Legislature(2005 - 2006)HOUSE FINANCE 519

04/06/2006 08:30 AM House FINANCE


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08:39:05 AM Start
08:39:13 AM HB488
09:53:19 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ HCR 30 AK CLIMATE IMPACT ASSESSMENT COMMISSION TELECONFERENCED
<Bill Hearing Postponed to 1:30 PM Today>
+ HB 105 MEDICAID FOR ADULT DENTAL SERVICES TELECONFERENCED
<Bill Hearing Postponed>
+ HB 412 TUITION WAIVERS:MILITARY/POLICE/FIRE TELECONFERENCED
<Bill Hearing Postponed>
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= HB 307 KNIK RIVER PUBLIC USE AREA TELECONFERENCED
<Bill Hearing Postponed to 1:30 PM Today>
+= HB 493 SCHOOL CONSTRUCTION BOND REIMBURSEMENT TELECONFERENCED
<Bill Hearing Postponed to 1:30 PM Today>
+= HB 488 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
                  HOUSE FINANCE COMMITTEE                                                                                       
                       April 6, 2006                                                                                            
                         8:39 a.m.                                                                                              
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  Chenault   called  the  House   Finance  Committee                                                                    
meeting to order at 8:39:05 AM.                                                                                               
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Mike Chenault, Co-Chair                                                                                          
Representative Kevin Meyer, Co-Chair                                                                                            
Representative Bill Stoltze, Vice-Chair                                                                                         
Representative Richard Foster                                                                                                   
Representative Mike Hawker                                                                                                      
Representative Jim Holm                                                                                                         
Representative Reggie Joule                                                                                                     
Representative Mike Kelly                                                                                                       
Representative Beth Kerttula                                                                                                    
Representative Carl Moses                                                                                                       
Representative Bruce Weyhrauch                                                                                                  
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Marianne   Kah,  Chief   Economist,  ConocoPhillips-Houston;                                                                    
Barry  Pulliam, Senior  Economist,  Econ  One Research;  Dan                                                                    
Dickinson, Consultant, Tax  Division, Department of Revenue;                                                                    
Angus Walker,  Commercial Vice President,  British Petroleum                                                                    
-  Alaska; Dr.  Tony Finizza,  Special Consultant,  Econ One                                                                    
Research; David Bramley,  Vice President, CRA International;                                                                    
Representative Ethan Berkowitz                                                                                                  
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
None                                                                                                                            
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
                  Round Table Discussion                                                                                      
                                                                                                                                
HB 488    "An Act  repealing the oil production  tax and gas                                                                    
          production tax and providing for a production tax                                                                     
          on the net  value of oil and gas;  relating to the                                                                    
          relationship  of  the   production  tax  to  other                                                                    
          taxes;  relating to  the  dates  tax payments  and                                                                    
          surcharges  are due  under AS  43.55; relating  to                                                                    
          interest on overpayments  under AS 43.55; relating                                                                    
          to the treatment of oil  and gas production tax in                                                                    
          a  producer's settlement  with the  royalty owner;                                                                    
          relating to  flared gas, and  to oil and  gas used                                                                    
          in the operation of a  lease or property, under AS                                                                    
          43.55; relating to the prevailing  value of oil or                                                                    
          gas  under AS  43.55;  providing  for tax  credits                                                                    
          against  the tax  due under  AS 43.55  for certain                                                                    
          expenditures, losses, and  surcharges; relating to                                                                    
          statements  or other  information  required to  be                                                                    
          filed  with  or  furnished to  the  Department  of                                                                    
          Revenue, and  relating to the penalty  for failure                                                                    
          to file certain reports,  under AS 43.55; relating                                                                    
          to the  powers of  the Department of  Revenue, and                                                                    
          to the disclosure  of certain information required                                                                    
          to  be furnished  to  the  Department of  Revenue,                                                                    
          under  AS 43.55;  relating  to criminal  penalties                                                                    
          for violating  conditions governing access  to and                                                                    
          use  of confidential  information relating  to the                                                                    
          oil  and  gas  production  tax;  relating  to  the                                                                    
          deposit of  money collected  by the  Department of                                                                    
          Revenue   under   AS   43.55;  relating   to   the                                                                    
          calculation  of the  gross value  at the  point of                                                                    
          production  of   oil  or  gas;  relating   to  the                                                                    
          determination of the net value  of taxable oil and                                                                    
          gas for  purposes of a  production tax on  the net                                                                    
          value of oil and  gas; relating to the definitions                                                                    
          of  'gas,'  'oil,'  and certain  other  terms  for                                                                    
          purposes   of   AS    43.55;   making   conforming                                                                    
          amendments; and providing for an effective date."                                                                     
                                                                                                                                
