seven or                                                               
eight years  ago. Some dry  holes were  drilled by others  and it                                                               
made Chevron  rethink those projects. Since  then, Chevron needed                                                               
to decide whether  to drop the leases. "We decided  that we would                                                               
keep holding  on to  them because another  concept had  come that                                                               
was  different than  the  one  that was  condemned  by the  other                                                               
wells.  So,  I believe  our  first  significant additional  lease                                                               
purchases then were around…March 1  of 2006." Chevron picked up a                                                               
lot  of acreage  then, and  it has  picked up  additional acreage                                                               
since. The last  round has been since PPT was  in place. "So that                                                               
is spending the  capital to acquire the lease  acreage, which was                                                               
really just  the down payment,  if you  will, on that  play." The                                                               
real investment was six to  eight million dollars acquiring those                                                               
lease positions, he  said, and that money will be  dwarfed by the                                                               
amount Chevron  will spend  drilling over  two seasons.  The real                                                               
investment decision  is committing  to get  the rig  and mobilize                                                               
all the people and resources to evaluate the leases.                                                                            
9:19:14 AM                                                                                                                    
SENATOR  WIELECHOWSKI noted  that DOR  and DNR  said PPT  did not                                                               
impact  those  decisions.  He requested  a  verification  of  the                                                               
MR. ZAGER said  he doesn't know how the agencies  would know when                                                               
Chevron made the decision-"maybe from  the fact that we took some                                                               
of those  leases prior to the  passage of PPT." They  may surmise                                                               
that Chevron had  made the drilling decision then,  "but that was                                                               
not  the  case; that  was  only  made  in the  last  several...we                                                               
committed to  the rig probably  a year  ago because of  long lead                                                               
times. So they  may have said, at that point,  we're committed to                                                               
drilling. But  usually when you  make a rig commitment,  you have                                                               
fallback provisions; you  can do other things with  that rig, you                                                               
can get  out of your  lease, so you're  trying to, all  the time,                                                               
stay  on the  timeline, make  what commitments  you need  to, but                                                               
also   have   off-ramps  along   the   way.   And  so   when   we                                                               
finally…committed  to the  full thing  was  certainly within  the                                                               
last three to four months-where  we got internal approval all the                                                               
way up to our board of directors to make that investment."                                                                      
9:20:51 AM                                                                                                                    
CHAIR  HUGGINS  said the  committee  is  interested in  Chevron's                                                               
perspective  and  if  its  activity   is  relevant  to  the  PPT.                                                               
Exploration  investment  was the  idea  behind  the PPT.  In  his                                                               
estimation, the  challenge of exploration  and production  is the                                                               
future challenge to cut down the decline in production.                                                                         
9:21:30 AM                                                                                                                    
MR.  ZAGER  said the  PPT  was  used  in making  Chevron's  final                                                               
investment decision.  It is hard to  say what it would  have done                                                               
if the  PPT had not been  there. It probably would  not have made                                                               
it uneconomic  but would have moved  it down the queue  of world-                                                               
wide opportunities. It is a  real challenge to convince a company                                                               
that has been successful internationally  that it is time to come                                                               
back to  the North Slope-"where  we've left  a lot of  money over                                                               
the years without  too much to show  for it." Now is  the time to                                                               
come back and test the waters again.                                                                                            
SENATOR WAGONER asked how many wells are proposed.                                                                              
9:22:39 AM                                                                                                                    
MR. ZAGER said  Chevron is permitted for 15 or  16 locations, but                                                               
"that  was  done largely  to  provide  optionalities as  we  move                                                               
forward." He  said he expects 6  to 9 over the  next two seasons.                                                               
The first wells may cause Chevron to make changes.                                                                              
9:23:14 AM                                                                                                                    
CHAIR HUGGINS asked how much it costs to drill a well.                                                                          
MR. ZAGER said because of the  infrastructure it would be hard to                                                               
determine cost  per well,  but the total  commitment for  the two                                                               
seasons is about $150 million.                                                                                                  
CHAIR HUGGINS asked what the North Slope labor force will be.                                                                   
MR. ZAGER  said it is  hard to say,  but probably 100.  There are                                                               
probably 20-30  people now. Getting  the right people is  "a real                                                               
constraint." Chevron is staging and  waiting for snow to fall. He                                                               
showed a  graph entitled "Chevron is  increasing investment under                                                               
PPT,"  and  it showed  the  increase  in capital  investments  of                                                               
Chevron. He said most of it is  in Cook Inlet gas. In 2007 begins                                                               
the  increased  efforts  in  the oil  business  and  North  Slope                                                               
drilling.  In 2008  there will  be a  full program  on the  North                                                               
Slope with investments  of over $300 million along  with adding a                                                               
full rig  line in  Cook Inlet.  In 2009,  Chevron is  planning to                                                               
bring a second rig line  into Cook Inlet. Individual wells aren't                                                               
drilled; "you've got to  get a rig; you've got to  get a queue of                                                               
opportunities  lined up  in front  of it  so that  crew can  keep                                                               
working."  In today's  world, a  hiatus means  people may  not be                                                               
there. The  way to operate  efficiently and  safely is to  have a                                                               
crew that has worked together.                                                                                                  
9:26:11 AM                                                                                                                    
SENATOR WIELECHOWSKI asked  if Chevron is looking for  oil or gas                                                               
in Cook Inlet.                                                                                                                  
MR.  ZAGER  said  both.  Chevron intends  "to  flatten  and  then                                                               
hopefully increase  the production on  the oil side," and  it has                                                               
strong market  commitments for  gas. To  fill them,  Chevron must                                                               
spend  a lot  of money  on exploration  and development  of those                                                               
SENATOR  WIELECHOWSKI asked  if  there are  a  limited number  of                                                               
arctic rigs for drilling.                                                                                                       
MR. ZAGER said he is not the best  person to ask, but there are a                                                               
limited  number. One  rig  does  not fit  every  well, he  added.                                                               
Chevron had  a new rig  built in Canada,  and it is  now drilling                                                               
gas prospects  in Cook Inlet.  It is  drilling today and  it will                                                               
head north in  November. Anadarko may have the  same small mobile                                                               
rig,  designed to  drill  and move  more  efficiency. The  common                                                               
enemy  is production  decline. Not  that long  ago "we  were here                                                               
slugging this through." Chevron believes  it is too early to tell                                                               
if  the PPT  is  working.  Chevron investments  show  that it  is                                                               
working. A review  has been scheduled for 2011,  and that doesn't                                                               
give him comfort,  he said. He asked what Chevron  is supposed to                                                               
assume.  He  expressed concern  about  the  White Hills  prospect                                                               
drilled  in   2007-2009,  with  delineation  work   in  2009  and                                                               
commissioning in 2010.                                                                                                          
9:29:41 AM                                                                                                                    
MR. ZAGER  said knowing  that there  is a review  of PPT  in 2011                                                               
could influence the  timing if taxes are expected  to increase. A                                                               
spike in oil prices or an  election between then and now may give                                                               
Chevron the confidence to go forward.                                                                                           
CHAIR HUGGINS said Senator Wagoner made that same comment.                                                                      
SENATOR WAGONER  said the administration  said it will  leave gas                                                               
at 25 or 22.5  percent, and then take care of  it in three years.                                                               
He asked  if that has  the same kind of  effect as the  review in                                                               
2011. It will open up the tax  policy of Alaska if gas prices are                                                               
not addressed at this time. He  said he understands the nuance of                                                               
the gas line contract and negotiations.                                                                                         
MR. ZAGER said anything that  opens the discussion brings concern                                                               
to people who are investing potentially billions of dollars.                                                                    
SENATOR WAGONER said, "We might be rushing to judgment."                                                                        
CHAIR HUGGINS said,  "What we're doing…I characterize  as a knee-                                                               
jerk-that we can't qualify why we're doing it."                                                                                 
9:32:26 AM                                                                                                                    
MR. ZAGER expressed  the desire to balance taxes  with an optimum                                                               
investment climate.  Corporations should operate  safely, protect                                                               
the  environment, and  increase value  to shareholders.  Managing                                                               
cash  flow  determines  accumulated   value.  Cash  is  used  for                                                               
operating   costs;    investment   for    upstream,   downstream,                                                               
technology, or  acquisitions; paying down debt  and cash buildup;                                                               
dividends to shareholders;  and buying back stock.  He noted that                                                               
there are always more opportunities  and not enough capital to go                                                               
around. There is always a  ranking process of projects where some                                                               
get cut off at the bottom.                                                                                                      
9:36:45 AM                                                                                                                    
MR.  ZAGER  said  investment decisions  in  Alaska  consider  the                                                               
government take,  but it isn't  the most important  thing. Alaska                                                               
has an  asset that Chevron wants  to lease out in  the market. To                                                               
value  it,  one  first  looks  at the  geology  and  the  reserve                                                               
potential.  The crown  jewels  have been  found,  and now  Alaska                                                               
state land is  "fair to middling." The oil industry  spends a lot                                                               
of time studying rocks. The  cost of operation is another factor,                                                               
and Alaska  is on  the high  end. Even Cook  Inlet lacks  a large                                                               
infrastructure-at  times  a tool  has  been  flown in  from  Nova                                                               
Scotia. Time is  a factor. On the North Slope,  it takes eight to                                                               
ten  years  before revenue  comes  in.  Risk and  probability  of                                                               
success  are  important.  The  fiscal  regime  defines  how  much                                                               
revenue the investor keeps.                                                                                                     
9:41:35 AM                                                                                                                    
MR.  ZAGER said  he sometimes  gets lost  in the  minutia of  why                                                               
people are  so fixed on  government take  when there are  so many                                                               
other things.  The product  needs to  be priced  appropriately in                                                               
the market. He  said investment decisions are made  on the after-                                                               
tax net  present value. That means  that the future cash  flow is                                                               
discounted back,  and opportunities are ranked,  and certain ones                                                               
will get  funded and some  will not.  Great rocks can  trump poor                                                               
fiscal  terms, he  stated. Pricing  a Chevrolet  like a  Cadillac                                                               
won't work.  He showed a graph  of Alaska lease sales  since 2002                                                               
compared with the Gulf of Mexico.  It is a good example, he said,                                                               
"because these are  the exact same companies you  want bidding on                                                               
the North  Slope." They are  large companies that can  operate in                                                               
the deep water,  and they are the major producers  here in Alaska                                                               
and  the large  independents. If  this were  baseball, the  score                                                               
would be 72 for the Gulf of Mexico and 1 for Alaska.                                                                            
SENATOR STEDMAN said the Gulf of  Mexico is under a different tax                                                               
structure  and he  asked for  a comparison  of near  shore versus                                                               
being  out  in  federal  waters. "Could  you  elaborate  on  that                                                               
because  we've had  Gulf of  Mexico conversations  numerous times                                                               
here, and I still have a  conceptual difficulty in drawing a real                                                               
tight correlation between  the federal deep water in  the Gulf of                                                               
Mexico versus the Arctic?"                                                                                                      
9:46:00 AM                                                                                                                    
MR. ZAGER said he doesn't have  all the details of the leasing in                                                               
the deep  water. They  are federal sales,  and state  waters have                                                               
different  terms. From  the investors'  point of  view it  is how                                                               
much  they  can  keep.  It   doesn't  matter,  and  this  is  the                                                               
competition that Alaska  has. "This is the league  we are playing                                                               
in…in terms of attracting investment to Alaska."                                                                                
SENATOR STEDMAN  said he has  a conceptual challenge. A  lease in                                                               
the  Arctic  on state  lands  comes  under the  state,  property,                                                               
corporate  income  taxes  and the  royalty  system  versus  going                                                               
offshore  that only  has  the federal  environment  and no  state                                                               
financial burdens. Wouldn't it lead  to higher bonus bids to stay                                                               
MR.  ZAGER said  that is  correct. Industry  is actually  bidding                                                               
that  government  take  up  with   upfront  money  going  to  the                                                               
government.  The rocks  are so  attractive and  the fiscal  terms                                                               
leave money  on the table,  so they  put $2.9 billion  upfront to                                                               
make sure  they get  a bite  of the pie.  Alaska used  to attract                                                               
bonus  rounds in  the 1980s,  because the  rocks were  that good.                                                               
Times have changed, he stated.                                                                                                  
SENATOR WIELECHOWSKI said he sees  it differently. The rocks have                                                               
not changed from  2002 to 2007, and yet the  number of leases has                                                               
increased. The  fiscal terms were  lower in 2002-2005,  and there                                                               
was less  investment. "Now  that we've  raised the  fiscal terms,                                                               
we've actually  had more investment. A  person can come to  a lot                                                               
of   conclusions,  but   Alaska   raised  taxes   and  got   more                                                               
9:49:23 AM                                                                                                                    
MR. ZAGER said that oil prices have  a lot to do with it. He said                                                               
to look  at government take in  the Gulf. If Alaska's  rocks were                                                               
that attractive,  why didn't  it attract at  least a  few hundred                                                               
million? Libya got over 100 bids  in the first two rounds. People                                                               
were  bidding on  an excess  of 90  percent government  take-it's                                                               
what you've  got left  at the  end of the  day that  drives those                                                               
decisions, he stated.                                                                                                           
SENATOR  WAGONER  said  the  Gulf   of  Alaska  has  been  little                                                               
explored. He asked if anyone will go back there in the future.                                                                  
MR. ZAGER said  he has not heard  any talk about that.  It is not                                                               
on the  top list of basin  potential, but he does  not know. But,                                                               
generally, a company wants to  get a concept that another company                                                               
doesn't have and be the first in to capture the opportunity.                                                                    
SENATOR MCGUIRE  asked how other  things factor in. She  said she                                                               
doesn't discount the value of  basic geology. The stock market is                                                               
based on reality and perceptions.  She asked how perceptions play                                                               
a  role on  deciding to  invest in  Alaska. Maybe  Alaska is  the                                                               
fallback, because Libya-type  places are unstable and  need to be                                                               
got while they can.                                                                                                             
9:52:42 AM                                                                                                                    
MR.  ZAGER  said  he  disagrees. There  are  hundreds  of  energy                                                               
companies  scrambling  for  opportunities,  so  Alaska  won't  be                                                               
deferred if  the opportunities are  good. The oil business  has a                                                               
herd mentality,  and everyone  follows success.  That is  seen in                                                               
Angola and  West Africa  now. If  Anadarko and  similar companies                                                               
are  showing great  returns in  Alaska,  several other  companies                                                               
that size  would follow.  "We follow  success." He  doesn't think                                                               
Alaska is  being mothballed, because  it is too competitive  of a                                                               
SENATOR  STEDMAN asked  if a  gas line  would spur  more activity                                                               
from firms  the size  of Anadarko,  since the  two big  oil pools                                                               
have been tied up for several decades.                                                                                          
9:54:46 AM                                                                                                                    
MR. ZAGER  believes that is  right. "We  are fighting an  oil and                                                               
gas business with a hand tied  behind our back, and basically the                                                               
gas hand is tied behind your back."  He said access to the gas is                                                               
required before anyone will invest.                                                                                             
CHAIR HUGGINS said  he likes that comment because  it "appeals to                                                               
my strategic mindset."                                                                                                          
SENATOR WIELECHOWSKI  asked if a  gas line  will spur a  lot more                                                               
drilling and then more gas and oil will be found.                                                                               
MR. ZAGER  said geologists  sometimes think  they know  more than                                                               
they do.  The conventional  wisdom is  there is  more gas  to the                                                               
south. At times, the industry has  drilled for oil and found gas.                                                               
Putting  more wells  in  the ground  will  lead to  serendipitous                                                               
discoveries, which happens frequently, he said.                                                                                 
9:56:42 AM                                                                                                                    
SENATOR WIELECHOWSKI  said it seems  that the gas line  is really                                                               
critical, and herd  mentality will shift to  Alaska because there                                                               
will be  10 percent of  the U.S. supply  of gas pumped  down that                                                               
pipeline. Are incentives and tax breaks really needed?                                                                          
MR. ZAGER said it is a presumption  that there will be a gas line                                                               
before  declining oil  creates  fiscal  problems. The  assumption                                                               
that  the  tariff  of  such a  pipeline  will  leave  competitive                                                               
returns for grassroots  exploration on the North  Slope should be                                                               
studied if  not challenged. Costs  will be high, the  tariff will                                                               
be several  dollars, and prospects  are remote. Unless  there are                                                               
world-class reservoirs, it  will be a challenge to  attract a lot                                                               
of capital for a gas drilling frenzy on the North Slope.                                                                        
SENATOR WIELECHOWSKI said your company  has plopped down 15 wells                                                               
looking for gas.                                                                                                                
MR. ZAGER asked who said they are looking for gas.                                                                              
9:59:14 AM                                                                                                                    
CHAIR  HUGGINS said  he  is  a cheerleader  for  a gas  pipeline.                                                               
"Contract doesn't equal gas pipeline," and that scares him.                                                                     
MR. ZAGER showed  a "risk (or decision) tree," which  is a way to                                                               
value  a future  investment  opportunity and  the probability  of                                                               
success or  failure. Some  of Chevron's  models have  hundreds of                                                               
variables, but his  example uses four. He gave an  example of the                                                               
decision  to  drill  an  exploration  well  with  an  85  percent                                                               
probability  of failure,  which  would cost  Chevron $20  million                                                               
after  taxes.  "Then how  you  figure  the expected  values,  you                                                               
multiply by  the probability of  failure, so that gives  you your                                                               
value.  Your expected  value  at  that point  is  minus 17."  The                                                               
success  side gets  more complicated,  because success  means oil                                                               
was found  but volumes  vary. "There is  a P10  discovery," means                                                               
there is only  a 10 percent chance that the  accumulation will be                                                               
smaller than  that. A P50  is "kind of  the middle of  this whole                                                               
distribution  of outcomes  from  virtually  nothing to  something                                                               
very big."  The P90 is  "the upside  case-that's kind of  how big                                                               
you think it can  be." 90 percent of the time  the amount will be                                                               
smaller than  that. The chance of  getting a P90 discovery  is 15                                                               
percent times  10 percent, or  1.5 percent. "We take  the average                                                               
of this  distribution and we  multiply it  by 15 percent  and you                                                               
come up  with an expected value  of 20.625." To get  the expected                                                               
value for  Chevron's decision,  he adds those  values and  gets a                                                               
positive  3.6, "so  the answer  would be,  yes, drill  the well."                                                               
Some people  see those as excess  profits and want a  bigger take                                                               
from the state.  But he said look what happens  if he changes the                                                               
"300'  to "200"  because of  taxes:  the expected  value goes  to                                                               
minus  0.9, and  the well  doesn't  get drilled.  "You can  drive                                                               
something from  positive to negative  simply by changing  the tax                                                               
rate on  the most successful  outcome." If taxes are  expected to                                                               
change, a  risk factor  needs to  be added,  which could  cause a                                                               
change in  an investment decision.  Most likely a tax  would move                                                               
it down lower in the queue of opportunities.                                                                                    
10:05:35 AM                                                                                                                   
SENATOR  STEDMAN said  the legislature  spent  a lot  of time  on                                                               
forecasting  and  progressivity.  One  concern is  that  the  tax                                                               
regime  didn't "start  taking  off  some of  the  higher end  too                                                               
early." There  were price  ranges used  in the  models, including                                                               
optimistic  and stress  values. "We  set some  of these  triggers                                                               
above  the optimistic  arena so  the industry  would not  use the                                                               
progressivity  in their  financial modeling."  "We spend  quite a                                                               
bit of time…to  try to insulate the industry from  that but still                                                               
put the state  in a position that if we  had excessively high oil                                                               
prices,  the  state would  not  have  their  percent of  the  pie                                                               
MR. ZAGER  said there  are many other  uncertainties used  in the                                                               