          HB 488 was heard and HELD in Committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
8:39:13 AM                                                                                                                    
                                                                                                                                
HOUSE BILL NO. 488                                                                                                            
                                                                                                                                
     "An  Act  repealing  the oil  production  tax  and  gas                                                                    
     production tax  and providing for  a production  tax on                                                                    
     the  net  value  of  oil   and  gas;  relating  to  the                                                                    
     relationship  of the  production  tax  to other  taxes;                                                                    
     relating to  the dates tax payments  and surcharges are                                                                    
     due   under  AS   43.55;   relating   to  interest   on                                                                    
     overpayments under AS 43.55;  relating to the treatment                                                                    
     of  oil   and  gas  production  tax   in  a  producer's                                                                    
     settlement with  the royalty owner; relating  to flared                                                                    
     gas, and  to oil  and gas  used in  the operation  of a                                                                    
     lease  or property,  under AS  43.55;  relating to  the                                                                    
     prevailing  value  of  oil  or   gas  under  AS  43.55;                                                                    
     providing for tax credits against  the tax due under AS                                                                    
     43.55   for    certain   expenditures,    losses,   and                                                                    
     surcharges;   relating    to   statements    or   other                                                                    
     information required  to be filed with  or furnished to                                                                    
     the Department of Revenue, and  relating to the penalty                                                                    
     for failure  to file  certain reports, under  AS 43.55;                                                                    
     relating to  the powers of  the Department  of Revenue,                                                                    
     and to  the disclosure of certain  information required                                                                    
     to be furnished to the  Department of Revenue, under AS                                                                    
     43.55;  relating to  criminal  penalties for  violating                                                                    
     conditions governing access to  and use of confidential                                                                    
     information  relating to  the  oil  and gas  production                                                                    
     tax; relating to the deposit  of money collected by the                                                                    
     Department of  Revenue under AS 43.55;  relating to the                                                                    
     calculation  of  the  gross   value  at  the  point  of                                                                    
     production   of   oil   or   gas;   relating   to   the                                                                    
     determination of the  net value of taxable  oil and gas                                                                    
     for purposes  of a production  tax on the net  value of                                                                    
     oil  and gas;  relating  to the  definitions of  'gas,'                                                                    
     'oil,'  and  certain other  terms  for  purposes of  AS                                                                    
     43.55; making conforming  amendments; and providing for                                                                    
     an effective date."                                                                                                        
                                                                                                                                
Co-Chair  Chenault introduced  the  speakers  for the  round                                                                    
table discussion.   He  summarized the  PPT process  so far.                                                                    
He  noted  that  each  oil  corporation  has  had  a  little                                                                    
different opinion on the proposed tax.                                                                                          
                                                                                                                                
8:42:16 AM                                                                                                                    
                                                                                                                                
Co-Chair Chenault read the first question for the PPT                                                                           
panel:                                                                                                                          
                                                                                                                                
     1. Legislators took  an oath to maximize  the return on                                                                    
     resources for  the benefit  of Alaskans.   What  do you                                                                    
     believe is  the best  proposal to maximize  this return                                                                    
     while  at  the  same time  encouraging  investment  and                                                                    
     exploration  to  extend  the  production  life  of  our                                                                    
     oil/gas resources?                                                                                                         
                                                                                                                                