model besides oil prices. If there  are good rocks, the oil price                                                               
could stay the same, and Chevron  would end up with more profits.                                                               
It is just a risk factor.                                                                                                       
CHAIR  HUGGINS   said  he  is  concerned   about  the  unintended                                                               
consequences of the  knee-jerk of failing to look  at all aspects                                                               
of  a  proposal. The  luxury  tax  on  boats  to get  money  from                                                               
affluent people didn't work because it put people out of a job.                                                                 
10:09:21 AM                                                                                                                   
MR. ZAGER  showed a  model of the  investment needed  to maintain                                                               
production at reasonable levels. The  blue line shows a 6 percent                                                               
decline, and  the model assumes  development costs to be  $15 per                                                               
barrel. It  assumes $1  or $2  billion additional  annual capital                                                               
spending.  It assumes  spending  keeps going  and  that there  is                                                               
adequate inventory. "So  you kind of look at the  kind of capital                                                               
you'll  need to  attract,  in order  to keep  decline  at a  more                                                               
reasonable--or almost a flat--decline for a number of years."                                                                   
SENATOR  WIELECHOWSKI asked  if the  PPT is  left in  place, what                                                               
assurances   will  Chevron   provide   to  continue   substantial                                                               
investments in Alaska?                                                                                                          
MR. ZAGER  said oil  companies put money  where the  best returns                                                               
are, and the more attractive Alaska  is, the more money will flow                                                               
there. No guarantees.                                                                                                           
SENATOR WIELECHOWSKI asked if the PPT  will keep the graph at the                                                               
green line.                                                                                                                     
MR. ZAGER said he can't say that.                                                                                               
SENATOR  WIELECHOWSKI said,  "And you  can't tell  us that  if we                                                               
went to ACES, we're not going to stay at the green line?"                                                                       
MR. ZAGER said he can only talk about probabilities.                                                                            
SENATOR WIELECHOWSKI said, "But you can  tell us that if we do go                                                               
to ACES, there  is going to be more money  coming into the Alaska                                                               
MR. ZAGER said ACES will likely  increase tax income in the short                                                               
term, but "in the year 2010  to 2015, I think that's probably not                                                               
a probability and you'll see  less money coming into the Alaska…"                                                               
He said  Chevron will  not run away  from Alaska  production, and                                                               
there is no  doubt that short-term state revenue will  go up. For                                                               
the next  two to  three years, that  would be the  way to  go, he                                                               
said.  For  future  generations and  "some  reasonable  level  of                                                               
production, then you  need to be more circumspect  in your answer                                                               
and think  long term about  how do we maintain  production." Take                                                               
care of your goose that laid the golden egg.                                                                                    
10:13:45 AM                                                                                                                   
SENATOR WAGONER  asked if Mr.  Zager's model has the  current tax                                                               
structure, with credits, figured in.                                                                                            
MR. ZAGER  said no,  he looked at  a couple of  reports to  get a                                                               
feel for  where current finding  and development (F&D)  costs are                                                               
running. Fifteen is about as good  a number as he could pick, but                                                               
it is not  necessarily for Alaska. It is more  of a North America                                                               
number.  F&D is  "how  much it  takes to  explore  for, and  then                                                               
develop,  the  oil  and gas  resources."  It  includes  drilling,                                                               
infrastructure and whatever  is required to get  to production. A                                                               
lower number is better for both the state and producer.                                                                         
SENATOR  STEDMAN asked  Mr.  Zager  to discuss  the  impact of  a                                                               
credit on that number.                                                                                                          
MR. ZAGER said it would lower  the after-tax F&D. The credit is a                                                               
partial return of the capital investment.                                                                                       
SENATOR STEDMAN asked if the  industry considers the number after                                                               
all the taxes and transaction costs are taken out.                                                                              
MR. ZAGER said it depends on  the source. His numbers came from a                                                               
report  of industry-wide  surveys.  It is  public data.  Internal                                                               
investment decisions  would be looked  at on an  after-tax basis,                                                               
and F&D  costs would just  be one  of several parameters  in that                                                               
decision. The  next chart is  from the Wood  Mackenzie Government                                                               
Take  study, and  it ranks  fiscal attractiveness  against fiscal                                                               
uncertainty. Alaska  is at  the bottom  of fiscal  certainty, but                                                               
that  is not  why he  is  showing the  slide. He  said there  are                                                               
government takes  of up to  90 percent, and those  countries that                                                               
have high  government take have the  best rocks in the  world and                                                               
they  are   OPEC  members.  They  generally   have  national  oil                                                               
companies.  The  terms  are   pretty  onerous  for  international                                                               
companies. Libya  is one  of the least  attractive places  in the                                                               
world, but there was  a rush to get in there.  The rocks are good                                                               
enough. Countries with less than  a billion B.O.E [barrels of oil                                                               
equivalents] want to attract investors.  The others can afford to                                                               
turn them  away. The  gulf coast  apparently has  something going                                                               
for  it because  industry  voluntarily  increased the  government                                                               
take.  Alaska is  in the  middle,  he said,  and it  can move  to                                                               
compete with  the best rocks in  the world or move  the other way                                                               
to  attract investment.  "Do we  want  to make  Alaska even  less                                                               
fiscally   attractive?"  It   will  be   hard  to   attract  more                                                               
investment, he concluded.                                                                                                       
10:22:09 AM                                                                                                                   
SENATOR STEDMAN  noted that Alaska  is put in the  lower quadrant                                                               
[fiscally uncertain].  He said  both the  state and  the industry                                                               
agreed to change  the ELF [economic limit factor]  system. If the                                                               
state didn't  change ELF  or adopt  the PPT,  he asked  if Alaska                                                               
would be next to Saudi Arabia on the chart.                                                                                     
MR. ZAGER said maybe.                                                                                                           
SENATOR  STEDMAN  said  the  legislature   is  like  a  board  of                                                               
directors   and   in  charge   of   maximizing   the  wealth   of                                                               
shareholders-the people of  the state. Alaska had to  come to the                                                               
table  with  industry to  change  the  tax structure  under  ELF.                                                               
Industry and the state agreed to  move on the chart. He suggested                                                               
that is different from "a scenario  where a state may just happen                                                               
to create a tax structure…for whatever reason."                                                                                 
10:25:01 AM                                                                                                                   
MR. ZAGER  said the changes  to date are understandable,  "but if                                                               
this gets to be an annual  trend, then we've got a real problem."                                                               
Gas  taxes will  be looked  at in  2010. He  suggested sending  a                                                               
signal  that Alaska  is disciplined  enough to  see if  PPT works                                                               
before  changing  it. Investors  went  into  countries with  high                                                               
fiscal terms with  eyes wide open-they ran the  economics and the                                                               
deal hasn't change since they got in.                                                                                           
SENATOR STEVENS noted  that ELF was advantageous  to industry and                                                               
"there  was still  precious little  exploration and  development.                                                               
Why would that be?"                                                                                                             
MR. ZAGER said  ELF didn't have the credit  incentive. The reward                                                               
is smaller because of the tax  increase, but the risk is smaller.                                                               
The super  majors can take on  any size project, but  the smaller                                                               
companies  are  concerned  about   exposure,  so  the  investment                                                               
incentives are more important.                                                                                                  
10:27:36 AM                                                                                                                   
SENATOR  STEDMAN spoke  of another  chart he  would like  to see:                                                               
"Global state take versus pre-take…at ten."                                                                                     
MR.  ZAGER said  he needs  permission to  use the  graphs. Energy                                                               
companies have  the responsibility to  invest where there  is the                                                               
best  risk/reward  ratio.  He  has  heard  people  say  that  oil                                                               
companies are  threatening to withhold investment  in Alaska, but                                                               
"that is absolutely  not true." He said he will  work hard to get                                                               
as much money for Alaska as he  can, "but you're making the job a                                                               
lot  more difficult  if you  increase  government take-lower  the                                                               
returns."   "It's  not   that  we're   threatening  to   withhold                                                               
investment,  it's  just a  fact…that  if  the state  takes  more,                                                               
they're less  attractive investments." He has  500 people working                                                               
with  him who  want  the  company to  keep  investing in  Alaska.                                                               
Investment is the  only way to stem decline.  Sell Alaska's Chevy                                                               
as a Chevy, and don't price it like something else, he said.                                                                    
10:32:04 AM                                                                                                                   
SENATOR WIELECHOWSKI said obviously  raising taxes costs Chevron,                                                               
but every  world-renowned, independent expert hired  by the state                                                               
has said raising taxes will not substantially impact investment.                                                                
SENATOR GREEN  said, "I would  somewhat question the  fervor with                                                               
which  you've made  that statement,  because I  think there  were                                                               
other  things  to  balance  that   that  would  have  offset  the                                                               
increase." It wasn't that carte blanche, she stated.                                                                            
SENATOR  WIELECHOWSKI  said  he  will be  happy  to  recount  the                                                               
testimony. Pedro Van Meurs said  the state could increase the tax                                                               
to 25  percent, plus 8.5  progressivity at $50  per barrel--0.25.                                                               
Dr.  Johnston,  another world-renowned  expert,  said  it can  be                                                               
increased to 30 or 35 percent, plus  0.25 at $30 or $40 a barrel;                                                               
Gaffney  Cline   &  Associates  said   ACES  would  not   have  a                                                               
substantial impact.  Dan Dickenson  and Steve Porter  agreed with                                                               
the experts. "Do you disagree with that?"                                                                                       
MR. ZAGER said we are only  arguing about the order of magnitude.                                                               
No one has  said that increasing taxes  will increase investment.                                                               
The commissioner  of DOR said  it won't attract  more investment;                                                               
in fact it  will hurt investment in Alaska. If  you are perfectly                                                               
happy  with current  investment, and  if you  are in  it for  the                                                               
short term, "by all means."                                                                                                     
10:34:40 AM                                                                                                                   
SENATOR STEDMAN  asked how  spent Chevron  spent money  to create                                                               
their  credits.  He asked  about  Chevron's  ability to  use  the                                                               
credits and how they are handled from Cook Inlet to the Arctic.                                                                 
MR. ZAGER  said Chevron has  been drilling  oil and gas  wells to                                                               
generate credits. Operating expenses are  high in Cook Inlet. The                                                               
tax is  based on the ELF  system, which is good  and justifiable.                                                               
Gas storage  wells are  not deductible  for credits.  Chevron has                                                               
sufficient cash flow to use its  own credits, so it doesn't trade                                                               
SENATOR STEDMAN asked  what impact Chevron would  be subjected to                                                               
if the credits  were split so that only 50  percent could be used                                                               
in  the year  they were  created, which  would give  the treasury                                                               
more predictability.                                                                                                            
10:37:29 AM                                                                                                                   
MR.  ZAGER said  it  would  be far  down  the  list of  financial                                                               
impacts, because  it is only  the net  present value of  half its                                                               
credits  for one  year.  It may  be a  bigger  issue for  smaller                                                               
companies, he surmised.                                                                                                         
CHAIR HUGGINS asked about the claw-back provision.                                                                              
MR. ZAGER  said it is a  justifiable provision. It is  a fairness                                                               
issue to the  people investing over the years.  The taxes changed                                                               
in  the middle  of  the game.  "We  went from  no  tax to  taxing                                                               
basically  cash  flow." Federal  income  tax  is on  income.  For                                                               
income tax  purposes, companies can  depreciate their  assets, so                                                               
even investing in  2005, they are still recognized  as offsets in                                                               
2008 or  2009. PPT is  a tax on  annual cash  flow, so if  it was                                                               
spent last year,  it doesn't count for this year.  It is probably                                                               
an advantage  to do it  on an annual basis  since it can  be done                                                               
immediately, but during  the transition period of  going from one                                                               
system to another, companies that  invested heavily get the short                                                               
end of the stick. "There are  also provisions put in where you've                                                               
got  to  earn   that  capital  back  again   through  double  the                                                               
reinvestment rate."  There was a  lot of discussion  around this,                                                               
he said. PPT had more sense  of partnership between the state and                                                               
the  industry  by  sharing  in  the upside  and  risking  in  the                                                               
downside. That has been eliminated by  putting a floor in, so the                                                               
state is  running away from  the risk  and continuing to  take on                                                               
the upside. The  clawback provision is about  fairness. There has                                                               
to be recognition  that the cash flow now is  largely the benefit                                                               
of the investments that were made over the past five years.                                                                     
10:41:59 AM                                                                                                                   
CHAIR HUGGINS asked about "the floor".                                                                                          
MR.  ZAGER said  the floor  was put  in to  mitigate the  state's                                                               
risk, so when  things get bad there is some  minimal assurance by                                                               
getting  10 percent  of  the  gross. It  moves  the  risk to  the                                                               
producers,  he said.  Cook Inlet  is not  included because  it is                                                               
heritage fields, but  someday the heritage fields  will have high                                                               
lift costs.  Putting a floor  in will  shorten the life  of those                                                               
fields. He  said to think what  the incentive is. A  gross tax is                                                               
regressive, like  a flat tax, and  is not a good  tax policy. The                                                               
poor fields end up being taxed a higher percentage.                                                                             
10:43:53 AM                                                                                                                   
SENATOR  WAGONER said,  in terms  of the  clawbacks, the  company                                                               
still amortizes the  costs against federal taxes.  The state does                                                               
not disallow the deduction at the federal level.                                                                                
MR. ZAGER said it would not.                                                                                                    
SENATOR WAGONER added that if the  state allows it to be deducted                                                               
from production  taxes, then it  is a two-for-one.  They continue                                                               
to get the amortization for federal taxes.                                                                                      
MR. ZAGER  said that is  the way the  system works. "You  net out                                                               
state taxes  and that takes the  bite out of the  federal tax, so                                                               
essentially  by  eliminating  this  deduction,  you're  taking  a                                                               
partial bite out of the federal taxes as well.                                                                                  
SENATOR  WIELECHOWSKI  said  he   agreed  that  the  rich  fields                                                               
shouldn't be  taxed the same  as the poor fields.  Chevron's goal                                                               
is to  maximize the  money for shareholders.  The state  needs to                                                               
maximize income, investment and Alaska  jobs. He said that can be                                                               
accomplished  with  a two-tiered  tax  system  that taxes  legacy                                                               
fields higher than the more expensive exploration fields.                                                                       
10:47:03 AM                                                                                                                   
MR. ZAGER  said his statement is  that a gross tax  would tax one                                                               
higher than another.  "I don't think I said they  should be taxed                                                               
differently."  He thinks  he was  implying that  a net  tax would                                                               
take those differences into account.                                                                                            
SENATOR WIELECHOWSKI asked if a multi-tier system makes sense.                                                                  
MR. ZAGER said  the PPT system handles it with  its net system. A                                                               
less-profitable field  will be taxed  at a lower rate.  There are                                                               
also  exploration credits.  A viscous  oil credit  was considered                                                               
but  not added.  The net-tax  system  is designed  to take  those                                                               
differences into account.                                                                                                       
10:48:56 AM                                                                                                                   
CHAIR  HUGGINS   said  this   was  one   of  the   most  engaging                                                               
conversations  with an  oil company.  Slide  6, 9,  and chart  14                                                               
revealed a  number of  elements that  haven't yet  been presented                                                               
The committee recessed from 10:49:48 AM until 11:03:52 AM.                                                                  
PAT FOLEY,  Manager, Land and  External Affairs,  Pioneer Natural                                                               
Resources, Alaska, Inc.,  said Pioneer is still  a relatively new                                                               
player in Alaska.  The Oooguruk project is  Pioneer's North Slope                                                               
cornerstone.  The PPT  program provides  a  modest incentive  for                                                               
future  investment  and achieves  the  goal  of increasing  state                                                               
revenue. He  asked for no  negative changes  to the PPT  for this                                                               
special session.                                                                                                                
SENATOR WAGONER asked if ACES made any positive changes.                                                                        
MR. FOLEY said some are positive, but most are not.                                                                             
11:06:38 AM                                                                                                                   
KEN  SHEFFIELD,  President,  Pioneer Natural  Resources,  Alaska,                                                               
Inc., said Pioneer  is a large U.S.  independent operating around                                                               
the world.  It doesn't have any  production in the state,  but he                                                               
hopes to see  that change. He spoke of a  growing gas business in                                                               
South Africa and  oil in Tunisia. Company production  is a little                                                               
over 100,000 barrels per day  of oil equivalent. Pioneer's assets                                                               
are focused in North America,  with over 90 percent of production                                                               
and  reserves  there.  "That  is   our  primary  competition  for                                                               
capital," he said. Each fall,  the Pioneer business units present                                                               
opportunities  to the  senior management  committee. Pioneer  and                                                               
most of  the independents prefer  Lower 48 projects  because they                                                               
are  lower risk  and lower  cost.  The cycle  times are  shorter,                                                               
creating cash  flow in the same  year as investment. He  said his                                                               
team  advocates   for  Alaska   budget  dollars.  From   all  the                                                               
investment opportunities  around the  world, the  committee picks                                                               
projects that meet the corporate goals.                                                                                         
MR.  SHEFFIELD  said  some  of the  drivers  for  that  selection                                                               
include production growth,  with a ten percent  growth each year.                                                               
Pioneer wants to  replace 100 to 150 percent of  what it produces                                                               
each year.  The management team  looks at economic  and financial                                                               
metrics, and the probabilistic range of outcomes.                                                                               
11:11:58 AM                                                                                                                   
MR.  SHEFFIELD said,  looking at  the budget  for 2008,  about 75                                                               
percent of  the projects  that were  put forth  for consideration                                                               
will get  funded, and the  balance will either be  deferred or...                                                               
Rising oil  prices have  improved the  margins, but  rising costs                                                               
have taken  a bite  out of  that. "The tide  for new  projects is                                                               
still  lifting  all   boats,"  he  said.  That   has  raised  the                                                               
profitability  of lower-risk  opportunities in  the Lower  48, so                                                               
budget  dollars  are  flowing  to  coalbed  methane,  tight  sand                                                               
reservoirs, and shale  gas, thus there has been  less emphasis on                                                               
high-risk  exploration.   The  current  commodity   cycle  allows                                                               
Pioneer to have a less aggressive portfolio.                                                                                    
CHAIR HUGGINS asked where Alaska projects fall.                                                                                 
MR. SHEFFIELD said Pioneer explores  around the world, "and we do                                                               
have  some high-risk  opportunities here  in Alaska,  as well  as                                                               
down in the Lower 48. We've  drilled, over the last decade, wells                                                               
in  West Africa."  Five percent  of Pioneer's  projects are  high                                                               
risk, and some of that money has been allocated to Alaska.                                                                      
CHAIR  HUGGINS said  Alaska's objective  is  to double  Pioneer's                                                               
production in Alaska.                                                                                                           
11:15:50 AM                                                                                                                   
MR.  SHEFFIELD said  Pioneer's projects  in Alaska  are competing                                                               
against  low-risk, short-cycle  projects, including  oil and  gas                                                               
drilling in Texas, shallow-gas  drilling in Colorado, high-margin                                                               
gas  in South  Africa, and  successful oil  drilling in  Tunisia.                                                               
Pioneer also  has a  business development  group that  scours the                                                               
lower-48 looking for  new resource plays. So  Alaska is competing                                                               
with existing and new projects.  The government take in Alaska is                                                               
somewhere in  the range  of the  mid 60s,  "and people  said it's                                                               
kind of  in the  middle of the  road in the  scheme of  the whole                                                               
world of opportunities."  But for Pioneer in  Alaska, the primary                                                               
competition is  the Lower 48,  with lower costs,  shorter cycles,                                                               
and lower [government] take.                                                                                                    
SENATOR WIELECHOWSKI asked  about Oooguruk with 30  million to 90                                                               
million barrels, and if it is one of Pioneer's larger fields.                                                                   
MR. SHEFFIELD  said, "Our  Oooguruk project at  70 to  90 million                                                               