8:42:49 AM                                                                                                                    
                                                                                                                                
DAN  DICKINSON,  CONSULTANT,  TAX  DIVISION,  DEPARTMENT  OF                                                                    
REVENUE,  began by  challenging the  basis of  the question.                                                                    
He  opined that  encouraging investment  and exploration  to                                                                    
extend  the production  life  of oil  and  gas resources  is                                                                    
maximizing the  benefit of our  resources for  all Alaskans.                                                                    
He suggested that the governor's  bill does that and strikes                                                                    
the best balance.   It is important to account  for the long                                                                    
term as well as the short term.                                                                                                 
                                                                                                                                
ANGUS WALKER,  COMMERCIAL VICE PRESIDENT,  BRITISH PETROLEUM                                                                    
-  ALASKA, responded  that  barrels in  the  ground have  no                                                                    
value, so  production and investment  need to  be maximized.                                                                    
The  lowest tax  rate would  be best  for Alaska  because it                                                                    
would  stimulate investment.    He maintained  that a  15/25                                                                    
structure  would be  better than  a  20/20 structure,  which                                                                    
would be better than a 20/25 structure.                                                                                         
                                                                                                                                
8:44:24 AM                                                                                                                    
                                                                                                                                
MARIANNE  KAH, CHIEF  ECONOMIST,  CONOCOPHILLIPS -  HOUSTON,                                                                    
agreed  with Mr.  Walker, but  added that  a lower  tax rate                                                                    
combined  with  tax  credits  would   do  the  best  job  of                                                                    
maximizing production, investment, and revenues.                                                                                
                                                                                                                                
BARRY   PULLIAM,  SENIOR   ECONOMIST,  ECON   ONE  RESEARCH,                                                                    
responded that maximizing investment  for investment sake is                                                                    
not the  goal.  The ultimate  goal is to maximize  the value                                                                    
of  the  resource.   If  you  only maximize  production  and                                                                    
investment, there would not be a  tax or a royalty.  As Econ                                                                    
One  views   the  proposals,   20/20  does   not  discourage                                                                    
investment.                                                                                                                     
                                                                                                                                
8:47:20 AM                                                                                                                    
                                                                                                                                
DR.  TONY FINIZZA,  SPECIAL CONSULTANT,  ECON ONE  RESEARCH,                                                                    
echoed Mr.  Pulliam's comments.   He  opined that  there are                                                                    
enough incentives  for the new  fields.  He thought  the ELF                                                                    
tax was not  onerous and movements from it  would not stifle                                                                    
investment.                                                                                                                     
                                                                                                                                
Mr.  Walker  responded  that  PPT   is  not  investment  for                                                                    
investment sake, but to stem  the 6 percent per year decline                                                                    
of  Alaska North  Slope oil  production.   In  10 years  the                                                                    
production and  revenue will  be half of  what it  is today.                                                                    
This is a  matter of great importance for  Alaska because it                                                                    
is  about  getting  investment  to  Alaska  to  develop  the                                                                    
barrels on the North Slope that are difficult to develop.                                                                       
                                                                                                                                
Ms.  Kah   added  to  the   comment  about   investment  for                                                                    
investment sake.  Just providing  tax credits and incentives                                                                    
for  new players  to  come in  for  new exploration,  versus                                                                    
supporting  more  production  from existing  fields,  sounds                                                                    
like investment for investment sake.   To maximize the value                                                                    
of investment,  the industry should  get more  reserves from                                                                    
existing fields,  particularly heavy  oil.  She  pointed out                                                                    
that the 20/20  proposal is a 17-23 percent  increase in the                                                                    
government  take  and   is  bound  to  have   an  impact  on                                                                    
investment.                                                                                                                     
                                                                                                                                
8:50:21 AM                                                                                                                    
                                                                                                                                
Co-Chair Meyer requested Econ One's response to Ms. Kah.                                                                        
                                                                                                                                
Mr.  Pulliam stated  that the  increase would  be only  a 4-                                                                    
percentage  point increase  in  government take.   At  lower                                                                    
prices the  take would be even  lower.  Ms. Kah  agreed.  He                                                                    
addressed  the intent  of  the  bill, which  is  to reach  a                                                                    
balance and keep  investment going.  He  suggested that even                                                                    
at higher prices, the take is  not out of line in comparison                                                                    
to the  industry in  the rest  of the  world.   He suggested                                                                    
that Mr. Johnston could comment further.                                                                                        
                                                                                                                                
8:51:57 AM                                                                                                                    
                                                                                                                                
Dr.  Finizza observed  that when  he first  came to  Alaska,                                                                    
major producers agreed to a 20/20  tax, so he thought it was                                                                    
not  too  onerous, but  a  reasonable  starting point.    He                                                                    
advised not going higher than that.                                                                                             
                                                                                                                                
8:52:47 AM                                                                                                                    
                                                                                                                                
DAVID BRAMLEY,  VICE PRESIDENT, CRA  INTERNATIONAL, referred                                                                    
to Slide 91  from Econ One's presentation  yesterday.  Price                                                                    
projections  at  $52.7  per  barrel  show  calculations  for                                                                    
government  take  figures  go  from  54.4  percent  to  62.3                                                                    
percent.    He  highlighted Alaska's  competitive  position.                                                                    
The  step  proposed by  Econ  One  is  a  step from  a  high                                                                    
government take to an even higher  one.  He pointed out that                                                                    
his company's  view is  pessimistic.   He termed  this trend                                                                    
very onerous with a negative impact on investment.                                                                              
                                                                                                                                
8:54:39 AM                                                                                                                    
                                                                                                                                
Mr.  Pulliam said  when you  look at  those take  figures at                                                                    
$52.7, at real prices, in  time, with 2.5 percent inflation,                                                                    
the prices are high.                                                                                                            
                                                                                                                                
Mr. Walker said it important  to remember that what has been                                                                    
proposed  in the  new CS  and  in the  governor's bill  will                                                                    
create  the highest  tax rate  in  the United  States for  a                                                                    
state that has the highest  cost structure.  He disputed the                                                                    
idea that  if the producers agreed  to it, it must  be good.                                                                    
He emphasized that  the agreement was part  of a negotiation                                                                    
as a steppingstone  to gas.  He reiterated that  it would be                                                                    
better for Alaska to have a lower tax rate.                                                                                     
                                                                                                                                
8:56:31 AM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer pointed  out that  the  legislators take  an                                                                    
oath of  office to maximize  returns to citizens.   He noted                                                                    
that  at Kuparuk  the tax  rates went  down and  investments                                                                    
went up.   Pioneer is trying to decide whether  to invest in                                                                    
Alaska  or Texas.   He  suggested  improving regulatory  and                                                                    
permitting  processes.   He  asked  if  there would  be  any                                                                    
difference, from  the investor's point of  view, between the                                                                    
various tax rates.                                                                                                              
                                                                                                                                
Mr. Walker repeated the statement,  "The lower the tax rate,                                                                    
the  more investment.   The  higher the  tax rate,  the less                                                                    
investment."                                                                                                                    
                                                                                                                                
Co-Chair Meyer asked if oil  price would impact the decision                                                                    
about tax  rate.  Ms. Kah  noted that most of  the remaining                                                                    
reserves are  in small  fields and in  heavy oil  outside of                                                                    
ANWR.    She  suggested  that  is  why  there  is  not  more                                                                    
investment  today.   The  effect of  lowering  the tax  rate                                                                    
would  make a  marginal field  more economic  and result  in                                                                    
more investment.                                                                                                                
                                                                                                                                
8:59:40 AM                                                                                                                    
                                                                                                                                
Mr. Dickinson agreed  with Mr. Walker's "the  lower the tax"                                                                    
statement.   He  said people  are faced  with a  competitive                                                                    
situation and  with a limited  capital budget.   He wondered                                                                    
if dropping the  tax would create a window.   Dr. Van Meurs'                                                                    
work suggests  that investment  is more  likely with  the 20                                                                    
percent  PPT, but  there will  not  be a  dramatic shift  in                                                                    
investment opportunities.                                                                                                       
                                                                                                                                