barrels is a number that we've  made public, is toward the higher                                                               
end of  new projects that  Pioneer's undertaking world  wide." It                                                               
is a significant step out for  a company the size of Pioneer. The                                                               
company looks  at economics and  puts together a  swat analysis-a                                                               
tool to  weigh the  strengths, opportunities  and threats  of any                                                               
new business  decision. Alaska,, in  2002, had a  great petroleum                                                               
system-"geologists  just love  Alaska  because  of the  petroleum                                                               
system." Pioneer  saw a  potential for  high-impact opportunities                                                               
and liked the  state's fiscal policy. The state  was courting the                                                               
independents  with the  ELF  regime, saying  there  would be  low                                                               
severance taxes  unless "you hit a  home run, and then  you would                                                               
pay  significant  severance  taxes."  The  exploration  incentive                                                               
credits were in  play at that time, and the  combination of those                                                               
factors was a plus for Pioneer.                                                                                                 
11:19:58 AM                                                                                                                   
SENATOR WIELECHOWSKI  asked if "prolific petroleum  system" means                                                               
the same as "good rocks."                                                                                                       
MR. SHEFFIELD said  yes, and the North Slope  petroleum system is                                                               
charged with  hydrocarbons, "which  means…that most  anywhere you                                                               
drill a  well on the North  Slope, you have a  really good chance                                                               
of   finding  some   hydrocarbons.   Maybe   not  in   commercial                                                               
quantities,   which  is   a  real   challenge,   but  there   are                                                               
hydrocarbons  in the  system, and  that contrasts  to many  other                                                               
petroleum  systems  in the  world  where  you  have a  hard  time                                                               
SENATOR WIELECHOWSKI said the majors  say the rocks in Alaska are                                                               
not good.  He asked if  the rocks  are good for  independents. Is                                                               
this the elephant for independents like Pioneer?                                                                                
MR. SHEFFIELD  said that  is not a  fair assessment,  because the                                                               
rocks are the  same for everyone. He said Pioneer  found that the                                                               
rocks  aren't   as  good   as  was   thought.  There   are  large                                                               
accumulations,  but  the oil  quality  is  low. There  are  large                                                               
fields, "but  they're on  the margin." Rocks  are a  challenge to                                                               
the economics and the recovery in those reservoirs.                                                                             
11:22:08 AM                                                                                                                   
SENATOR WIELECHOWSKI asked if he is talking about heavy oil.                                                                    
MR. SHEFFIELD  said, "Yes,  the oil quality  has something  to do                                                               
with it,  but I  think our experience  through the  drilling that                                                               
we've done--and  we've participated in  a number of  wells across                                                               
the slope--has been just low rock quality."                                                                                     
CHAIR HUGGINS asked when the state courted independents.                                                                        
MR.  SHEFFIELD said  it was  under the  Murkowski administration,                                                               
and Mark Myers  was the Director of the Division  of Oil and Gas.                                                               
In  2003 or  2004 he  recalled having  some informative  meetings                                                               
with DNR and DOR, talking about how to do business in Alaska.                                                                   
CHAIR HUGGINS  said he would  like to continue that  practice. It                                                               
is more important than ever to Alaska's future.                                                                                 
11:24:29 AM                                                                                                                   
MR.  SHEFFIELD  said business  opportunities  are  opening up  to                                                               
Pioneer; larger companies are looking  for partners. The downside                                                               
is  high operating  and transportation  costs. The  long project-                                                               
cycle times  are nearly unacceptable  to independents,  he added.                                                               
Pioneer wouldn't  put serious  money into  something with  a long                                                               
lead time. At  that time there were thoughts that  the tax policy                                                               
might  be  changing.  In  a frontier  area,  project  delays  and                                                               
potential  for   cost  overruns  needs  to   be  considered.  The                                                               
reservoirs  turned  out to  be  at  the  lower  end of  what  was                                                               
expected.  The regulatory  process has  been more  time consuming                                                               
that  was expected.  Costs came  out higher  as well.  Pioneer is                                                               
about half-way through with the  spending on the Oooguruk project                                                               
and, to  date, it is over  budget by 25 percent,  or $70 million.                                                               
Most   of   Pioneer's  11   exploration   wells   have  come   in                                                               
significantly over budget.                                                                                                      
11:27:45 AM                                                                                                                   
SENATOR WIELECHOWSKI  asked if the increased  cost was particular                                                               
to Alaska or worldwide.                                                                                                         
MR. SHEFFIELD  said it is a  combination. The price of  steel has                                                               
gone through  the roof.  The logistical  challenges of  the North                                                               
Slope can  snowball because  of the short  winter season  and the                                                               
transportation challenges. It is true of any remote area.                                                                       
CHAIR HUGGINS asked about the expanded days for exploration.                                                                    
MR. SHEFFIELD said  that is generally good for  the industry. The                                                               
expanded  drilling season  allows  for more  work and  amortizing                                                               
over more  wells. A rig on  the North Slope can  drill more wells                                                               
and get  more value. "Five  years later  the tax policy  is still                                                               
being discussed." Pioneer drilled  three exploration wells in the                                                               
shallow  waters of  the Beaufort  Sea in  2003, which  became the                                                               
Oooguruk project.  An extended-reach  appraisal well  was drilled                                                               
on the Kenai Peninsula near  Anchor Point, three miles under Cook                                                               
Inlet. It  is called Cosmopolitan  and is a known  oil discovery.                                                               
Over  the last  two  years,  Pioneer took  over  as operator  and                                                               
increased  its interest  to 100  percent. "We  upped the  ante on                                                               
this project  based upon  PPT." It is  a challenged  resource and                                                               
the  company  thought it  had  a  decent  chance under  the  PPT.                                                               
Maintaining that  tax structure  is critical  to the  project. If                                                               
the project is successful, it could be similar to Oooguruk.                                                                     
11:32:47 AM                                                                                                                   
MR. SHEFFIELD said Pioneer owns  an interest in 1.5 million acres                                                               
in Alaska, and most is in  the North Slope, including Prudhoe Bay                                                               
and the  NPRA. Pioneer has  participated in 11 North  Slope wells                                                               
over the last 5 years, but it doesn't  have a lot to show for it.                                                               
Pioneer has 35 staff in Anchorage.                                                                                              
SENATOR STEVENS asked about Cosmopolitan.                                                                                       
MR. SHEFFIELD  said if  the appraisal well  is successful  and it                                                               
meets  the  economic  criteria,  it likely  will  result  in  the                                                               
construction of  an onshore facility  near Anchor Point,  a dozen                                                               
wells,  and a  long-life  oil field.  There  will be  significant                                                               
economic  activity during  construction  and  drilling, and  then                                                               
Pioneer will need two or three operators per hitch.                                                                             
11:35:07 AM                                                                                                                   
CHAIR HUGGINS said Cook Inlet is an important basin.                                                                            
SENATOR WIELECHOWSKI asked how Cook  Inlet projects were affected                                                               
by PPT or would be affected by ACES.                                                                                            
MR. SHEFFIELD  said the PPT  established incentives-a  20 percent                                                               
tax credit--that significantly affected Cook Inlet.                                                                             
SENATOR WIELECHOWSKI asked if that is changed by ACES.                                                                          
MR. SHEFFIELD said he thinks Cook Inlet is being left alone.                                                                    
CHAIR HUGGINS  said one exception  is "you can't take  Cook Inlet                                                               
factors and transfer them to your northern operations."                                                                         
11:36:49 AM                                                                                                                   
MR. SHEFFIELD said  Oooguruk is near the end  of its construction                                                               
phase, and it is the  largest single capital project in Pioneer's                                                               
history.  Pioneer  is the  operator  with  a 70  percent  working                                                               
interest, at  a cost of  over $0.5 billion. First  production may                                                               
be in 2008, with 15,000 to 20,000 barrels per day by 2010.                                                                      
SENATOR WAGONER asked if the facility access agreement is final.                                                                
MR. SHEFFIELD said it is  nearly completed, with only minor legal                                                               
nuances left.                                                                                                                   
SENATOR WAGONER asked the length of that negotiation.                                                                           
MR.  SHEFFIELD said  Pioneer sent  a  formal request  to the  KRU                                                               
[Kuparuk River Unit] owners in May of 2005.                                                                                     
MR. FOLEY  said two years  is the time  frame. It is  complex and                                                               
this  is  the   first  time  that  the   owners  have  contracted                                                               
production  with  a  third  party,   so  they  are  cautious.  He                                                               
suggested that  the agreement will  be the basis for  many future                                                               
agreements, so there is a huge desire to get it right.                                                                          
11:39:44 AM                                                                                                                   
SENATOR  WIELECHOWSKI  said  facilities access  is  critical  for                                                               
bringing in  more independents.  He asked if  that is  a weakness                                                               
and if  there could be  some legislation on facilities  access to                                                               
better open up exploration in Alaska.                                                                                           
MR. SHEFFIELD said  Pioneer is quite experienced  at dealing with                                                               
it.  Usually there  is sufficient  commercial  incentive for  the                                                               
facility owner  to bring in  the third party production  and make                                                               
some money off  of it. The North Slope is  more complicated as it                                                               
is  a  secondary   and  tertiary  operation,  and   most  of  the                                                               
facilities  are being  operated to  the maximum  extent. The  new                                                               
players need  to provide enough  incentives to  actually displace                                                               
some  of  the  facility  owner's  own  production.  That  is  the                                                               
complicated part that  took so long to work out.  He has run into                                                               
facility access  issues on  both sides, and  the free  market has                                                               
always been  able to  work things  out. Once  this deal  is made,                                                               
others will follow in an easier fashion.                                                                                        
CHAIR HUGGINS asked if Pioneer is being tortured by the process.                                                                
11:43:09 AM                                                                                                                   
MR.  SHEFFIELD   said  Pioneer's   oil  from  Oooguruk   will  be                                                               
displacing  production  from KRU,  and  that  makes it  a  fairly                                                               
unique  agreement. The  KRU ownership  has been  reasonably fair.                                                               
The  facility  is  full,  so   obviously  they  want  the  proper                                                               
incentives in  order to displace  its own production. He  said he                                                               
has  been on  the other  side of  it. Without  the infrastructure                                                               
that the KRU provides, Pioneer couldn't move forward.                                                                           
SENATOR WAGONER asked if Pioneer would have other choices.                                                                      
MR.  SHEFFIELD said  the obviously  option  would be  to build  a                                                               
stand-alone  facility, but  the  economics  wouldn't support  it.                                                               
Most of  the systems within  the KRU  are at capacity,  but there                                                               
are other systems-gas lift, injection  water, oil handling, water                                                               
separation-"we need  all those things  to operate our  field, and                                                               
some of the systems within KRU  are not at their capacity." It is                                                               
a complex sharing arrangement.                                                                                                  
11:45:33 AM                                                                                                                   
SENATOR WAGONER  asked the feasibility of  expanding the existing                                                               
unit and creating more capacity.                                                                                                
MR. SHEFFIELD  said that is an  option in the future,  as well as                                                               
building a  facility owned by  Pioneer. He  wants to see  how the                                                               
wells produce before  committing more capital. It  may make sense                                                               
eventually, he explained.                                                                                                       
SENATOR WIELECHOWSKI said North Slope  is declining, and he asked                                                               
about displacing 20,000 barrels instead of adding to 2                                                                          
MR. SHEFFIELD said it will only  displace a few hundred barrels a                                                               
day. The gross production coming  into the facility is maxed out.                                                               
The  KRU will  have to  shut  in some  wells that  are making  99                                                               
percent water, but it will displace a small amount.                                                                             
CHAIR HUGGINS said there is a lot of water.                                                                                     
MR. SHEFFIELD  said marginal wells  in the KRU have  greater than                                                               
95 percent water.                                                                                                               
CHAIR HUGGINS  said the cost  of doing business  is exceptional-a                                                               
little bit of oil and a lot of water coming out of some wells.                                                                  
11:48:46 AM                                                                                                                   
MR. SHEFFIELD  said Pioneer has  come a  long way from  its first                                                               
well in  2003. It has  evaluated and sanctioned a  major offshore                                                               
project  in the  Arctic in  less  than three  years; permitted  a                                                               
complex  project  with  government agencies  and  stake  holders;                                                               
constructed  a  gravel island  offshore  in  2006/7, installed  a                                                               
complex sub-sea  flow line bundle,  fabricated and  installed the                                                               
facilities  in  a  remote  setting,  and  at  peak  construction,                                                               
Pioneer had  over 600 workers  on the North Slope.  Pioneer looks                                                               
forward to seeing  its first oil production in  2008. Oooguruk is                                                               
a  precedent-setting event  for  Pioneer and  for Alaska.  "We're                                                               
poised  to  become the  first  independent  oil producer  in  the                                                               
state,  and…the first  to  enter into  a  third party  processing                                                               
agreement  with   the  existing  fields."  Other   investors  are                                                               
watching,  he  surmised.  The  benefits  to  the  state  are  the                                                               
royalties, 30  percent of  the net  profits, PPT  revenues, state                                                               
income  tax, property  tax, and  the construction  and contractor                                                               
benefits to the economy.                                                                                                        
11:51:20 AM                                                                                                                   
SENATOR  WIELECHOWSKI asked  if  DNR provided  royalty relief  or                                                               
incentive credits.                                                                                                              
MR. SHEFFIELD said  Pioneer was shooting for a  big Kuparuk play,                                                               
but ended up  getting a lower quality reservoir  in the Jurassic.                                                               
So DNR pointed out that it was  the kind of resource that the law                                                               
was intended to help.                                                                                                           
SENATOR WIELECHOWSKI noted  that DNR has other  tools that aren't                                                               
going to be changed.                                                                                                            
MR. SHEFFIELD said, "No I don't  believe that there's any talk of                                                               
changing the royalty relief law."                                                                                               
CHAIR HUGGINS asked what tools he was talking about.                                                                            
SENATOR  WIELECHOWSKI said  DNR  has the  ability  to give  small                                                               
independents royalty relief  and to create other terms  to make a                                                               
project more attractive. "We're not changing that with ACES."                                                                   
CHAIR HUGGINS asked if Pioneer has received royalty relief.                                                                     
MR. SHEFFIELD said yes, in early 2006.                                                                                          
MR. FOLEY  said the  DNR royal reduction  application was  a one-                                                               
year process, and  DNR concluded that the  project was challenged                                                               
and royalty  relief was granted. Prices  were significantly lower                                                               
at that time, he stated. Some  leases at Oooguruk are 1/8 royalty                                                               
and some are 1/6. The  1/8 royalties have an additional component                                                               
of a 30 percent net profit-"they are some of the most heavily-                                                                  
burdened leases  in the  state." The state  did grant  the relief                                                               
down to five  percent until pay out-and pay out  is the same time                                                               
Pioneer  begins making  payments under  net-profit share  leases.                                                               
Over a  three-year period, it  starts phasing up, he  said. "Even                                                               
in light  of a royalty,  Oooguruk is the  highest government-take                                                               
project that we're aware of in Alaska."                                                                                         
11:55:24 AM                                                                                                                   
SENATOR  STEDMAN said  prior  to PPT  there  were royalty  relief                                                               
mechanisms, and after PPT there was  the stimulus of a 20 percent                                                               
credit. Since  ELF, the calculations of  attractive projects have                                                               
changed, and the state will take that into account.                                                                             
CHAIR HUGGINS asked if there  were no investment incentives, only                                                               
royalty relief.                                                                                                                 
MR. SHEFFIELD said that is correct.                                                                                             
SENATOR WIELECHOWSKI said it is  important that royalty relief is                                                               
still available  for independents, and  it is a good  thing. This                                                               
project  probably wouldn't  have happened  without it,  he added.                                                               
ACES isn't affecting any of that.                                                                                               
CHAIR  HUGGINS said  ACES  does something  to  the clawback,  but                                                               
Alaska has enhanced making "profitability work for you."                                                                        
11:57:41 AM                                                                                                                   
MR. SHEFFIELD  said PPT was  rolled out without  any consultation                                                               
with Pioneer,  which had  already committed  to Oooguruk  and had                                                               
significant exploration  commitments in  the central  North Slope                                                               
and the NPRA. After the "initial  shock of seeing the rates going                                                               
from basically  zero to  over 20 percent,  we worked  through the                                                               
PPT  mechanics and…found  it to  be a  balanced system  where the                                                               
investment tax  credits helped to  offset the higher  tax rates."                                                               
The PPT  is a  modest incentive,  encouraging development  of the                                                               
abundant  lowered-tiered resources  that  are  challenged by  low                                                               
quality  or  location. Looking  at  a  wide range  of  investment                                                               
opportunities,  PPT  is fair  and  sustainable  because the  net-                                                               
profit  aspect  levels  the  playing  field,  whether  it  is  an                                                               
exploration  investment,  a new  satellite  field,  or heavy  oil                                                               
project. It is  not perfect, but it is fair  and balanced. In the                                                               
long term, PPT will grow the pie and give Alaska a bigger slice.                                                                
CHAIR  HUGGINS said  some  see  Pioneer as  the  type of  company                                                               
Alaska needs in order to flatten the curve of production.                                                                       
MR.   SHEFFIELD  said   Pioneer   sees  Alaska   as  a   business                                                               
opportunity. There  were few operators  and not  much competition                                                               
when Pioneer  arrived. Historically the role  of independents has                                                               
been to commercialize the smaller opportunities.                                                                                
CHAIR  HUGGINS  said  Alaskans  needs to  hear  what  Pioneer  is                                                               
saying-with a caveat  that it has a  business interest. Companies                                                               
like Pioneer will likely lessen oil production decline.                                                                         
12:02:33 PM                                                                                                                   
MR. SHEFFIELD said  ACES erodes some of the  modest incentives of                                                               
PPT.  The   cumulative  effect  of   the  tax-rate   change,  the                                                               
aggressive  progressivity, and  the TIE  [transitional investment                                                               
expenditures]   results  in   significant   erosion.  "Prior   to                                                               
yesterday, we  were of the opinion…that  we would not be  able to                                                               
recover the roughly  $100 million that we sunk  into Alaska prior                                                               
to the  initiation of  PPT. We  now think that  maybe we  will be                                                               
able to…Maybe  we've made  it just  under the  wire." He  said he                                                               
will need clarification.  "That $100 million that  we got sunk…we                                                               
spent that  money prior to PPT,  but since that time  we've spent                                                               
over $200  million, and  we think we'll  spend over  $200 million                                                               
prior to  the end  of 2007, I  guess, which is  the next  cut off                                                               
date."  With  a  little  bit of  clarity,  perhaps  the  clawback                                                               
provision won't adversely impact Pioneer, he stated.                                                                            
MR. FOLEY said Pioneer is striving  to clarify when it earned the                                                               
credit. He  said it  spent transition  capital and  expended over                                                               
$200 million under  the PPT, "so under the  interpretation of the                                                               
PPT and under  ACES, we would be allowed to  utilize that credit.                                                               
Now the  reality is,  because we  don't have  production, because                                                               
we're  not  paying  taxes, we  haven't  actually  monetized  that                                                               
credit." So Pioneer  wants to clarify if it has  earned it and if                                                               
it can retain it even though ACES repeals the TIE.                                                                              
SENATOR STEDMAN asked if Pioneer will sell its credits.                                                                         
MR. FOLEY said  Pioneer has about $80 million in  credits and has                                                               
sold all of them at a price it was comfortable with.                                                                            
12:06:38 PM                                                                                                                   
SENATOR STEDMAN surmised  that Pioneer could sell  its credits at                                                               
a good enough price and did not  feel it needed to hold on to the                                                               
credits until Pioneer had the production to use them with.                                                                      
MR. FOLEY said  Pioneer has sold them at a  value that was higher                                                               
than the value that would be received under ACES.                                                                               
SENATOR  WAGONER  said he  doesn't  understand  because the  ACES                                                               
offers 100 percent of the value of the credits.                                                                                 
MR. FOLEY said, under ACES, only  half the credits can be used in                                                               
one year  and the  other half  the next year.  "So a  very simple                                                               
cash flow analysis,  the value of those credits on  a net present                                                               