9:00:50 AM                                                                                                                    
                                                                                                                                
Mr. Bramley pointed out a  statistic that over the last five                                                                    
years, for every  $1 invested in exploration,  more than $10                                                                    
has been invested  in known reserves.  The reason  has to do                                                                    
with  the   underlying  prospectivity.    When   looking  at                                                                    
investment  attractiveness, there  is  a  concern about  the                                                                    
extent of  focus on exploration.   He  found it hard  to see                                                                    
that  new exploration  would be  more  prospective than  old                                                                    
exploration.      Changing   the   balance   of   investment                                                                    
attractiveness between investment  and development, in favor                                                                    
of investment,  does not seem  the sensible  way to go.   To                                                                    
contemplate  a tax  system focused  on  incentives does  not                                                                    
make sense.                                                                                                                     
                                                                                                                                
Co-Chair  Meyer referred  to a  graph produced  by Econ  One                                                                    
with  scenarios of  18/10  and  19/15.   He  noted that  the                                                                    
government  take does  not  differ so  much  from the  20/20                                                                    
scenario, with  the price of  oil between  $35 and $60.   He                                                                    
suggested  18/10   and  wondered  if  that   would  be  more                                                                    
beneficial to existing producers  and less attractive to the                                                                    
independents  and  explorers.   Mr.  Pulliam  addressed  the                                                                    
credit   mechanism    in   the   bill,    which   encourages                                                                    
reinvestment.   Producers would like  a lower tax  rate, but                                                                    
also  a higher  credit.   He  suggested  that the  producers                                                                    
would not view it as better.                                                                                                    
                                                                                                                                
9:04:48 AM                                                                                                                    
                                                                                                                                
Mr. Walker  responded that the  credit mechanism in  the PPT                                                                    
bill  is of  the least  concern because  it is  powerful and                                                                    
appropriate.  The tax rate is of most concern.                                                                                  
                                                                                                                                
Mr.  Dickinson said  that  at today's  prices  the tax  rate                                                                    
overwhelms the  effect of the  credit, but at  lower prices,                                                                    
the  two  strike a  better  balance.  At medium  prices  the                                                                    
credits  become   a  significant  portion  of   the  overall                                                                    
economics.                                                                                                                      
                                                                                                                                
Mr. Pulliam maintained that the two work together.                                                                              
                                                                                                                                
Mr. Walker did  not disagreed with that.   He voiced concern                                                                    
for the very high tax rates.                                                                                                    
                                                                                                                                
9:06:41 AM                                                                                                                    
                                                                                                                                
Representative Holm  stated appreciation for  the discussion                                                                    
about tax  rates.   He requested  information about  how the                                                                    
price of the commodity affects investment in Alaska.                                                                            
                                                                                                                                
Ms.  Kah  replied   that  the  price  upside   is  of  great                                                                    
consideration.   If  that is  taken away  it is  of concern.                                                                    
She commented  that if prices  are high,  it is going  to be                                                                    
because  replacement  costs are  that  high.   The  upstream                                                                    
margin will not change that  much and costs will have caught                                                                    
up.                                                                                                                             
                                                                                                                                
9:08:59 AM                                                                                                                    
                                                                                                                                
Representative Kerttula  said that at the  current price the                                                                    
tax rate  is overwhelmed.   She asked  if we are  banking on                                                                    
the higher price.  Mr.  Dickinson clarified that the credits                                                                    
will reward  investment at  the same  amount no  matter what                                                                    
the  price.   He  provided  an example.    Banking needs  to                                                                    
create an environment that is pro-investment.                                                                                   
                                                                                                                                
Mr.  Walker responded  to Representative  Kerttula and  said                                                                    
that  everyone  is  banking  on higher  prices.    Price  is                                                                    
masking  the  real  issue   that  production  is  declining.                                                                    
British  Petroleum is  very concerned  about the  decline of                                                                    
prices.                                                                                                                         
                                                                                                                                
9:11:50 AM                                                                                                                    
                                                                                                                                
Co-Chair Chenault read question 2:                                                                                              
                                                                                                                                
     2. Econ One stated that 25/20  was better in a low rate                                                                    
     environment.    What  tax/credit rate  best  meets  the                                                                    
     balance between  government and  industry and  high and                                                                    
     low  prices?   Should we  consider a  two-tiered system                                                                    
     dependent on price?                                                                                                        
                                                                                                                                
Dr. Finizza said that is a  comment that came out of the new                                                                    
fields analysis  for low prices.   If  you look only  at new                                                                    
fields and the  EIA price distribution, the  20/20 is better                                                                    
for producers and brings in more  revenue for the state.  He                                                                    
suggested not having a high  tax rate at average prices, but                                                                    
rather at higher prices.                                                                                                        
                                                                                                                                
Ms.  Kah  commented  about  the economics  of  25/20.    She                                                                    
speculated that the  only reason it appears to  be better is                                                                    
because dry hole  costs are being subsidized.   She asked if                                                                    
the state  wants to  be in the  business of  subsidizing dry                                                                    
hole costs.                                                                                                                     
                                                                                                                                
Dr. Finizza  spoke to  dry hole costs,  a necessary  part of                                                                    
investment.  Ms.  Kah countered that was her point    a high                                                                    
success rate with known reserves.                                                                                               
                                                                                                                                
9:15:40 AM                                                                                                                    
                                                                                                                                
Representative Kerttula  pointed out that in  Norway a great                                                                    
deal of  credit was successfully  given.  Ms.  Kah commented                                                                    
about how  successful how  those credits  were.   Norway did                                                                    
not   see  the   increase   in  exploration   and  had   rig                                                                    
availability  problems.   The success  of  those credits  is                                                                    
debatable.                                                                                                                      
                                                                                                                                
Representative Holm  asked what  the rig availability  is in                                                                    
Alaska.  Mr.  Walker said he does not know,  but he observed                                                                    
that oil  is a  big industry  and it takes  time to  ramp up                                                                    
investment.   It is very  important to have a  fiscal policy                                                                    
to rely on.                                                                                                                     
                                                                                                                                
9:18:01 AM                                                                                                                    
                                                                                                                                
Representative Foster  spoke of  his air  service experience                                                                    
with fares  and taxes.   He wondered  if the  consumer would                                                                    
pay for  any operating increases  in costs.  Ms.  Kah agreed                                                                    
that in  a tight  supply and  demand environment,  costs get                                                                    
passed  to the  consumer.   She  gave an  example of  demand                                                                    
destruction from last  year.  Prices are  still high because                                                                    
of supply disruptions in places like Nigeria.                                                                                   
                                                                                                                                
Dr. Finizza generally agreed, but  commented that one cannot                                                                    
expect  the  same level  of  demand  as  prices rise.    Mr.                                                                    
Pulliam questioned  Ms. Kah's statement  that if  taxes rose                                                                    
in  Alaska, it  would cause  crude oil  prices generally  to                                                                    
rise.   Ms. Kah clarified  if the cost of  global production                                                                    
went  up,  that  will  happen.   Mr.  Pulliam  agreed.    He                                                                    
maintained  that what  happens in  Alaska will  not have  an                                                                    
effect on consumers around the world.                                                                                           
                                                                                                                                
9:21:04 AM                                                                                                                    
                                                                                                                                
Co-Chair Chenault read question 3:                                                                                              
                                                                                                                                
     3. Substantial discussion has occurred over the                                                                            
     progressivity surcharges in the House and Senate                                                                           
     bills.     Outstanding   issues   of  concern   include                                                                    
     inflation,  the  slope,  and  the cap.    What  do  you                                                                    
     consider  to  be  a reasonable  way  to  address  these                                                                    
     issues?                                                                                                                    
                                                                                                                                
Mr. Kah maintained  that the ideal solution would  be not to                                                                    
have  a windfall  profits tax.   If  there were  to be  one,                                                                    
inflation adjustment  is a must  because otherwise  it would                                                                    
make the  investment incentive go  away over time.   The cap                                                                    
would have to  be set high enough at a  relevant range.  The                                                                    
tax would  have to be set  wider and more upside.   It would                                                                    
have to  start the tipping point  at a much higher  level in                                                                    
order  to not  affect  investment.    It  would  need to  be                                                                    
capped it at a lower level in order to maintain investment.                                                                     
                                                                                                                                