worth basis is about 95 cents  on the dollar if you discounted it                                                               
10 percent."                                                                                                                    
SENATOR  WAGONER said  Pioneer got  more than  95 percent  of the                                                               
MR. FOLEY said that would be a reasonable deduction.                                                                            
SENATOR  WIELECHOWSKI said  that Chevron  wasn't concerned  about                                                               
the two-year split  in using the credits because of  its size. He                                                               
asked  if  it  is  a  bigger  impact  on  the  independents,  and                                                               
suggested that it be required for some fields and not others.                                                                   
12:09:00 PM                                                                                                                   
MR. SHEFFIELD  said it has  a significantly higher impact  of the                                                               
independents. But  Pioneer might  be a  bit different  because it                                                               
has  a significant  volume of  credits, "which  gives us  maybe a                                                               
little more  clout than some  of the  other guys that  just might                                                               
have $5 million or something like that."                                                                                        
The committee recessed from 12:09:40 PM to 1:17:25 PM.                                                                      
CHAIR HUGGINS reconvened the hearing. All members were present.                                                                 
1:17:39 PM                                                                                                                    
MR.  SHEFFIELD   showed  slide  12,  and   said  increased  taxes                                                               
jeopardize  lower-tiered  projects.  That  is not  good  for  the                                                               
state. He also  expressed concern about the  returns on Oooguruk.                                                               
"Our lease has  a 30 percent net profits on  top of the royalty,"                                                               
and Pioneer is  concerned that ACES will lower  those returns and                                                               
make similar projects  less likely. ACES does retain  the net tax                                                               
framework for the  non-legacy fields, and that is  the only thing                                                               
that makes sense with tax rates  as high as 20 percent. Also, the                                                               
feature in ACES  that allows the credits to be  monetized at full                                                               
value  is a  positive thing,  although the  delay would  probably                                                               
more than offset the par value of cashing in credits.                                                                           
CHAIR HUGGINS asked for perspective on information sharing.                                                                     
MR.  FOLEY  suggested that  he  was  referring to  information  a                                                               
taxpayer must provide  to the state to help  it with forecasting.                                                               
That  is not  a  problem; Pioneer  will  provide any  information                                                               
that's helpful, assuming it will be kept confidential.                                                                          
SENATOR WAGONER asked if Pioneer would  like the bill to allow it                                                               
to sell credits  immediately "or have the option of  going to the                                                               
state over two years."                                                                                                          
MR. SHEFFIELD said that sounds like best of both worlds.                                                                        
SENATOR  WAGONER said  it wouldn't  cost the  state any  more. He                                                               
then asked which changes are the  most egregious of the five that                                                               
Pioneer has listed.                                                                                                             
MR. SHEFFIELD  said the top two  are the tax rate  and the change                                                               
in progressivity. The change in TIE credits would be third.                                                                     
SENATOR WAGONER said  the administration wants to make  it a more                                                               
defined system of allowable deductions.                                                                                         
MR.  SHEFFIELD  said the  tax  increases  are more  onerous  than                                                               
providing  more  information. He  discussed  the  slide on  ACES'                                                               
impact  on new  projects.  Taking  it in  aggregate  of the  four                                                               
projects,  the  net  present  value  is  decreased  by  about  50                                                               
percent. "If  these projects  were in  our portfolio,  we believe                                                               
they  would have  much  less  chance of  being  funded with  that                                                               
deterioration in  value." ACES reduces competitiveness  of Alaska                                                               
projects and will  make it more difficult for Pioneer  to build a                                                               
business in the state.                                                                                                          
1:23:47 PM                                                                                                                    
SENATOR  STEDMAN  asked  what  stress   oil  price  was  used  in                                                               
analyzing PPT. He suggested it was below 40.                                                                                    
MR. SHEFFIELD didn't recall the prices then.                                                                                    
SENATOR  WIELECHOWSKI said  this  doesn't take  into account  the                                                               
potential  for DNR  giving upfront  royalty  relief, which  would                                                               
make it more profitable.                                                                                                        
MR. SHEFFIELD  said that  is true  if the  risk had  already been                                                               
taken.  But that's  not going  to be  a driver  on the  front end                                                               
because the company is not hoping for that scenario.                                                                            
CHAIR HUGGINS  said he will ask  DNR how often royalty  relief is                                                               
1:27:05 PM                                                                                                                    
MR. SHEFFIELD  reiterated that Pioneer's Alaska  projects compete                                                               
primarily with the low-risk ones in  the Lower 48. It has been an                                                               
aggressive investor  to date. It sanctioned  the Oooguruk project                                                               
under  the  ELF  system,  and  it  "anted  up  and  significantly                                                               
increased  our position  in  the  Cosmopolitan opportunity  under                                                               
PPT."  For Pioneer  to  take the  next step,  it  will need  more                                                               
fiscal stability. PPT provides the  balance and stability to grow                                                               
Pioneer's Alaska business. It works  across all investment types.                                                               
The cumulative effect  of ACES erodes incentives put  in place by                                                               
PPT. Raising taxes jeopardizes lower tiered investments.                                                                        
SENATOR WAGONER  said everyone is  asking for tax  stability, and                                                               
this regime will  be in place for 10-15 years,  like ELF. "At the                                                               
end of ELF, we should have…changed  ELF long before we did, cause                                                               
we had  Kuparuk coming up  paying no production tax,  so…what I'm                                                               
looking at  is where do  we set  the tax so  we don't have  to go                                                               
back short  term and  change the  tax system  again if  the world                                                               
changes--if  the  price  of  oil goes  up  dramatically."  A  2.5                                                               
percent increase  could stabilize Alaska's  tax system for  10 to                                                               
15 years-"maybe that isn't a bad thing."                                                                                        
MR. SHEFFIELD said  it is a tall  task, and "you have  to kind of                                                               
strike a balance." Stability for  independents is very important.                                                               
He doesn't see that a higher tax makes it more stable.                                                                          
SENATOR  WIELECHOWSKI hypothesized  if  ACES  passes and  Pioneer                                                               
finds a  field that is  marginal, there  is still the  ability of                                                               
DNR giving royalty relief.                                                                                                      
MR. SHEFFIELD  said the field  in Oooguruk isn't the  one Pioneer                                                               
was looking for. "It didn't provide  the incentive for us to take                                                               
that  exploration   risk.  We  were  looking   for  a  completely                                                               
different target. So really the way  I see it, the royalty relief                                                               
is a safety net  if you get not what you're  looking for and it's                                                               
down  near  the  bottom-something that  you  can't  commercialize                                                               
otherwise." It is more of a  safety net rather than an incentive.                                                               
It won't attract investment dollars.                                                                                            
SENATOR WIELECHOWSKI  asked if  he is saying  that Oooguruk  is a                                                               
crummy investment with a low rate of return.                                                                                    
MR. SHEFFIELD said if oil  prices had remained low, Pioneer would                                                               
not have  moved forward with  it. It  wasn't willing to  take the                                                               
risk  without the  royalty  relief, which  protects  them on  the                                                               
downside.  "But  if prices  are  higher,  it  will pay  out  more                                                               
quickly and  the state's  interest will revert.  It will  get its                                                               
full royalty  back plus a  30 percent net  profit. So, it  was, I                                                               
think, a win-win for Pioneer and the state."                                                                                    
CHAIR  HUGGINS  expressed concern  that  the  data used  for  any                                                               
assumptions  must be  accurate and  reviewed by  multiple people,                                                               
and he isn't  convinced that's the case. "What  we're being asked                                                               
to do will  not be durable." PPT  was passed last year  and a new                                                               
person-the  governor--came  in,  who  was  not  involved  in  the                                                               
process, and  said to redo  it. Commissioner Galvin is  also new.                                                               
"The  temptation  to  put your  fingerprints  on  something  just                                                               
because you're  the new person,  or because there's  a perception                                                               
that it's  not doing what it  should do, if that's,  in fact, the                                                               
case, then we  need to see the data  that…substantiates that. And                                                               
my concern  is that  what we're  looking at, may  be part  of the                                                               
data…and we  should, in all  good faith, be  able to look  you in                                                               
the  eye and  be able  to give  you some  semi-assurances there's                                                               
going to be some durability  involved, understanding that part of                                                               
the statute  right now says a  review period in 2011.  My concern                                                               
is we're not going to be able to do that."                                                                                      
1:37:16 PM                                                                                                                    
CHAIR HUGGINS said  he has requested transcripts of  what Mr. Van                                                               
Meurs said.                                                                                                                     
At ease from 1:37:58 PM to 1:42:09 PM.                                                                                      
MARK   HANLEY,  Manager,   Public  Affairs,   Anadarko  Petroleum                                                               
Corporation  Alaska,   said  Anadarko   is  a   large,  worldwide                                                               
independent based  in Houston. Independents explore  and produce.                                                               
They  are  not  integrated  and   typically  have  no  pipelines,                                                               
tankers, refineries,  nor gas stations.  There are  niche markets                                                               
for everyone.  In Alaska,  Anadarko is  exclusively on  the North                                                               
Slope. He  showed a map  showing where  it has interest.  It owns                                                               
22% at  Alpine and is a  partner in NPRA with  ConocoPhillips. In                                                               
the  foothills and  to the  east, Anadarko  is the  operator with                                                               
partners including BG, Petro-Canada,  and ASRC-an equity partner.                                                               
Anadarko has lots of acreage,  plays, and opportunities. He noted                                                               
that  about 300,000  acres  of leases  in  NPRA was  relinquished                                                               
recently-that  was  the   Anadarko,  Pioneer  and  ConocoPhillips                                                               
partnership. "We bought the leases,  we did research, and we give                                                               
some   of  that   up.  Sometime   you  just   don't  think   it's                                                               
prospective."  Returns  on  some  fields  must  cover  losses  on                                                               
1:47:16 PM                                                                                                                    
SENATOR WAGONER asked which acreage was given up.                                                                               
MR. HANLEY said  it's in NPRA. Alaska is  a world-class petroleum                                                               
basin  and  has  significant remaining  resource  potential  that                                                               
tends to be  in smaller fields. Anadarko believes  there are some                                                               
legacy-type prospectivity-or anchor fields.  It is looking at the                                                               
Alpine-sized, which there  should be a few left to  be found. "We                                                               
tend to  be far away  from infrastructure; we're looking  at what                                                               
we  call higher-risk,  but potentially  higher reward."  The past                                                               
risk is often discounted if nice returns are made.                                                                              
SENATOR  WIELECHOWSKI asked  if the  world-class basin  refers to                                                               
the future or past.                                                                                                             
MR. HANLEY  said both.  He referred to  an Econ  One presentation                                                               
from April  5, 2006  during the  PPT debate.  He showed  a United                                                               
States  Geological  Survey  chart  of  undiscovered  technically-                                                               
recoverable oil  reserves. The mean  estimate of reserves  on the                                                               
Central North  Slope is 4  billion barrels  of oil. There  are no                                                               
fields over 1 billion barrels, and  2 percent are fields over 500                                                               
million barrels, and 51 percent  are smaller than 64 million. "We                                                               
have a lot of  oil out there…but it's in a  lot of small fields."                                                               
A field  with 50 million barrels  is not economic if  there is no                                                               
infrastructure within 10 miles.                                                                                                 
MR. HANLEY  said there  are not  many 500  million-barrel fields,                                                               
but he  thinks there are  Alpine-sized fields yet to  find, which                                                               
could spawn satellite  fields. He said a tax hike  has to have an                                                               
impact on  recoverable oil.  He said there  is huge  potential in                                                               
gas as well. Big companies have  to find new places, and he asked                                                               
if they will go after a  50 million-barrel field when they really                                                               
need the  production out  of a billion-barrel  field. He  said it                                                               
takes the  same number of geologist  to look for the  big fields.                                                               
"But you get Pioneer looking  for…100 million-barrel fields," and                                                               
others that he listed.                                                                                                          
1:58:13 PM                                                                                                                    
SENATOR  WIELECHOWSKI  noted  that  much  of  the  acreage  where                                                               
Anadarko is  looking for  oil and  gas is  further than  10 miles                                                               
out. He asked how to do that economically.                                                                                      
MR. HANLEY  said that is  exactly the point. Anadarko  is focused                                                               
on those larger fields. "We're  not looking for 50 million-barrel                                                               
fields  out there."  BP wouldn't  be interested  in such  a small                                                               
field. Anadarko  drilled a  well by Barrow  last winter,  and "if                                                               
you  found  500 million  barrels,  I  suspect it's  not  economic                                                               
because  it's way  out  there."  There may  be  ways  to get  the                                                               
infrastructure closer.  He said he  is optimistic, but it  has to                                                               
be  put  in  perspective.  Regarding  tax  policy,  "800  tcf  of                                                               
discovered  gas, pretty  close to  tide water,  costs are  not as                                                               
expensive to  drill as  they are here,  that's not  a significant                                                               
factor.  But honestly,  you've got  800 tcf.  If we  had 800  tcf                                                               
sitting at  Prudhoe, I  think government  could extract  a little                                                               
higher rent."                                                                                                                   
2:01:54 PM                                                                                                                    
MR. HANLEY  said there  is a  lot of  gas, but  no transportation                                                               
network,  and that  is a  real  challenge. The  new entrants  and                                                               
partnering opportunities are very  positive. Each learns from the                                                               
other. He  noted a company  that spent  $100 million in  NPRA for                                                               
one well  drilled and  then gave  up the  leases and  left. "That                                                               
tells us  something." Nothing  was moving  west until  Alpine, he                                                               
added.  There's good  prospectivity but  the fields  are smaller.                                                               
The long  lead time and  seasonal restriction-"that's  a killer."                                                               
Doing  business in  Alaska takes  much more  time and  thus costs                                                               
more. There's a  lack of infrastructure and  competition. The PPT                                                               
credits  have been  helpful because  they reduce  costs. "In  the                                                               
end, we're going  to pay a higher  tax rate; we don't  get to use                                                               
those credits against that production  later on. But just because                                                               
you have so much capital stranded  up front, it can really affect                                                               
your  net present  value economics,  and that  has really  helped                                                               
with the issue that you can't  do much about, which is the winter                                                               
drilling and the longer seasons."  A gross system that raised the                                                               
same money isn't  as good. "It helps us with  our front-end costs                                                               
and helps  our net present  value even though you're  getting the                                                               
same amount of money."                                                                                                          
2:06:22 PM                                                                                                                    
MR. HANLEY  said Anadarko got hit  with a tax increase  at Alpine                                                               
and didn't get  to use the credits. "The existing  fields got hit                                                               
hard." New  fields were slightly  improved by the PPT,  he added.                                                               
"We  started  off with  a  20/20  [tax  rate/credit rate  in  the                                                               
PPT]…and we were comparing it to  the old ELF system. People said                                                               
there  wasn't enough  investment under  the old  ELF system.  And                                                               
that's  why I  said that  the gross  system was  not getting  the                                                               
investment. The  PPT helped with  these credits, even  though you                                                               
might have got similar amounts of  money. But for us…20/20 was an                                                               
improvement;  25/20…the  economics  for  exploration  were  worse                                                               
under the old  system, and that was before  the progressivity was                                                               
put  in." It  ended  up  in the  middle  with progressivity,  and                                                               
Anadarko found  it to be  a slight  incentive. "It did  help with                                                               
our NPVs on  some of our prospects, so we  were supportive in the                                                               
end of the overall system that's out there."                                                                                    
MR.  HANLEY  said  he'd  already   touched  on  the  net  profits                                                               
approach.  He appreciated  that the  administration let  Anadarko                                                               
talk to them  about sticking with the net system.  "We did pitch,                                                               
if you're  going to go  to a  gross system…and we  appreciate the                                                               
fact that  I think  they did their  own analysis  after listening                                                               
and  came to  somewhat  of  the same  conclusion  that the  gross                                                               
system does not encourage the  investment, and frankly, if you're                                                               
going  to have  it, to  get to  the kind  of investment  that you                                                               
want, you're going to have to  have credits with a gross system."                                                               
Capital  credits need  to  be differentiated.  He  spoke of  four                                                               
categories:  existing large  fields, satellites,  heavy oil,  and                                                               
frontier  exploration.   A  gross  system  must   understand  the                                                               
economics  of each.  A  net tax  works it  out.  A gross  doesn't                                                               
encourage development, and  there are taxes even  when you're not                                                               
making money. The royalty is a  gross tax, and property taxes are                                                               
the value of the property.                                                                                                      
2:12:26 PM                                                                                                                    
MR. HANLEY  said negatives  outweigh the  positives in  ACES. The                                                               
positives include: expanding the  time to qualify for exploration                                                               
incentive   credits-but  that   is   diminished   by  the   extra                                                               
administrative   processes  and   getting   good  auditors   that                                                               
understand the industry.  He said stability is a  factor. He said                                                               
the rates  are a problem  for gas and  will need to  be addressed                                                               
later--and then everything will  be open again. The progressivity                                                               
escalator is  a stability  factor in making  it less  likely that                                                               
government will  raise taxes when prices  go up. He sees  that as                                                               
CHAIR  HUGGINS said,  "We  would  have been  much  wiser to  have                                                               
combined oil and  gas at a future date that  has some rationale."                                                               
It is important to know when gas will be addressed.                                                                             
2:19:03 PM                                                                                                                    
CHAIR HUGGINS recognized that Senator Therriault had arrived.                                                                   
MR. HANLEY said  he hopes to come  back in two or  three years to                                                               
address the gas issue, and thus oil will be discussed again.                                                                    
MR.  HANLEY  said the  tax  rate  increase  is of  most  concern,                                                               
escalator is  second, and  the transition  credits are  third. On                                                               
the eve  of the PPT  coming out, Anadarko sanctioned  a satellite                                                               
project around  Alpine. It was  less economic than  a stand-alone                                                               
field. "We  would have much rather  done it under the  PPT model,                                                               
but we  got hit  with the  higher tax  rate." He  said developing                                                               
that   satellite  was   deferred   because   of  the   governor's                                                               
aggregation  decision at  Prudhoe  Bay, because  Anadarko had  to                                                               
negotiate how  the state was  going to deal with  the satellites.                                                               
He  said the  "two for  one-you've got  to spend  two dollars  to                                                               
bring a dollar forward that you  spent in the past to create that                                                               
pool, effectively  you get a  10 percent credit for  every dollar                                                               
you spend."  He said that has  an impact. For the  next two years                                                               
there's  an  extra ten  percent  credit  on money  that  Anadarko                                                               
spends. It was one of  the things pitched regarding the foothills                                                               
project, and getting  the extra ten percent was  a positive." But                                                               
prices make more  of an impact, but he can't  control prices. "So                                                               
on the TIE  credits, I would just  say our view is that  it was a                                                               
fairness issue…and we rather they not be eliminated."                                                                           
CHAIR HUGGINS asked about the ten percent floor.                                                                                
MR. HANLEY  said the  floor doesn't  affect Anadarko  directly at                                                               
this point. Some have suggested  calling Alpine a legacy field. A                                                               
floor is a concern because if it's  a 10% gross, "the way we read                                                               
the bill…clearly you  can't use credits from that  field to lower                                                               
that tax rate."  But if Anadarko is drilling  like mad everywhere                                                               
else, it can't use those credits  either, which is a real problem                                                               
because Anadarko  essentially ends up  with a 22.5  percent gross                                                               
tax with an escalator on what it's exploration drilling.                                                                        
2:26:31 PM                                                                                                                    
MR. HANLEY said that when  he reads: notwithstanding any contrary                                                               
provision of law, he highlights  it, "because basically that says                                                               
it doesn't  matter what  anybody else says  anywhere else  in the                                                               
statute, this  is what's  controlling." He  noted the  base floor                                                               
language  is Section  16,  page 11.  It  doesn't directly  affect                                                               
Anadarko, "but I  expect some of the same stuff  might occur with                                                               
the guys  at Prudhoe…they might  have other income  against which                                                               
to offset  things, but they could  be affected the same  way." He                                                               
read: "a producer  may not apply tax credits to  reduce its total                                                               
tax liability under  (e) of this section…for oil  or gas produced                                                               
from all  leases or  properties within  the unit  or non-unitized                                                               
reservoir below 10 percent of the  total gross value at the point                                                               
of production of that oil and  gas." It appears tax credits can't                                                               
be  used,   so  it's  problematic   and  could   have  unintended                                                               
consequences. ELF was regressive, but  one of the benefits of PPT                                                               
is its more progressive system. The  10% floor takes away the low                                                               
side risk to  the state, so it  is regressive on the  low end and                                                               
progressive "as it  gets up above whatever that  number is." When                                                               
the crash hit  in the 1990s, "companies got  hammered…we were not                                                               
quite as aggressive on our expenditures."                                                                                       
2:30:08 PM                                                                                                                    
MR.  HANLEY showed  a chart  of different  field models  from the                                                               
administration where  the gross system with  capital credits "has                                                               
less  npv [net  present value]  than raising  the same  amount of                                                               
money."  From  that perspective,  he  liked  the chart,  but  for                                                               
project  economics,  "it's  hard  to  argue  that  a  50  percent                                                               
reduction in the  economics of the field doesn't  have an impact.                                                               
You can argue  there's still enough left there, but  as I pointed                                                               
out,  at some  point there's  always something  on the  edge, and                                                               
it's gotta have an impact."                                                                                                     
2:31:53 PM                                                                                                                    
SENATOR WIELECHOWSKI asked what kind of npv Anadarko needs.                                                                     
MR. HANLEY said it depends  on the geologic and commercial risks.                                                               
Every  field and  circumstance is  different. Risks  are assessed                                                               
and a "percent chance of  commerciality" is determined. Cash flow                                                               
analysis  is  another  consideration.   Risk  for  heavy  oil  is                                                               
different-it  is  more of  a  commerciality  risk rather  than  a                                                               
geologic risk. A gross tax should  look at the economics of every                                                               
single field. Net doesn't necessarily  address risk, but it takes                                                               
care of a lot of those issues.                                                                                                  
2:36:49 PM                                                                                                                    
CHAIR HUGGINS asked  if the unknowns of heavy oil  could make the                                                               
state revisit this issue.                                                                                                       
MR. HANLEY  said he  thinks it's challenged,  but he  hasn't done                                                               
the economics on the North  Slope. "If it's not getting developed                                                               
at the rate you  think it is at the prices…This  is where you get                                                               
some experts…and  figure out what  is the challenge and  is there                                                               
anything you  can do  about it?"  Tax credits may  or may  not be                                                               
enough.  The   tax  and  progressivity  increases   outweigh  the                                                               
potential  benefits of  the program.  The progressivity  is taken                                                               
from a monthly  to an annual calculation. Averaging  is a benefit                                                               
to  the  companies because  it  reduces  amount the  state  would                                                               
collect. He finds it to be  a significant increase in taxes, even                                                               
though it  is expected to be  neutral to the state.  "If our view                                                               
is right…this  will raise quite  a bit  more money than  is being                                                               
2:40:37 PM                                                                                                                    
SENATOR STEDMAN asked about marketable credits.                                                                                 
MR. HANLEY said Anadarko uses its  own credits and has not bought                                                               
any either.  The problem, he  said, is Anadarko can't  reduce its                                                               
tax liability  below 80  percent of what  it would  normally pay.                                                               
"We   have  partners   that   have   credits…that's  our   direct                                                               
experience. So  we haven't had to  go out into the  market to try                                                               
and  sell them."  It  gets complicated  because  Anadarko has  to                                                               
predict what credits of its own it will use in a year.                                                                          
SENATOR  WAGONER  said there  have  been  discussions on  whether                                                               
annual or monthly  would be best. Dan Dickinson  showed the large                                                               
up-kick and  down-kick in  one month, and  when that  is averaged                                                               
over a  year, it wouldn't  mean much to  the state. But  three or                                                               
four of  those would. It  is difficult  to predict. He  said he's                                                               
conflicted on  whether it  should be  done annually,  monthly, or                                                               
MR. HANLEY  said that is  one issue and  the rate is  another. He                                                               
gave an example of "at $40, the  new system is a 2 percent higher                                                               
tax."  "At $50  the proposal goes to 39, and  then the old system                                                               
would have  been at 27.5,  and…they cross…at $80 they  become the                                                               
same." Above  $80 net,  it's better for  the companies  and worse                                                               
for the  state. Oil prices  are high now,  "but we still  are not                                                               
planning our capital projects based…on  $80 a barrel." He said it                                                               
doesn't matter the price today,  it is the prediction 10-30 years                                                               
from now. Anadarko won't divulge  what it bases its economics on,                                                               
"although there's usually  a price that you think is  going to be                                                               
out  there and  then people  do sensitivities  kind of  above and                                                               
below just to see how it goes."                                                                                                 
2:48:11 PM                                                                                                                    
MR.  HANLEY said  people are  looking at  accounting models,  but                                                               
risks and potential are also factors.                                                                                           
CHAIR  HUGGINS  asked  about  not   being  held  accountable  for                                                               
progressivity under the annual system.                                                                                          
MR. HANLEY  said, "I guess  you're right…we don't have  the error                                                               
rate-we're going to  know more what it is after  the fact, but it                                                               
is what  it is." The  annualized aspect  has a benefit,  but with                                                               
the tax rate  increase over the $50 to $60  to $80-net range, the                                                               
annualized issue doesn't help near as much.                                                                                     
The committee took an at-ease from 2:51:30 PM to 3:02:36 PM.                                                                
3:02:47 PM                                                                                                                    
MARILYN   CROCKETT,  Executive   Director,  Alaska   Oil  &   Gas                                                               
Association  (AOGA),  said  her   company  represents  17  member                                                               
companies-the   instate  refiners,   Alyeska  Pipeline,   Agrium,                                                               
explorers,  and producers.  It provides  a forum  for members  to                                                               
adopt   industry   positions   on  legislative   and   regulatory                                                               
proposals. A  position requires  a 5/6  majority vote  of members                                                               
present. Tax proposal positions  require unanimous support. "What                                                               
I'm going to  be telling you today has the  100 percent consensus                                                               
of our tax committee members with no dissent."                                                                                  
MS. CROCKETT  said the ability of  the DOR to use  joint interest                                                               
billings  as  a tool  for  audit  is  an important  provision  to                                                               
retain.   There   have   been  inappropriate   changes   to   the                                                               
interpretation of  the statute of  limitations on  production tax                                                               
assessment, which would make it  retroactive to matters currently                                                               
being  litigated. There  are also  challenges with  extending the                                                               
statute of limitations from three to six years.                                                                                 
3:06:36 PM                                                                                                                    
TOM WILLIAMS,  Chair, AOGA tax  committee, and an employee  of BP                                                               
said he worked for the state  in the Attorney General's office in                                                               
litigation over royalties  from Cook Inlet. In 1975,  the DOR put                                                               
him in  charge of running  the oil and gas  tax laws. He  came up                                                               
with the idea  for ELF but not the formula.  He made the separate                                                               
accounting tax work and made  the temporary reserves tax work. He                                                               
did the property  tax for the pipeline after it  was finished. He                                                               
was commissioner of  DOR under Governor Hammond.  There are parts                                                               
of his  legacy that are  good and parts  that "have come  back to                                                               
haunt me."                                                                                                                      
3:08:39 PM                                                                                                                    
CHAIR HUGGINS asked when Mr. Williams left DOR.                                                                                 
MR. WILLIAMS said he  left at the end of 1982  and then he worked                                                               
for Cook Inlet Region for almost four years before joining BP.                                                                  
MS. CROCKETT said  Alaska's greatest challenge is  the decline of                                                               
oil production  even with  massive investments.  There will  be a                                                               
major  challenge when  the North  Slope production  gets down  to                                                               
300,000 barrels per  day. The minimum mechanical  capacity of the                                                               
pumps is at  that level. She showed a graph  of that happening at                                                               
2022 if the rate of decline remains  the same. She said it is not                                                               
a prediction.                                                                                                                   
3:10:54 PM                                                                                                                    
MS. CROCKETT  said the difference  in a six percent  decline rate                                                               
and  a   three  percent  rate,   works  out  to   fifteen  years.                                                               
Exploration,  investment in  existing fields,  and investment  in                                                               
technology  and new  infrastructure for  heavy oil  can slow  the                                                               
rate of decline  on the North Slope. There are  three major areas                                                               
of  significant  oil  and  gas  potential  on  the  North  Slope:                                                               
central,  National  Petroleum   Reserve-Alaska  (NPRA),  and  the                                                               
coastal plain of  the Arctic National Wildlife  Refuge (ANWR). In                                                               
the  NPRA  there  have  been  300,000  acres  of  lands  recently                                                               
relinquished because of disappointing exploration results.                                                                      
3:12:10 PM                                                                                                                    
MS. CROCKETT said  it is unwise to depend too  much on investment                                                               
as a solution  to production decline. There is  no assurance that                                                               
spending a dime  will get you a dime. Even  with the discovery of                                                               
a commercially  viable field, it  will take years  to production.                                                               
Investing in  exploration can make a  significant contribution in                                                               
the longer term, but results are  needed in the short term. Heavy                                                               
oil is  a solution in  the long term as  the first test  well was                                                               
drilled only  this year  at Milne  Point, and  it is  still being                                                               
evaluated.  Until then,  West  Sac will  be  the only  commercial                                                               
viscous  opportunity. There  are investments  in existing  fields                                                               
that can be made to slow  the decline. This infield drilling will                                                               
accelerate  the drainage  of  the  oil from  the  rock below  the                                                               
existing  wells.  Last  year, the  development  wells  that  were                                                               
drilled resulted in  an additional 70,000 barrels a  day from the                                                               
Prudhoe Bay field.                                                                                                              
3:13:37 PM                                                                                                                    
MS. CROCKETT said  if that were a stand-alone field,  it would be                                                               
the fourth largest oil field  on the slope. There are investments                                                               
in the  renewal of  surface facilities  for existing  fields. The                                                               
gathering centers and flow stations  for Prudhoe Bay have been in                                                               
service for over 30 years and  need to be overhauled or replaced.                                                               
Heavy oil will require modifications too.                                                                                       
3:15:24 PM                                                                                                                    
MS.  CROCKETT said  that  will  add to  the  cash  flow risk.  An                                                               
incentive  effective for  initial development  is also  effective                                                               
for renewal.  "The harsh reality is  that we find ourselves  in a                                                               
declining production mode that we  have to grapple with." Massive                                                               
new investments  in the three  aforementioned categories  are the                                                               
only way to deal with it.                                                                                                       
MS. CROCKETT  said, regarding ACES, a  tax must do the  things it                                                               
is intended to do; enforcement of  a tax should be consistent and                                                               
efficient; and  a taxpayer must  be able to calculate  the amount                                                               
of tax due. Most new taxes  are designed to bring new revenues to                                                               
government, but in the PPT, things  were not so simple. Partly it                                                               
was  to  bring in  revenue  because  legislators viewed  the  ELF                                                               
system as  outdated and unduly  generous to producers.  But Pedro                                                               
Van  Meurs  explained  that  PPT was  also  designed  to  provide                                                               
incentives for investment.  No one disputes that  PPT has brought                                                               
in  more revenue  than  ELF  would have.  According  to DOR,  the                                                               
increase  was more  than $800  million in  the last  9 months  of                                                               
2006. DOR  also said that the  March 31 payments were  about $137                                                               
million  less than  projected.  But  her point  is  that PPT  has                                                               
outperformed the ELF tax.                                                                                                       
3:17:51 PM                                                                                                                    
MS.  CROCKETT  said it  has  been  suggested that  Alaskans  were                                                               
promised  that the  PPT would  generate  $800 million  additional                                                               
this year than was being projected,  so it necessary to raise the                                                               
rate. That is  flawed because DOR has said it  can't forecast PPT                                                               
accurately  because it  has  so many  variables.  "If they  can't                                                               
forecast accurately  then why should  so much reliance  be placed                                                               
on its  current forecast that  shows that the prior  forecast was                                                               
off by  $800,000,000.00?" The purpose  of PPT was also  to create                                                               
incentives, and it provided  significant incentives for investing                                                               
in  capital assets.  Current capital  expenditures generate  a 20                                                               
percent tax  credit in addition  to being  immediately deductible                                                               
as lease expenditures. Such front-end  benefits have the greatest                                                               
effects because of the time value of money.                                                                                     
MS. CROCKETT  said the  incentive to  invest sooner  is increased                                                               
with  the  transitional   investment  expenditure  (TIE)  credit.                                                               
Taxpayers  only have  until 2013  to  use those  credits. The  20                                                               
percent tax  credit for carried forward  annual loss particularly                                                               
benefits explorers  and those bringing  new fields  to production                                                               
but don't  yet have the  production to deduct costs  against. The                                                               
Section  024(c)  credit  of  up  to  $12  million  per  year  for                                                               
producers with  less than 100,000  barrels a day is  an incentive                                                               
for independents.  The $6 million  annual credit is  incentive in                                                               
areas outside of the North Slope.                                                                                               
3:20:18 PM                                                                                                                    
MS. CROCKETT  said these  incentives have  worked under  PPT. The                                                               
administration has  stated that  capital investment for  FY08 are                                                               
80  percent greater  than previously  estimated despite  the fact                                                               
that operating  costs are up  by 101 percent. There's  a question                                                               
of   whether  the   inability  of   explorers   to  sell   credit                                                               
certificates near face value has  been a problem, but they aren't                                                               
serious enough to amend the PPT.                                                                                                
CHAIR HUGGINS asked if anyone has had problems.                                                                                 
SENATOR STEDMAN asked Ms. Crockett to repeat her position.                                                                      
MS.  CROCKETT said  SB 2001  will  generate more  revenue in  the                                                               
short term.                                                                                                                     
3:22:45 PM                                                                                                                    
MS. CROCKETT  said the two  chief objections  to the PPT  are the                                                               
difficulty in forecasting revenues and  that the DOR auditors are                                                               
hopelessly outgunned.  The dramatic  difference in  forecasts and                                                               
what  the  PPT  brought  in  puts forth  the  question  that  the                                                               
legislature  made decisions  based on  inappropriate information.                                                               
Also  DOR   needs  cost  information  about   spending  from  the                                                               
operators,  producers, and  explorers,  which  allegedly has  not                                                               
been   forthcoming  from   them.  When   the  DOR   staff  sought                                                               
information about  expenditures, they  chose not  to rely  on the                                                               
2006 costs  but looked  at the  partnership tax  returns. Federal                                                               
partnership returns  are not due  until October of  the following                                                               
year, so the most recent returns available were from 2004.                                                                      
CHAIR HUGGINS said the 2004 date is used by the administration.                                                                 
MS. CROCKETT said yes. She showed  a graph of increased costs for                                                               
field machinery.                                                                                                                
3:25:46 PM                                                                                                                    
MS.  CROCKETT  said AOGA  is  not  privy  to what  taxpayers  are                                                               
reporting  to   the  department   as  they  make   their  monthly                                                               
installment  payments and  their annual  true-up payments.  DOR's                                                               
second objection to  PPT is the audit challenges. "It  is not for                                                               
us  to comment…on  the proposal  to  put auditors  in the  exempt                                                               
service, but  what we  can address  is the  dimension of  the PPT                                                               
audits," which  has to do with  the source or starting  point for                                                               
determining how  much a producer's deductible  lease expenditures                                                               
are.  The PPT  allows  DOR  a choice  of  starting  with a  joint                                                               
interest  billing  and  invoices  that operators  bill  to  other                                                               
participants in  an oil and gas  field venture or start  from the                                                               
comprehensive  set of  accounting rules  that DOR  prepares. That                                                               
choice will determine the success or failure of PPT or SB 2001.                                                                 
MS. CROCKETT said  it is like have a tax  based on your financial                                                               
book  income   and  choosing   between  your   audited  financial                                                               
statements  or   starting  with  generally   accepted  accounting                                                               
principles  and  finding the  right  answers.  From the  taxpayer                                                               
perspective it  means a near  certainty of  continual assessments                                                               
for  more  tax,  interest,  and  penalties,  and,  depending  how                                                               
litigious a  company is, it may  mean a long series  of lawsuits.                                                               
From the state's perspective, incentives  for investments will be                                                               
seriously  eroded. The  taxpayer's  recourse is  to discount  the                                                               
face value  of the  incentives in deciding  to invest.  The other                                                               
choice that DOR  could make is to start with  the operator bills.                                                               
Anything that is non-deductible would  have to be backed out. The                                                               
central concept of lease expenditures  under 165 (a) is that they                                                               
must  be  direct, ordinary,  and  necessary.  "It would  be  most                                                               
surprising if  anything in those  billings would go  outside that                                                               
standard." Alaska  can be sure  of this because  the participants                                                               
do not give the operator a license to waste their money.                                                                        
3:30:13 PM                                                                                                                    
MS. CROCKETT  said the non-operating  participants don't  want to                                                               
pay any  costs that are  not related  to the exploration  of that                                                               
prospect. It  is reasonable  to rely  on the  non-operator's self                                                               
interest to  police. In the  context of  PPT, DOR ought  to audit                                                               
the audits  to verify  that the  non-operators do  audit operator                                                               
invoices. Once  it is confirmed  that these are arms  length, DOR                                                               
should  not spend  additional time  to redo  the company  audits.                                                               
Daniel Johnston praised the  expertise of joint-interest auditors                                                               
and  the ability  for  the  state to  use  unit accounting.  This                                                               
approach will be  inapplicable for those with  operations with no                                                               
audits. Section  64 would  repeal DOR's  authority to  require or                                                               
authorize the  operators' joint-interest  billings as  a starting                                                               
point  for   computing  the  amount   of  the   other  producers'                                                               
deductible lease  expenditure for that  unit. We expect  that DOR                                                               
will testify that  they will still be able to  require the use of                                                               
these billings anyway, but AOGA doesn't think so.                                                                               
3:33:02 PM                                                                                                                    
MS.  CROCKETT  asked  the  committee   to  delete  the  last  two                                                               
sentences  on page  10 of  her  written testimony,  which she  is                                                               
reading.  The reason  she  is  spending time  on  this issue  is:                                                               
"Consider the  situation that a non-operating  participant faces.                                                               
All of the  information it has about what's being  spent for that                                                               
operation is  what it  gets from its  billings from  the operator                                                               
plus whatever  it may  learn by auditing  those invoices.  But if                                                               
such a non-operator cannot start  from those invoices, how can it                                                               
figure  out  what to  report  as  a  lease expenditure  for  that                                                               
operation?" It is not feasible  for a non-operator to be auditing                                                               
the  operator   month  by  month,   yet  it  will  have   to  pay                                                               
installments  month  by  month.  Even with  the  true-up,  it  is                                                               
unlikely that the  audit will have begun by that  date. There are                                                               
penalties  of  up  to  30  percent for  negligence  that  can  be                                                               
assessed on any  underpayment after the true-up date.  "If a non-                                                               
operator  cannot rely  on its  billings  from the  operator as  a                                                               
starting point for those purposes, what is it supposed to use?"                                                                 
3:35:49 PM                                                                                                                    
CHAIR HUGGINS asked if it was discussed with the administration.                                                                
MS. CROCKETT said no; AOGA has not had an opportunity.                                                                          
SENATOR WIELECHOWSKI asked if AOGA was declined an opportunity.                                                                 