Dr.  Finizza agreed  somewhat.   He suggested  a minimum  of                                                                    
indexing.   Mr. Pulliam  suggested taking increase  in costs                                                                    
into account  when looking  at progressivity,  otherwise the                                                                    
margin  between cost  production and  delivering the  oil to                                                                    
market,  relative to  the  price at  which  the trigger  for                                                                    
progressivity,  shrinks.   He  advocated  for the  threshold                                                                    
price to be adjusted annually.                                                                                                  
                                                                                                                                
Ms.  Kah asked  about cost  inflation increasing  beyond 2.5                                                                    
percent   general   inflation.     Mr.   Pulliam   suggested                                                                    
increasing it dollar  for dollar with increasing  costs.  He                                                                    
spoke to  the threshold  and where  it should  kick in.   He                                                                    
suggested that  one couldn't divorce progressivity  from the                                                                    
underlying  tax  rate.  If  the  tax  rate  is  higher,  the                                                                    
threshold should be  moved up.  A lower tax  rate allows for                                                                    
a higher slope.   He agreed with moving higher  into the $50                                                                    
range.  He concurred with the index level.                                                                                      
                                                                                                                                
9:25:22 AM                                                                                                                    
                                                                                                                                
Mr. Walker thought that if  progressivity were to be chosen,                                                                    
it needs to  be simple, balanced, and based  on the realized                                                                    
price  of crude  on  the  North Slope.    That  is what  the                                                                    
economics is based on.                                                                                                          
                                                                                                                                
Representative  Weyhrauch  thought  that   the  bill  had  a                                                                    
progressivity feature in it.  Ms. Kah agreed.                                                                                   
                                                                                                                                
Ms.  Kah,  in  response  to  a  question  by  Representative                                                                    
Weyhrauch, replied  that when a  certain cap is  reached the                                                                    
rate increase should be leveled  off.  Mr. Pulliam responded                                                                    
to a  question by  Representative Weyhrauch about  moving up                                                                    
the  threshold for  progressivity.    Mr. Pulliam  clarified                                                                    
that  he  was  talking  about  adjusting  the  threshold  in                                                                    
response to changes in cost.   Representative Weyhrauch said                                                                    
that agrees with Ms. Kah's  point on inflation.  Mr. Pulliam                                                                    
agreed  that   there  should  be  a   cap.    Representative                                                                    
Weyhrauch suggested finding specific language.                                                                                  
                                                                                                                                
Mr. Dickinson  pointed out that  there is a  real difference                                                                    
between   merely   acknowledging   general   inflation   and                                                                    
acknowledging  specific costs.    He spoke  to the  possible                                                                    
ranges.                                                                                                                         
                                                                                                                                
Dr. Finizza said it is possible  to have a decrease in costs                                                                    
from year to  year, which could change the  threshold in the                                                                    
other direction.   Mr. Dickinson  agreed.  Ms.  Kah referred                                                                    
to 20 years of cost decline.   Mr. Pulliam asked whether the                                                                    
state  is collecting  cost  information as  a  part of  this                                                                    
program.   Mr. Dickinson said yes.   Ms. Kah added  that the                                                                    
$20-$80  dollar range  is the  working range  ConocoPhillips                                                                    
uses.  She  emphasized that starting at $50  would result in                                                                    
a negative impact on investment.                                                                                                
                                                                                                                                
9:30:39 AM                                                                                                                    
                                                                                                                                
Representative  Hawker  asked  about progressivity  and  the                                                                    
windfall profits tax  approach.  He suggested  finding a way                                                                    
to  inflation-adjust  the  index.    He  wondered  if  other                                                                    
approaches to  progressivity should be taken  off the table.                                                                    
He questioned if  a gross receipts surtax should  be kept in                                                                    
place or a tax on the margins should be looked at.                                                                              
                                                                                                                                