MS. CROCKETT  said there have  been scheduling  difficulties. "We                                                               
did not,  however, have  any contact as  an association  from the                                                               
administration about  sitting down to  walk through the  bill and                                                               
answer any questions until about a week and a half ago."                                                                        
SENATOR   WIELECHOWSKI    asked   if   the    administration   is                                                               
intentionally refusing to see AOGA.                                                                                             
MS. CROCKETT said no.                                                                                                           
CHAIR HUGGINS  said he will  remind the DOR that  it's important.                                                               
It is for the betterment of  the state because AOGA is a business                                                               
partner. It's mandatory.                                                                                                        
3:37:56 PM                                                                                                                    
MS.  CROCKETT asked  why a  provision in  Section 1  dealing with                                                               
confirming the  interpretation of  the limitation  of assessments                                                               
is  there.  She  said  AS43.05.260 is  the  existing  statute  of                                                               
limitation for  auditing all  state taxes and  she asked  what is                                                               
being  confirmed.  The  new  section   has  two  parts,  and  one                                                               
addresses decisions that retroactively  change the parameters for                                                               
calculating the tax, and the  second requires producers to report                                                               
decisions  to DOR  within 60  days. The  curious thing  about the                                                               
existing statute  of limitations in AS43.05.260  does not pertain                                                               
to either. She pointed to  her testimony that includes subsection                                                               
(a), which  sets three years as  the period for the  DOR to audit                                                               
and  assess  any  additional  tax.   It  bars  suits  to  collect                                                               
additional tax if it is not  assessed within the three years. (b)                                                               
says  that if  a taxpayer  files a  return early,  the three-year                                                               
period  starts  running  before  the  due  date.  (c)  has  three                                                               
exceptions including false returns to  evade tax, failure to file                                                               
a tax, and  for extensions that are mutually  agreed upon. "Which                                                               
of these  provisions have anything to  do with tax effects  for a                                                               
retroactive decision?  Which has  anything to  do with  having to                                                               
report such decisions to DOR  in filing amended tax returns?" She                                                               
believes that  it is a  stealthy attempt to legislate  an outcome                                                               
to  matters  that  are  already being  litigated.  In  1999,  DOR                                                               
amended one of  its production regulations so that  it reads like                                                               
that being enacted in the bill.                                                                                                 
3:41:20 PM                                                                                                                    
MS. CROCKETT  showed a side  by side  on page 13.  The regulation                                                               
deals  with "decisions  of regulatory  agencies,  courts, or  any                                                               
other preemptive authority" while  the proposed statute addresses                                                               
"decision  of a  regulatory  agency, court,  or  other body  with                                                               
authority  to  resolve  disputes."   The  regulation  deals  with                                                               
retroactive adjustments in costs  of transportation, sales price,                                                               
prevailing  value,  or  consideration for  quality  differentials                                                               
relating  to the  commingling of  oils or  of oil  and NGLs.  The                                                               
proposed statute addresses a retroactive  change to the very same                                                               
things,   plus   any  change   to   a   lease  expenditure.   The                                                               
interpretation  is  when  interest   begins  accruing  on  a  tax                                                               
increase or decrease  that results from one  of these retroactive                                                               
decisions. The  Director of the  Tax Division told AOGA  that DOR                                                               
was interpreting  the amendment to  mean interest would  start to                                                               
accrue as of  the original due date  of the tax, not  the date of                                                               
the  retroactive decision.  The  administration  intends to  have                                                               
this interpretation  confirmed in the  bill. "Do you  really want                                                               
to  confirm  this?"   she  asked.  Confirming  it   would  set  a                                                               
destabilizing precedent  because it  will mean  that laws  can be                                                               
rewritten  to deal  with subjects  that they  did not  originally                                                               
deal,  and this  can  be done  clandestinely  by confirming  such                                                               
interpretations and determining the  outcome of judicial matters.                                                               
She questioned  the separation  of powers  and Alaska's  sense of                                                               
justice and fair play.                                                                                                          
3:44:13 PM                                                                                                                    
MS. CROCKETT said  another confusing thing in SB  2001 relates to                                                               
the  new statute  of  limitations for  production  tax only.  She                                                               
questioned  the  extension  to six  years,  when  the  three-year                                                               
period can  be extended multiple  times. She said  auditors' work                                                               
will expand to fill the time  allowed. The longer the audits run,                                                               
the greater the accrued interest.  After six years, interest goes                                                               
up  to $0.92  for  every  dollar of  additional  tax. The  longer                                                               
limitation  periods will  make it  easier to  justify litigation.                                                               
The purpose  of a statute  of limitations  is to bar  claims that                                                               
are  so  old that  the  records  are  lost.  The old  statute  of                                                               
limitations  has  worked  for   many  taxes,  including  separate                                                               
accounting, which  involved income from  interest in oil  and gas                                                               
pipelines and was more complicated.                                                                                             
3:46:12 PM                                                                                                                    
SENATOR STEVENS  asked if the  extension has  to be agreed  to by                                                               
both parties.                                                                                                                   
MR. WILLIAMS said  usually the auditor has more  questions or the                                                               
taxpayer asks  for more  time. It  is a  document signed  by both                                                               
parties. It can be renewed again.                                                                                               
SENATOR STEVENS asked if that has happened.                                                                                     
MR. WILLIAMS said he believes it's common.                                                                                      
SENATOR  WIELECHOWSKI  noted  that  the  state  said  it  had  to                                                               
negotiate for more time.                                                                                                        
MR.  WILLIAMS said  both must  agree, but  if there's  a jeopardy                                                               
assessment  to  disallow  everything,   it's  in  the  taxpayer's                                                               
interest to grant the extension.                                                                                                
SENATOR WIELECHOWSKI  suggested that a jeopardy  assessment can't                                                               
be issued unless there is something to back it up.                                                                              
MR. WILLIAMS  said no, the  state can make a  jeopardy assessment                                                               
because the taxpayer has been stonewalling.                                                                                     
SENATOR  WIELECHOWSKI  asked  what   companies  ask  for  in  the                                                               
extension negotiations.                                                                                                         
MR. WILLIAMS  said if it  involves material that his  company can                                                               
still find, it asks  for more time to look for  it. More often it                                                               
is  requested  from  the  auditor.  He said  that  BP  has  given                                                               
auditors up to five extensions.                                                                                                 
SENATOR  WIELECHOWSKI  asked  if   companies  ask  for  financial                                                               
MR. WILLIAMS said interest can't  be compromised. If there is any                                                               
compromise, it  comes after the assessment.  The attorney general                                                               
has to approve it.                                                                                                              
3:52:15 PM                                                                                                                    
CHAIR HUGGINS said  there was some reason  the administration put                                                               
this in  and he  was suspect  of it.  Going from  38 cents  to 92                                                               
cents on  the dollar is a  powerful inflation. What could  you do                                                               
to avoid the administration from taking the six years?                                                                          
MR. WILLIAMS  said the law is  very clear about interest,  and it                                                               
starts accruing  form the date the  payment was due for  the tax.                                                               
That is a  simple matter of 11 percent  compounding each calendar                                                               
quarter. After  six years there  are twice as  many compoundings,                                                               
and the rate is accelerating as it grows.                                                                                       
SENATOR  WIELECHOWSKI said  the money  will be  in the  company's                                                               
possession  and  could be  invested,  so  it's  not like  it's  a                                                               
complete loss to the company.                                                                                                   
MR. WILLIAMS said he is  not complaining about the interest rate.                                                               
The  question  is  whether  six  years as  a  starting  point  is                                                               
CHAIR HUGGINS  said he is  concerned because the  consequences of                                                               
"what we're doing" are unknown.                                                                                                 
3:55:50 PM                                                                                                                    
MR. WILLIAMS the  state could be wanting it  for pending disputes                                                               
or if anything  like that arises in the future.  "I think they're                                                               
hoping that  this legislature would  grant them the  authority to                                                               
go back  to the first  due date when you  had no idea  that there                                                               
was going  to be such a  decision, rather than the  date when the                                                               
decision actually came out. And if  you give them that, then they                                                               
would like  to have  six years…because once  a period  closes and                                                               
the statute of limitations has  run, everybody agrees that that's                                                               
it. If there's anything later  turns out that was not paid-unless                                                               
there was fraud-it can't be reopened."                                                                                          
CHAIR HUGGINS said, "We owe you an answer."                                                                                     
SENATOR WAGONER said, "That's the  exact scenario explained to us                                                               
MS. CROCKETT continued  with her conclusion on page  15. She said                                                               
SB2001 fails two  of the three standards for  evaluating the tax,                                                               
while PPT  passes two  of them  and would pass  the third  if the                                                               
agency  adopts the  appropriate regulations.  SB2001 worsens  the                                                               
overall  tax  climate;  can't be  administered  efficiently;  and                                                               
doesn't allow  a taxpayer to pay  the correct amount of  tax when                                                               
it becomes do, which will destroy  the value of the remaining tax                                                               
incentives. If investors  cannot tell what they  owe, they cannot                                                               
put a reliable figure on  the value of the incentives. Production                                                               
has  declined  and  she  has   shown  the  committee  the  purely                                                               
mathematical  results about  how long  it is  before hitting  the                                                               
TAPS  mechanical  threshold.  Alaska  is fortunate  to  have  the                                                               
Oooguruk  project on  the horizon.  Half  of Alaska's  production                                                               
will come from  new oil needing additional  investment. AOGA's 17                                                               
member companies  unanimously agree that SB2001  does not provide                                                               
a framework for encouraging that additional investment.                                                                         
4:00:10 PM                                                                                                                    
SENATOR  WAGONER referred  to Steve  Porter's testimony  where he                                                               
said companies  were not as  worried about  the tax rate  as they                                                               
are worried about increased state spending with no fiscal plan.                                                                 
MS. CROCKETT  said he's  half right.  Business is  concerned that                                                               
the state  doesn't have a  fiscal plan, but "we're  worried about                                                               
both," she said.                                                                                                                
SENATOR  WIELECHOWSKI  asked  if  she's  seen  modeling  for  the                                                               
projected production decline  under PPT vs. ACES.  He stated that                                                               
he  understands  the  argument that  increasing  government  take                                                               
decreases  the incentives  for  investment, but  he  asked for  a                                                               
model that would show how the decline would speed up.                                                                           
MS. CROCKETT said it is  impossible to prove what future projects                                                               
won't be taken. It's the decision  making that is impacted by the                                                               
tax rate. "The correlation isn't there."                                                                                        
SENATOR  WIELECHOWSKI said  that's the  problem; he  is making  a                                                               
decision  in a  vacuum. "If  the decline  would be  instead of  6                                                               
percent, maybe  it would  be 7  percent, but  the take  to Alaska                                                               
increases substantially. That would be  something I would want to                                                               
know." He suggested that any producer would want that analysis.                                                                 
MR. WILLIAMS  said the  6 percent decline  was under  ELF; that's                                                               
the empirical  evidence. Large projects in  this decade flattened                                                               
that out, but  from 1990 through 1999, it was  6 percent, and now                                                               
it's back to 6 percent. It's 8 percent for Cook Inlet.                                                                          
SENATOR WIELECHOWSKI  said it  was 6 percent  under ELF,  and PPT                                                               
was designed to increase investment.                                                                                            
MR.  WILLIAMS  said the  6  percent  decline  is there.  The  PPT                                                               
appears to  have increased  the level of  investment to  slow the                                                               
decline. People are  hoping to add barrels to  the production and                                                               
slow the decline rate  from 6 to 5, 4 or  "whatever they are able                                                               
to  do." You  see investment  is up,  but it's  too early  to see                                                               
barrels coming out of the ground, he stated. The PPT is new.                                                                    
4:06:18 PM                                                                                                                    
SENATOR  WAGONER said  at  700,000  barrels a  day,  a 6  percent                                                               
decline would be 42,000 barrels.  Ms. Crockett said last year in-                                                               
field drilling was bringing another 70,000 barrels.                                                                             
MR. WILLIAMS  said the decline for  Prudhoe Bay is 9  percent, so                                                               
adding satellites slows the decline.                                                                                            
SENATOR WAGONER  said he is  dealing with  total numbers, so  a 6                                                               
percent decline would  mean only 42,000 barrels. He  asked for an                                                               
4:08:13 PM                                                                                                                    
CHAIR HUGGINS  asked him to figure  it out later and  said AOGA's                                                               
collective   voice    will   add    some   efficiency    to   the                                                               
administration's communications.                                                                                                
4:08:30 PM                                                                                                                    
PAUL LAIRD,  General Manager,  Alaska Support  Industry Alliance,                                                               
described the  alliance as a  trade organization  that represents                                                               
companies  and  individuals  providing   goods  and  services  to                                                               
Alaska's oil,  gas, and mining industries,  including small local                                                               
contractors,  Native  Corporations,  and subsidiaries  of  multi-                                                               
national service companies.                                                                                                     
MR.  LAIRD said  alliance  members don't  make the  multi-billion                                                               
dollar  investments  in oil  and  gas  development-they make  the                                                               
investments work. He said his  members are deeply concerned about                                                               
constant changes  in fiscal policy  that put some  investments at                                                               
risk. He doesn't  know what tax rate, escalators,  and credits is                                                               
the right  balance to ensure that  the state gets its  fair share                                                               
of  oil revenues  and encourages  long-term  investment. He  said                                                               
nobody knows. The  first returns of the current  tax haven't been                                                               
audited so there is no evidence that it is broken.                                                                              
MR.  LAIRD   said  there  was   little  proof  behind   the  many                                                               
projections. The  PPT has generated  an additional $1  billion in                                                               
revenues. The increase  that's proposed would be  the third major                                                               
severance  tax   increase  in  three  years.   "Every  dollar  in                                                               
additional  taxes  is   a  dollar  that  won't   be  invested  in                                                               
sustaining  production, in  creating  business opportunities  for                                                               
Alaska  companies, like  alliance  members,  in generating  good-                                                               
paying private sector jobs for  Alaskans." He said through-put in                                                               
the  trans-Alaska pipeline  has  declined  by two-thirds  despite                                                               
multi-billion  dollar investments  by the  industry. Without  the                                                               
investments, TAPS will  reach its economic threshold  in the next                                                               
15 or 20 years, instead of the next 50 or 60 years.                                                                             
MR.  LAIRD said  his  members  want to  be  here  long after  the                                                               
administration's consultants  are gone. "They'll  be the  ones to                                                               
bear the consequences if higher  taxes and higher costs really do                                                               
result in less  investment-a novel economic concept  to be sure."                                                               
The  tax will  do nothing  to  encourage new  oil production  and                                                               
construction  of  a gas  project.  He  suggested this  discussion                                                               
should be  about ensuring "our  fair share of long-term  jobs and                                                               
business opportunities  for Alaskans,  rather than how  much more                                                               
money  we can  extract from  the private  sector without  further                                                               
risking  our long-term  future." The  PPT calls  for a  review in                                                               
2011 to see how and if it  is working. It will take several years                                                               
to responsibly make that determination.  He suggested hiring more                                                               
auditors to  make the PPT work  and authorizing the state  to buy                                                               
back more  credits, but,  on behalf of  his members  and Alaska's                                                               
economic future, he  told the committee to reject  changes to the                                                               
PPT that  will increase  taxes that  jeopardize the  economics of                                                               
critical long-term investments and put production at risk.                                                                      
4:14:46 PM                                                                                                                    
CHAIR HUGGINS said there are  35,000 of them who have high-paying                                                               
jobs, "and  I thank  you for  the verbiage  here because  I think                                                               
it's one  of those  that each of  us need to  read more  than one                                                               
time and realize  that we just can't blindly  go doing something,                                                               
extracting  money…we know  that  bureaucracies and  taxes can  be                                                               
onerous and sometimes  just for the sake of…we  extract money out                                                               
of  the private  sector  and we  just  spend it  willy-nilly…like                                                               
drunken sailors…but  I will  read this again,  and I  respect you                                                               
very much  for your perspective…and I  hope that the rest  of our                                                               
legislative body does that."                                                                                                    
4:16:08 PM                                                                                                                    
JOHN  SHIVELY,  President,  Resource Development  Council  (RDC),                                                               
said the  RDC includes  businesses, Native  corporations, unions,                                                               
local governments and individuals.                                                                                              
CHAIR HUGGINS asked about his previous experience.                                                                              
MR.  SHIVELY  said  he  was  chief of  staff  for  Governor  Bill                                                               
Sheffield  and  the  commissioner   of  natural  resources  under                                                               
Governor Tony Knowles.                                                                                                          
CHAIR HUGGINS said  it is important to recognize  the Mr. Shively                                                               
has served Alaska in multiple capacities.                                                                                       
MR. SHIVELY  said this  tax review  has ramifications  beyond the                                                               
oil  industry.  He senses  growing  pessimism  from the  business                                                               
community about Alaska's future.  That is because virtually every                                                               
major resource  industry is under  attack. He noted  forestry and                                                               
then said to look at  what's happening with Kensington [mine]. He                                                               
said there  is a mining  initiative that would assure  that there                                                               
would be  no more mines.  The environmental community says  no to                                                               
coal.  The   fishing  industry  is   facing  some  of   the  same                                                               
challenges.  Environmental  groups  have  closed  vast  areas  to                                                               
fishing and  they provide misinformation about  Alaska fishing to                                                               
try to reduce  the income of Alaska's fishing  industry. "Does it                                                               
sound familiar  to you?" His  own industry, the  cruise industry,                                                               
is  still assessing  the  economic impacts  of  an initiative  by                                                               
Alaska voters. These things worry the business community.                                                                       
4:19:37 PM                                                                                                                    
MR. SHIVELY said there were  102,000 students in Alaska's schools                                                               
in 1988 and  133,000 in 1999-a respectable growth.  But from 2000                                                               
to 2006  the number flattens or  declines. "That's not a  sign of                                                               
growth."  In the  last 11  years, out-migration  prevailed for  8                                                               
years. Juneau  has a huge inventory  of houses on the  market and                                                               
value is decreasing.  Anchorage has an increase  in inventory and                                                               
a  decrease in  building. Agrium  closing is  another thing  that                                                               
worries  the business  community. The  gasline, which  is a  huge                                                               
part  of  Alaska's economic  future,  was  recently described  as                                                               
uneconomic  by  a consultant.  "Many  people  are looking  for  a                                                               
bridge, right now, to get us  from being reliant primarily on oil                                                               
to  having  gas that  also  helps  support  our economy  and  our                                                               
MR. SHIVELY said  he was told that geology was  in the rocks, and                                                               
you can't  do anything  about the  rocks. "And  unfortunately for                                                               
us,  the rocks  haven't  been very  kind  recently." "We  haven't                                                               
found a lot of  oil, so we're looking at trying  to deal with the                                                               
existing fields  and putting  substantial investments  into those                                                               
fields." Even with  those investments, there has  been a decline.                                                               
He said  to think  about the  time Alaska  had a  personal income                                                               
tax. If  it was  still the  primary driver  of state  revenue and                                                               
provided  a surplus,  he asked  if  the legislature  would be  in                                                               
special session  to raise the  tax. "I  suspect not." That  is an                                                               
issue "that's often lost here, and  it's one of the things that's                                                               
really bothered me about the debate  on this tax, and that is the                                                               
fact that tax is not the  way you show ownership, otherwise local                                                               
governments would  own all  of our houses.  Tax is  a sovereign's                                                               
right to get a fiscal benefit  to pay for government." He said he                                                               
believes there  is suppose to  a tension between  raising revenue                                                               
and providing services.                                                                                                         
4:23:58 PM                                                                                                                    
MR. SHIVELY  said this discussion  is happening without  a fiscal                                                               
plan for  the state.  He has things  he believes  the legislature                                                               
could do to start giving  the business community confidence. "The                                                               
easiest being  the establishment of  the percent of  market value                                                               
approach to  distributing money from  the permanent fund,  but we                                                               
don't hear  any discussion  at all,  anywhere, about  that." It's                                                               
wrong, he said, and it  makes the business community nervous. The                                                               
tax  debate is  amusing because  the  perfect tax  will never  be                                                               
found. Taxes  are just one  variable. From a public  policy point                                                               
the  legislature must  decide  how  to approach  it.  He said  to                                                               
decide on the conservative side since there is a surplus.                                                                       
SENATOR  STEDMAN said  Alaska has  a fiscal  plan. There  are $40                                                               
billion in  the Alaska permanent  fund, and  he hopes it  will be                                                               
more when  the state  needs to  rely on it.  There is  about $2.5                                                               
billion in the CBR [Congressional  Budget Reserve] to cushion the                                                               
state through the  fiscal gap. "We, in the last  couple of years,                                                               
put $400  million forward for  future capital budgets so  when we                                                               
have an implosion in the oil  prices we can have a capital budget                                                               
to push  the economy through the  dip." There is $300  million or                                                               
maybe $1  billion in  surplus in 2008  that will  be appropriated                                                               
into forward budgets. "We've put  $930 million forward for school                                                               
funding." It  is accurate to say  the legislature has not  made a                                                               
decision  between  income tax,  sales  tax,  and drawing  on  the                                                               
permanent fund,  but it  is a premature  decision. If  assets are                                                               
administered  prudently-the   problem  is   the  growth   of  the                                                               
operating  account--with  luck the  gap  to  the gasline  can  be                                                               
bridged without an  income or sales tax. If Alaska  can get there                                                               
without  taking from  the permanent  fund, it  will be  the first                                                               
state "to be  sitting on a virtual endowment that  would allow us                                                               
to run in  perpetuity." Saying Alaska doesn't have  a fiscal plan                                                               
is a nice sound bite, but it can't be further from the truth.                                                                   
4:28:32 PM                                                                                                                    
MR. SHIVELY said  Alaska has assets, which is  another reason not                                                               
to raise  taxes. There  are problems with  all those  assets, and                                                               
the business community doesn't know how they'll be spent.                                                                       
SENATOR STEVENS asked how to come close to a fair share.                                                                        
MR.  SHIVELY  said  finding  a  fair share  is  not  the  way  to                                                               
determine tax policy. That's an  ownership issue and that's where                                                               
the  debate has  gotten off  center. Government  generally raises                                                               
taxes for  services it needs to  pay for. "Here, we  sorta almost                                                               
do it backwards; we  try to go out and get as  much revenue as we                                                               
can…and then we go out and figure  out how we can spend the money                                                               
and if we're going to save any."                                                                                                
4:30:55 PM                                                                                                                    
SENATOR  WIELECHOWSKI said  he appreciates  the  dialog, but  the                                                               
constitution requires  the maximum benefit to  Alaskans. "That is                                                               
what  our mandate  is."  It's called  a tax,  but  it's what  the                                                               
market bears  for Alaska's oil. If  the market should bear  a few                                                               
hundred  million more  or less,  "then,  to me,  that's what  the                                                               
constitution means: maximum benefit for Alaskans."                                                                              
MR. SHIVELY  said maximum benefit can  be defined in a  number of                                                               
ways. The benefit  traditionally comes from the  royalties. It is                                                               
debatable whether  the constitution  considered taxes to  be part                                                               
of that.  If the  legislature makes a  mistake, then  there isn't                                                               
maximum benefit from the resources.                                                                                             
SENATOR WIELECHOWSKI noted that the  mistake could be made in the                                                               
other  direction, and  the state  could end  up in  a $3  billion                                                               
deficit in 2015.                                                                                                                
SENATOR WAGONER  said Alaska also has  a lot of debt.  "We owe $5                                                               
to $6 billion  to the CBR and  another $8 to $10  to the PERS/TRS                                                               
problem. A list of assets and liabilities isn't a fiscal plan.                                                                  
SENATOR STEDMAN  relayed that the  finance committee  will review                                                               
the amount  of debt the state  is carrying next session.  The PPT                                                               
was about getting a fair share.                                                                                                 
4:35:22 PM                                                                                                                    
SENATOR WAGONER  said the  intent of  PPT was  to get  a pipeline                                                               
with a certainty on oil and gas taxes--not to get a fair share.                                                                 
MR. SHIVELY said  just because two administrations  have used the                                                               
term "fair share" doesn't mean it is the right term.                                                                            
CHAIR HUGGINS noted that Mr.  Shively said the timber industry is                                                               
gone. "I  recall in finance  we allocated money to  ocean rangers                                                               
with the  assurance it would  paid back…and  I read in  the paper                                                               
today…not  going  to make  it-revenue's  not  going to  meet  the                                                               
bill." Governments don't  get things right most of  the time. The                                                               
permanent fund is  one it got right. He  said this administration                                                               
is  at the  helm  when Agrium  and Mat-Maid  are  going away.  He                                                               
mentioned a fish processing plant  in Anchorage that is now owned                                                               
by a  church. "The  point-it appears  in retrospectively,  if you                                                               
look at the  wisdom exercised by the state, you  could be suspect                                                               
on a number  of occasions. There are probably  some great success                                                               
stories." He said  PERS is a huge problem. The  state is facing a                                                               
dilemma for power generation. He  said the legislature has a very                                                               
compressed timeframe to come to  a conclusion without durability.                                                               
He said he is  wasting time because it can be  done later, and he                                                               
would rather work on a gasline.                                                                                                 
The committee recessed 4:39:13 PM.                                                                                            
6:17:12 PM                                                                                                                    
CHAIR HUGGINS called  the meeting back to  order. Senators Green,                                                               
McGuire, Stevens, and Huggins were  present at the call to order.                                                               
All other members showed up shortly thereafter.                                                                                 
DONALD  BENSON, Palmer,  said the  oil and  gas tax  needs to  be                                                               
reexamined to restore the public trust  and to bring a fair share                                                               
for future generations.  He said 72 percent of  the public polled                                                               
by  a  news service  said  Alaskans  weren't getting  their  fair                                                               
share.  The  public  lacks confidence.  Everyone  needs  to  work                                                               
together. The  current corruption cases  have smeared all  of the                                                               
good names  of hardworking  legislators. Their  confidence should                                                               
be restored by revisiting the  PPT. Legislators' decisions should                                                               
be  based  on  what  is  best for  Alaska,  rather  than  private                                                               
interests. Alaskans  are ready  to take back  Alaska to  the days                                                               
before  the oil  companies  influenced some  of the  legislature.                                                               
Follow the will of Alaskans by passing ACES, he concluded.                                                                      
6:19:56 PM                                                                                                                    
SENATOR  STEVENS  asked if  he  wants  taxes  raised on  the  oil                                                               
MR. BENSON said he listened  to petroleum representatives and the                                                               
administration, and  he feels  that oil  companies have  the best                                                               
accountants in the  world. ACES gives them even more  of a chance                                                               
to write off  their North Slope expenditures, so  he isn't saying                                                               
this is a tax increase.                                                                                                         
6:21:03 PM                                                                                                                    
CHAIR HUGGINS  said the  legislature is  wading through  it seven                                                               
days a week.                                                                                                                    
6:21:40 PM                                                                                                                    
JERRY  MCCUTCHEON,  Anchorage,  said   taxes  are  far  too  low.                                                               
Increasing the state's percentage  will decrease federal take. He                                                               
said  that Dr.  Van Meurs  testified that  the state  should take                                                               
more,  and that  the  revenue  from PPT  and  ACES declines  with                                                               
increasing oil  prices. "And  they thought  that was  stupid; the                                                               
state's  percentage   should  increase."   Dr.  Van   Meurs  said                                                               
government take of  75 to 85 percent is usual  and customary, and                                                               
a take  of 90 to 95  percent is not unusual.  Some countries take                                                               
98 percent, and  still the oil companies show up.  The gross take                                                               
from  Alaska's oil  should  approach 90  percent.  A contract  on                                                               
North  Star was  a little  over  90 percent  when oil  was $18  a                                                               
barrel.  "Those were  willing  bids-nobody held  a  gun to  their                                                               
heads." Both Van  Meurs and Johnston pointed out  that the threat                                                               
of the  oil companies leaving Alaska  may not be a  bad thing. It                                                               
might  be  in the  state's  best  interest  if  some of  the  oil                                                               
companies did  leave. He remarked  that the FBI  hadn't completed                                                               
its investigation. He urged them to  adopt a gross tax and modify                                                               
it  after  the  investigation  is completed.  [The  end  of  this                                                               
testimony was not decipherable.]                                                                                                
6:25:23 PM                                                                                                                    
LOWELL HUMPHREY, Anchorage,  said he is opposed SB  2001. He said                                                               
the  proposed  changes  will  not  increase  oil  production.  It                                                               
punishes the industry  for the investments it has  made under the                                                               
PPT. It  dramatically increases the  taxes for the third  time in                                                               
five years-"and  for what purpose?"  He said he has  six children                                                               
and is  concerned about  their future. For  the state  economy to                                                               
prosper, production  must be encouraged.  It's not wrong  for the                                                               
oil industry to  make a lot of money; the  state is also gaining.                                                               
He said  the increased revenue  from ACES  will not be  saved for                                                               
the future. Increased production  increases job opportunities and                                                               
saves for future generations.                                                                                                   
6:28:02 PM                                                                                                                    
CHRIS HUMPHREY,  Anchorage, said  he is the  son of  the previous                                                               
testifier  and he  has three  children. Now  is not  the time  to                                                               
raise  taxes.  We  must  encourage  production.  PPT  might  need                                                               
adjustments in the operating mechanics  to make sure there are no                                                               
loopholes.  The  review  in  2011  is  the  appropriate  time  to                                                               
consider  major modifications  based  on  performance data.  More                                                               
will be  known about the gas  pipeline as well. The  bigger focus                                                               
should be on  making the PPT perform and making  the gas pipeline                                                               
a reality.  No matter how  it is packaged, increasing  taxes will                                                               
impact future  investment. Without billions of  dollars in annual                                                               
investments, oil  production will  decline. The state  should pay                                                               
its fair  share for  developing the resources  with a  stable and                                                               
competitive tax structure as one way to share in those costs.                                                                   
6:29:54 PM                                                                                                                    
DAVID  LAWER, Senior  Vice President  and General  Council, First                                                               
National Bank of  Alaska, Anchorage, said his bank  has 750 full-                                                               
time  employees. It  is self-insured,  pays retirement  benefits,                                                               
and donates  to charitable and  community organizations.  It paid                                                               
$4 million in state corporate taxes  and more $1 million in other                                                               
taxes. It  serves small  businesses, not  oil producers.  But the                                                               
bank's success  and the employees'  well-being are  directly tied                                                               
to the  economic development that  comes with the  oil producers'                                                               
development in  Alaska. Shell  Oil's exploration  and development                                                               
activities were  halted by  the Ninth  Circuit Court  of Appeals,                                                               
which caused  it to postpone investment  in a facility of  one of                                                               
his  customers. "That's  money our  customer expected  to use  to                                                               
repay  money  he  borrowed from  First  National  Bank."  Another                                                               
customer  had  arranged  construction  financing  to  pay  for  a                                                               
building to  lease to  Shell Oil  who decided  not to  commit the                                                               
lease.  The  same  thing  will  happen  if  the  other  producers                                                               
voluntarily halt  exploration by  reasons of increased  costs and                                                               
taxes. No one  is saying that raising taxes will  cause the major                                                               
producers  to abandon  Alaska, "but  all of  us can  come to  the                                                               
logical  conclusion  that  an  increase  in  taxes…combined  with                                                               
ongoing increase in  the cost of exploration  and production will                                                               
have an adverse  impact on investment decisions." No  one can say                                                               
if  the PPT  will  increase exploration  in  Alaska. "The  policy                                                               
decision  to be  made is  whether  the current  tax regime,  PPT,                                                               
should  be  given  time  to  operate  to  see  if  it  encourages                                                               
investment  in  oil  exploration  and  production  in  Alaska  or                                                               
whether it can be amended in such a way to ensure that result."                                                                 
6:34:11 PM                                                                                                                    
SENATOR STEVENS asked if he preferred a gross or net tax.                                                                       
MR.  LAWER  said  a  gross  tax has  no  advantage  in  promoting                                                               
development, but a net tax offers that possibility.                                                                             
6:34:52 PM                                                                                                                    
JOE MATHIS,  Owner, Montana Creek Campground,  Anchorage, said he                                                               
and  his wife  have seven  employees.  They also  manage a  state                                                               
park.  A  business owner  needs  certainty  in  taxes. He  had  a                                                               
damaging flood and has  faced a high cost of fuel.  He has seen a                                                               
huge  decline in  travelers  to Alaska  arriving  from the  Alcan                                                               
Highway.   These  risks   are  nothing   compared  to   what  the                                                               
legislature  is contemplating.  Alaska can't  afford the  risk of                                                               
discouraging future  investment when 50 percent  of production in                                                               
ten years will  come from new oil. More information  is needed on                                                               
how PPT is  working. He doesn't recommend  making decisions based                                                               
on emotion and  rhetoric. Alaska should be  focused on increasing                                                               
oil  production.  If  investments  are  slowed,  the  decline  in                                                               
production will  increase to 15 percent.  Increased taxation will                                                               
not stimulate  the economy. It  will not improve the  business in                                                               
his  campground. In  the  past  year there  have  been more  than                                                               
enough  negatives  that  have consumed  the  public  process  and                                                               
diverted energy  from long-term economic issues.  He would rather                                                               
be testifying  on a long-term fiscal  plan. It is a  good time to                                                               
encourage  small independent  oil  companies to  come to  Alaska.                                                               
"I'm  sure that  they now  have a  wait-and-see attitude.  If you                                                               
start changing  the rules again, it  will be a long,  long wait."                                                               
He  doesn't think  the state  can  survive this  third change  in                                                               
6:39:22 PM                                                                                                                    
WILLIAM  HARVEY, Anchorage,  said  he built  roads  years ago  in                                                               
Savoonga where  contractors talked about how  the legislature was                                                               
controlled  by  the  oil  industry.  He spoke  of  the  high  oil                                                               
industry profits and  suggested simply putting a  meter in Valdez                                                               
and then taxing the oil by volume.                                                                                              
6:41:07 PM                                                                                                                    
RANDY SELMAN, Wasilla, said he worked  on the North Slope when he                                                               
came to Alaska in 1983. It has been  very good to him. The PPT is                                                               
not tainted.  All taxes  are a burden  on every  capital project,                                                               
and projects  need to compete  with every other project.  The PPT                                                               
may need some  administrative improvements, but he  is against an                                                               
increase in  taxes. Alaska can't  afford to lose a  single future                                                               
barrel, and raising taxes jeopardizes  that potential. Keep taxes                                                               
as low as possible in order to compete on the world oil market.                                                                 
6:43:51 PM                                                                                                                    
CHAIR  HUGGINS  said he  and  Senator  Green  wish they  were  in                                                               
Wasilla with him.                                                                                                               
6:44:16 PM                                                                                                                    
TOM LAKOSH said he is an Alaskan citizen representing himself                                                                   
and he read from the following written testimony:                                                                               
My  alternative to  ACES is  called TRIPS,  Taxes, Royalties  and                                                               
Infrastructure for  the Petroleum Sector. There  are some, albeit                                                               
few,  sections  of  ACES  that  would be  useful  but  the  basic                                                               
principles  at work  that require  a wholesale  reworking of  the                                                               
Bill are:                                                                                                                       
   · Virtually all oil bearing structures on state lands have                                                                   
     been explored so there's little reason to provide                                                                          
     incentives to the industry to explore where they have                                                                      
     already exploited everything they could. BP made this clear                                                                
     in their statement that 70% of their future investment                                                                     
     would be in the greater Prudhoe area where they are                                                                        
    obligated to wisely extract the hydrocarbons pursuant to                                                                    
    the applicable leases and AOGCC guidelines. If producers                                                                    
     don't provide full and efficient extraction in the                                                                         
     operation plans submitted to the Division of Oil and Gas,                                                                  
    leases may be subject to revocation and "there's always                                                                     
     other fish in the sea". We should not give existing                                                                        
     producers kickbacks where they're obligated to do the job                                                                  
     properly and within technological feasibility and economic                                                                 
     limits under their existing lease contracts and applicable                                                                 
     law. With the price of oil above $80 there should be little                                                                
    left to recover in our legacy fields and we must demand                                                                     
     that the ADOG conduct the mandated evaluations of the                                                                      
     economic feasibility of heavy oil extraction now while we                                                                  
    still have light oil to mix into TAPS shipments and the                                                                     
    price is still high enough to warrant extraction without                                                                    
   · If absolutely necessary, we can subsidize production of                                                                    
    hydrocarbons that are difficult to develop by adjusting                                                                     
     royalty rates instead of taxes. This would allow for lease                                                                 
     by lease evaluation that is clearly more sensible than the                                                                 
     broad subsidies to all operations. The royalty rates apply                                                                 
    to gross production so the 19% range I've suggested has                                                                     
     more than enough value available to provide incentive for                                                                  
    development of heavy oils and remote gas should existing                                                                    
     lessees submit, or new lessees sign on, to the new adjusted                                                                
     royalty rates that express the relative accessibility and                                                                  
     marketability of specific lease types at specific distances                                                                
     from established infrastructure.                                                                                           
  · The testimony clearly enforced the principle that "if you                                                                   
     build it they will come". Angola got a $1 billion for its                                                                  
    leases and rabid global competition because the oil co's                                                                    
    knew there was oil to develop. If there's oil/gas to be                                                                     
     found, the state should find it and define the field before                                                                
     it puts out leases so it can garner the highest bids among                                                                 
     many competitors. The state would also be better able to                                                                   
     predict development, classify fields to establish proper                                                                   
     royalty rates and determine appropriate deadlines for                                                                      
     relinquishment. The more we improve information on                                                                         
     prospective fields and insure access, the less we need                                                                     
     speculators that demand high rates of return. When we                                                                      
     eliminate the discovery and access impediments we                                                                          
     essentially only need contractors to build the production                                                                  
     facilities and pump the oil as regulated by ADNR and AOGCC.                                                                
  · If we have to subsidize the industry we should do it in a                                                                   
     way that benefits other businesses and public interests.                                                                   
     Taking money from royalties to improve transportation to                                                                   
    the fields/pipelines floats everybody's boat. The heavy                                                                     
     lift helicopters and low impact transport would also reduce                                                                
     tundra impacts, allow a longer exploration season and year                                                                 
     round deliveries to isolated drilling/production pads. They                                                                
     would also be extremely effective tools for getting spill                                                                  
     response equipment to remote sites and help repair global                                                                  
     warming damage in remote areas that is directly caused by                                                                  
     the oil we peddle.                                                                                                         
   · Our economic future through 40 - 60 years depends on our                                                                   
     ability to market gas and the gas will not be marketable                                                                   
     until the relative BTU value of gas approaches the price of                                                                
     oil BTUs, (PVM said it was at 40% of oil because Northern                                                                  
    Tier coal companies successfully marketed their coal to                                                                     
     power plants). The relative BTU value of gas can only be                                                                   
     increased by de-valuing coal as a power plant fuel with a                                                                  
     federal carbon tax. The carbon tax would also likely save                                                                  
     us as much in damages to infrastructure from global warming                                                                
     as we would make on oil exports, billions and billions in                                                                  
     prevented damage that we wouldn't have to spend our revenue                                                                
     on to mitigate.                                                                                                            
   · Providing tax incentives to explore on federal land will                                                                   
     mostly provide returns for the federal gov't, leaving us                                                                   
    with enormous development bills and not much revenue to                                                                     
     show for it.                                                                                                               
  · The least impact to exploration on federal land/OCS can be                                                                  
     accomplished by increasing the corporate income tax on                                                                     
     hazardous operations because an increase in state corporate                                                                
     tax is used as a direct offset to federal income taxes so                                                                  
     there' no net increase in taxes on the oil co's. This tax                                                                  
     will affect new fields and existing fields that we've been                                                                 
     getting a raw deal on, (i.e. the 90/10 vs 50/50 split,                                                                     
     justice w/o a court).                                                                                                      
   · If we allow the oil co's to write off their Alaskan                                                                        
     expenses it would tend to increase the price of our                                                                        
    hydrocarbons and make them less competitive on the open                                                                     
     market. Taxes do have an effect on corporate behavior and                                                                  
    only taxing the gross at the point of export or in-state                                                                    
     delivery will serve to keep a market check on expenditures                                                                 
    in-state and therefore keep our hydrocarbons as cheap as                                                                    
     possible in the market. We would surely have a strong case                                                                 
     for upholding the gross tax where it measured value IN                                                                     
     ALASKA. Both PPT and ACES are inviting fly by might                                                                        
    wildcatters that will sell their credits and leave. The                                                                     
     majors will be just as susceptible to the notion that                                                                      
    spending controls are less of a priority given that they                                                                    
    can sell the credits for marginal projects if they fail.                                                                    
     Why not just take the money we'd spend on credits and                                                                      
     provide the needed oversight to exploration contractors we                                                                 
     hire on a competitive bid?                                                                                                 
  · The whole TRIPS scheme is designed to enhance certainty of                                                                  
     development, (pre-defined leases and improved access),                                                                     
    while alleviating risk due to low prices but eliminating                                                                    
     any windfalls to industry, (the progressive production tax                                                                 
    spanning a $190 price range). Although I haven't done a                                                                     
     precise analysis of the total government take, I strongly                                                                  
     suspect that these rates would keep us below the Norwegian                                                                 
     standard of 78% up to about $70-$90/bbl and I would suggest                                                                
    lowering the base production tax and/or raising the new                                                                     
     class of corporate income tax until this parity was                                                                        
     reached. I'm sure that the Norwegians never anticipated the                                                                
     blistering oil market we have today and so did not include                                                                 
     progressivity. The gas problem can only be rectified with a                                                                
     carbon tax and then all else will be controlled by the                                                                     
     high, stable gas value generated by a proper valuation of                                                                  
     this external cost of our hydrocarbon economy. More                                                                        
     stringent particulate regulation would also likely help gas                                                                
Production  Taxes:  The gross  tax  on  hydrocarbons produced  in                                                           
Alaska  shall be  set at  the value  of the  hydrocarbons at  the                                                               
Alaskan terminus of export or  point of sale within Alaska, (e.g.                                                               
Valdez Marine Terminal for TAPS oil,  Drift River or KPL Dock for                                                               
Cook Inlet  oil and gas,  at the Canadian  border in the  case of                                                               
gas transport by  pipeline, at any in-state refinery  or point of                                                               
sale), in  order to  provide a market  check on  production costs                                                               
and   pipeline   tariffs   in   furtherance   of   the   relative                                                               
competitiveness of Alaskan resources.  This tax system would also                                                               
encourage  export  of  value   added  petrochemical  and  refined                                                               
products. The tax rates for crude oil are as follows:                                                                           
  1. There shall be a minimum PT of 15% of gross value for oil                                                                  
     prices between $0 and $20/bbl;                                                                                             
   2.  At $21/bbl the PT increases to 15.5% and increases by a                                                                  
    rate of 0.5% for each $1/bbl increase in price to $30 ;                                                                     
   3. At a price of $31/bbl the PT shall be raised to 20.2% of                                                                  
     gross value and shall increase at a rate of 0.2% for each                                                                  
     $1 in value per barrel until a price of $110/bbl at which                                                                  
     point the tax will have accumulated increases to provide a                                                                 
     rate of 36% of value;                                                                                                      
   4. At a price of $111/bbl the PT shall be assessed at 36.1% of                                                               
     value and shall increase at a rate of 0.2% for each $1 in                                                                  
     value per barrel until a price of $210/bbl at which point                                                                  
    the production tax will have reached its maximum rate of                                                                    
     46% of value.                                                                                                              
Corporate Income  Tax: A distinct  class of  Alaskan corporations                                                           
shall   include   those   operations  that   handle   substantial                                                               
quantities  of hydrocarbons  and  other  hazardous materials,  as                                                               
classified by the ADEC, and be  subject to a corporate income tax                                                               
of  14%.  The  safety  and security  issues  presented  by  these                                                               
operations  require significant  oversight,  security and  public                                                               
safety  assets  that  warrant  an  enhanced  level  of  corporate                                                               
classification in such regard.                                                                                                  
Royalty  Rates:  Lease  bidders  will  proffer  a  signing  bonus                                                           
payment  and  a bid  above  an  adjustable royalty  floor/minimum                                                               
established  between 1%  for  the  least marketable  hydrocarbon,                                                               
(e.g. inaccessible,  undefined gas fields),  to a maximum  of 20%                                                               
for the  highest wellhead value hydrocarbon,  (e.g. well defined,                                                               
light and  accessible liquids such  as those at  Point Thompson).                                                               
Each lessee  shall consent to  an adjustment of its  royalty rate                                                               
every  5  years  after  production   startup  that  reflects  any                                                               
increase or decrease  in the market valuation of  the BTU content                                                               
of the  hydrocarbon(s) under development and/or  by a substantial                                                               
improvement in  accessibility of  leased properties  as generated                                                               
by   state  efforts.   Lessees   shall   provide  all   necessary                                                               
information needed to  assess the relative BTU  values of Alaskan                                                               
Hydrocarbon   Exploration,   Production   and   Transport   Lease                                                           
Provisions: All  new leases shall have  relinquishment provisions                                                           
that  reflect  the  realistic  development  timelines  given  the                                                               
difficulty  perfecting   necessary  permitting   and  development                                                               
tasks. All  lessees consent to  regulation and assistance  by the                                                               
ADEC  to effectively  utilize and  otherwise  abate or  sequester                                                               
greenhouse gases released  by exploration, production, transport,                                                               
power  generation and  refinery  operations  associated with  its                                                               
leases. Lessees  shall proportionately supply all  necessary fuel                                                               
for state  aircraft and  vehicles used  to assist  and administer                                                               
lessees' operations.                                                                                                            
Exploration  Commitment: In  order to  exact the  highest signing                                                           
payments and  royalty bids  and to provide  for a  most efficient                                                               
and  predictable development  of Alaska's  hydrocarbon resources,                                                               
the ADNR  will commit  to obtaining  the services  of exploration                                                               
experts, whether  contracted or employed, with  the most advanced                                                               
geologic mapping  and analysis  capability to  define hydrocarbon                                                               
resources to  their greatest practicable extent  prior to leasing                                                               
of hydrocarbon fields to enhance "prospectivity".                                                                               
Infrastructure  Commitment: The  ADOT in  an MOU  with DNR  shall                                                           
employ  all due  diligence in  coordinating interested  state and                                                               
federal agencies  to develop,  subsidize or  otherwise facilitate                                                               
transportation  of   exploration  and  production   materials  to                                                               
proposed  leasing  areas  and  for   access  of  gas  by  Alaskan                                                               
communities.  A dedicated  4% portion  of total  royalty payments                                                               
shall be set aside for  this Safe Transport Development fund. The                                                               
ADOT  shall minimally  provide heavy  lift helicopters  and other                                                               
low impact  vehicles to advance preservation  of sensitive areas,                                                               
enhance spill  response, protect  wildlife and  maintain security                                                               
in leasing areas as training  for their primary public safety and                                                               
security  duties  that shall  include  repair  and prevention  of                                                               
Global  Warming  impacts  across  Alaska.  The  ADOT  shall  also                                                               
advance planning  and construction of ports,  port services, rail                                                               
systems and  pipelines necessary  to promote  efficient materials                                                               
transport  along  established  Alaskan  transport  corridors  and                                                               
extensions along the AGIA certified ROW(s).                                                                                     
Carbon Conservation  Commitment: The  state shall employ  all due                                                           
diligence with appropriate funding  of legislative and regulatory                                                               
efforts  to establish  in state  and federal  law establishing  a                                                               
transferable carbon tax and to additionally advance CO                                                                          
sequestration  and  secondary  utilization, methane  capture  and                                                               
abatement,    and   Arctic-appropriate    carbon-neutral   energy                                                               
generation  technologies using  a dedicated  4% portion  of total                                                               
royalty   payments.   The    ADEC   shall   develop   regulations                                                               
establishing  a  carbon   tax,  appropriate  emissions  standards                                                               
and/or  other   carbon  limiting  constraints   upon  hydrocarbon                                                               
lessees.  The  ADEC  shall  conduct  the  necessary  analyses  to                                                               
establish abatement  technology standards and  pursue advancement                                                               
of the  best available technologies  with a bi-annual  $3 million                                                               
grant funding that may accumulate  beyond the $3 million level to                                                               
ensure appropriate funding of  appreciably superior and effective                                                               
CHAIR HUGGINS asked him to fax his proposal to the committee.                                                                   
6:52:40 PM                                                                                                                    
MARY NORDALE, Fairbanks, said one  of her concerns with PPT stems                                                               
from  when she  was  commissioner of  the  Department of  Revenue                                                               
(DOR)  from 1983  to  1986.  The 12  years  of unresolved  audits                                                               
representing about $8 million were  the biggest problem. Auditing                                                               
was  overwhelming because  DOR  and the  Department  of Law  were                                                               
under staffed, under  equipped, and not well  enough trained. PPT                                                               
is far more  complicated and would require  adequate resources in                                                               
the agencies to insure it generates the appropriate revenue.                                                                    
6:55:36 PM                                                                                                                    
CHUCK LOGSDON, Alaska Oil and  Gas Association (AOGA), said he is                                                               
concerned  about  falling  production and  increasing  taxes.  He                                                               
spoke  of  the  ELF  being   regressive,  and  now  it  is  still                                                               
regressive at  the low  prices but more  progressive at  the high                                                               
prices.  "Heads--revenue  goes  up; tails--revenue  goes  up."  A                                                               
serious problem with the proposed  changes is the ring-fencing of                                                               
the legacy  fields. It  creates administrative  inefficiency. The                                                               
legacy fields  have the  most challenged  resources and  the high                                                               
floor rate  will be counterproductive. Basically  every dollar of                                                               
tax reduces  a dollar  of producer investment.  The PPT  made the                                                               
system   more  sensitive   to  the   upside.  High   profits  are                                                               
significant incentives  to reinvest in  Alaska. He urged  them to                                                               
be  careful in  weighing  the balance  between  picking up  state                                                               
revenue now and future economic development.                                                                                    
7:01:01 PM                                                                                                                    
MAYNARD TAPP, Anchorage, said the  state will raise more taxes by                                                               
increasing  production. The  state gets  75 percent  of the  12.5                                                               
percent  royalty. The  fair share  to  Alaskans is  the other  25                                                               
percent paid  into the permanent  fund. He has a  consulting firm                                                               
and much of  his work has to do with  the trans-Alaskan pipeline,                                                               
and he  and his  employees benefit from  new production.  He said                                                               
raising the tax would give  the state money that the corporations                                                               
could use  for three  new production wells.  He would  rather see                                                               
the  tax  lowered  to  10  or 20  percent  to  make  Alaska  more                                                               
competitive with  Canada and  the Gulf  of Mexico.  He recognized                                                               
that we are partners with the  producers. He said the bill should                                                               
be a development  bill not a tax-generation bill.  "Alaska is big                                                               
oil. We are partners with  the producers." Alaska's fair share is                                                               
created by jobs. His company is Hauke Consultants.                                                                              
7:05:16 PM                                                                                                                    
TOM WALSH,  Oil and Gas  Industry Consultant,  Anchorage, Alaska,                                                               
said  his  clients  include major  oil  companies,  independents,                                                               
Native corporations, and government  agencies. "We provide a wide                                                               
variety  of services."  He  is worried  about  his employees  and                                                               
about the future of oil and  gas business in Alaska. The proposed                                                               
tax increase is a threat to  oil and gas development. His company                                                               
does  commercial  analysis of  oil  and  gas opportunities,  "and                                                               
we've been  doing this  a lot  lately." His  clients say  the tax                                                               
structure  is  a  key  factor  in  marginalizing  their  prospect                                                               
economics,  and the  legislation will  worsen the  situation. The                                                               
companies  are  doing their  homework  on  looking at  plans  and                                                               
economics, and  they are finding  their projects don't  work with                                                               
escalating  costs and  tax increases.  He has  recently lost  two                                                               
clients who were  discouraged by the business  climate in Alaska.                                                               
"This trend, we believe, will  continue and will accelerate as we                                                               
continue  to be  burdened by  greed and  paranoia rather  than by                                                               
rational management of our resources."                                                                                          
MR. WALSH said  spending or saving taxes is not  a clear strategy                                                               
and  he  implored the  committee  to  develop  a fiscal  plan  to                                                               
determine  what services  the state  should provide  to Alaskans.                                                               
The current tax  structure is working, he said.  A company report                                                               
of the  impact of liquid  production on  the major fields  of the                                                               
North  Slope pointed  out that  the declining  liquid hydrocarbon                                                               
production  would likely  become  sub-economic  before a  gasline                                                               
could be  built. This  would be disastrous  for the  industry and                                                               
the state.  We are  headed in a  direction of  suffering greatly.                                                               
"We  should  be  trying  to  compete for  more  interest  in  our                                                               
resources rather than for a greater share of a shrinking pie."                                                                  
7:09:04 PM                                                                                                                    
SENATOR WIELECHOWSKI asked  if he thought the PPT  was working if                                                               
his  clients  are  leaving  the   state  under  the  current  tax                                                               
MR. WALSH replied  that he thought PPT is too  burdensome, "and I                                                               
think the reason for that is  that I don't believe we really know                                                               
what level  of taxation  is required to  provide services,  and I                                                               
just don't think  that we ought to be taxing  to create a surplus                                                               
simply for the fact that we can tax at a higher rate."                                                                          
SENATOR WIELECHOWSKI  noted that there is  conflicting testimony,                                                               
and he is concerned that companies are leaving under PPT.                                                                       
MR. WALSH said  he knows of two companies that  have left because                                                               
the tax is  too burdensome. "I don't know whether  they feel that                                                               
there's a  way around that  in the future, or  what, but it  is a                                                               
huge concern to them…their number one concern."                                                                                 
SENATOR WIELECHOWSKI asked who they are.                                                                                        
MR. WALSH said one company was  looking at a marginal prospect in                                                               
the  interior  basin  and  there   was  no  help  available  with                                                               
incentives. The tax structure was  driving the project to be sub-                                                               
SENATOR THOMAS joined the committee.                                                                                            
7:12:11 PM                                                                                                                    
JOSEPH HEGNA, Vice  President, Oil and Gas  Sector, MWH Americas,                                                               
Inc. said his company is  a global construction company with over                                                               
6000 employees in 30 countries,  including Anchorage. "We're very                                                               
bullish about the oil and  gas business," and the company intends                                                               
to invest  in Alaska,  Calgary, the Front  Range of  the Rockies,                                                               
and the  Gulf of  Mexico. It will  follow investment  dollars. He                                                               
said he  is excited to  grow his sector of  MWH, and he  has four                                                               
sons  getting  into  the  professional world.  The  PPT  was  put                                                               
together to  fix problems with ELF  and enable a gas  project. We                                                               
don't have  a gas project and  yet the tax is  being changed. One                                                               
reason is  the cloud [of  political corruption] and the  other is                                                               
that PPT  needs to be fixed.  "I think honestly that  you do have                                                               
to step  forward and remove  that cloud;  you do need  to restore                                                               
trust." He doesn't  know how to do that. He  doesn't believe [the                                                               
PPT] is broken.  He has 35,000 employees that are  members of the                                                               
Alliance  and he  is proud  of  Paul Liard's  testimony. PPT  has                                                               
already generated  $1 billion in  state revenues - "That's  a lot                                                               
of  money,  folks."  The Trans  Alaska  Pipeline  throughput  has                                                               
declined by  two thirds.  So, there  isn't enough  investment and                                                               
that won't be fixed by fooling around with the tenets of PPT.                                                                   
7:16:15 PM                                                                                                                    
LYNN  JOHNSON,  CEO  and  Co-Founder,  Dowland-Bach  Corporation,                                                               
Anchorage,  said  his  corporation   is  an  Alaskan-based  niche                                                               
manufacturing company  with 25 employees.  He said 71  percent of                                                               
its revenue  is derived from  the oil  and gas industry.  He said                                                               
his  payroll spins  off  about  $1.6 million  per  year into  the                                                               
Anchorage economy. He said Dowland-Bach  got the 2002 exporter of                                                               
the year award. He said he  is the past president of the Alliance                                                               
and a  staunch RDC member. He  said he is president  of the board                                                               
of the Alaska's Red Cross. He  said non-profits depend on the oil                                                               
industry  for  donations.  He  urged  the  committee  to  proceed                                                               
cautiously and  give PPT a little  more time to see  if it works.                                                               
He said  the tweaking  of taxes  sends a bad  message, and  it is                                                               
hard to know when they go too  far. The gas line is further away,                                                               
and federal  funding is on the  decrease. He has two  kids and he                                                               
would like them to return to Alaska after college.                                                                              
7:21:16 PM                                                                                                                    
MR. JOHNSON  said people in  Southeast and Kodiak think  they are                                                               
not affected by  the industry. He said a lot  of revenue from the                                                               
oil industry  goes to  the state.  "If our  tax revenue  drops to                                                               
zero, I would say that  the marine highway system…is obviously at                                                               
risk."  He  said  to  take  the long  view  and  don't  look  for                                                               
immediate  gratification. Businesses  with shareholders  can't do                                                               
that, but  he has  been fortunate to  be able to  do that  in his                                                               
business.  He suggested  bridging the  decline in  oil until  the                                                               
state can get to the  gas pipeline with continued investment. "We                                                               
do have  a surplus-that's been  stated many times  today-take the                                                               
long view-encourage investment-our future depends on it."                                                                       
7:22:55 PM                                                                                                                    
CHAIR HUGGINS  said he appreciates  the reminder to take  a long-                                                               
term  perspective. Americans'  natural tendency  is to  deal with                                                               
things when bumped  into, and what the committee is  doing now is                                                               
a  knee-jerk reaction  based on  questionable data,  at best.  He                                                               
said his son  is going to demolition school and  will be going to                                                               
The committee  took an  at-ease at 7:24:37  PM until  7:27:07 PM.                                                           
The committee adjourned at 7:27:12 PM.                                                                                        

Document Name Date/Time Subjects