Mr. Walker  replied that it  is a difficult question.   What                                                                    
is  on the  table  would create  an  unworkable outcome  for                                                                    
Alaska   and   would   not    serve   the   industry   well.                                                                    
Progressivity is not appropriate for  Alaska.  If it is part                                                                    
of  the final  solution, then  an option  based on  margins,                                                                    
which is  inflation-proofed and  balanced, should  be found.                                                                    
British Petroleum  does recognize  that there  are different                                                                    
ways to approach this.                                                                                                          
                                                                                                                                
9:34:25 AM                                                                                                                    
                                                                                                                                
Dr.   Finizza  suggested   that   progressivity  should   be                                                                    
addressed now.   Ms.  Kah repeated  that investment  will be                                                                    
impacted if the top is shaved off.  $50 is not high enough.                                                                     
                                                                                                                                
Representative Hawker  said he heard two  different opinions                                                                    
from   the  two   companies.     Ms.  Kah   emphasized  that                                                                    
ConocoPhillips  is  strongly  against the  windfall  profits                                                                    
tax.    Representative  Hawker  asked  for  Mr.  Dickinson's                                                                    
comments.                                                                                                                       
                                                                                                                                
9:36:29 AM                                                                                                                    
                                                                                                                                
Dan  Dickinson  responded, "The  flatter  the  better.   The                                                                    
further to the  right it starts, the better."   He mentioned                                                                    
when  cost   consideration  is  less   relevant.     In  the                                                                    
governor's proposal there is nothing addressing that.                                                                           
                                                                                                                                
Representative Hawker  asked if it  would be better  to keep                                                                    
progressivity on  a gross receipts surcharge  as a component                                                                    
of the state  income tax, rather than as a  component of the                                                                    
production tax.                                                                                                                 
                                                                                                                                
Mr. Dickinson replied  that he has not  thought through that                                                                    
point.  Representative  Hawker said he is  thinking in terms                                                                    
of simplicity.   If PPT is  worked out at a  flat rate, then                                                                    
it is easier to write  a gross-receipts calculation and tack                                                                    
it onto corporate income tax.                                                                                                   
                                                                                                                                
9:39:41 AM                                                                                                                    
                                                                                                                                
Mr. Pulliam  felt that mechanism,  which allows for  cost to                                                                    
increase, strikes  the right kind  of balance.   Mr. Bramley                                                                    
observed  that increasing  taxes would  bring a  lowering of                                                                    
investment.   He  added   that  complexity   would  not   be                                                                    
recommended.  The consequences are  hard to anticipate.  Mr.                                                                    
Pulliam noted  that one of the  goals is to move  the system                                                                    
into  a  more progressive  structure.    The old  system  is                                                                    
regressive.   The base PPT only  moves toward progressivity.                                                                    
The intent is to correct PPT to be more relevant.                                                                               
                                                                                                                                
9:43:39 AM                                                                                                                    
                                                                                                                                
Representative Kelly  noted that  the regressive  aspect can                                                                    
be changed later,  but is in place now. He  thought that the                                                                    
public might be confused about  when the rate increase kicks                                                                    
in.   There  are  three separate  elements.   Although  most                                                                    
folks are  going for  the net and  keeping it  simple, there                                                                    
are  good arguments  for the  other position.   He  stressed                                                                    
that it is not  just a tax.  The issue is  what the state is                                                                    
getting for  its oil.  The  market will adjust if  a mistake                                                                    
is made on the high side.                                                                                                       
                                                                                                                                
9:48:21 AM                                                                                                                    
                                                                                                                                
Mr. Walker  felt that gross  is an unworkable solution.   He                                                                    
reviewed the share between the  industry and the state as it                                                                    
moves to  the new system.   He explained what the  move from                                                                    
the existing  status quo to  the 20/20 proposal does  to the                                                                    
share.    Under the status quo at $60  per barrel, the state                                                                    
receives  32 percent,  the  federal  government receives  25                                                                    
percent, and the  industry receives 43 percent.   Under PPT,                                                                    
the state  share moves  from 32 to  40 percent,  the federal                                                                    
government  share  goes  from  25 to  22  percent,  and  the                                                                    
industry share goes from 43 to 38 percent.                                                                                      
                                                                                                                                
In  response to  a  question by  Representative Foster,  Mr.                                                                    
Walker observed  that there would a  substantial increase in                                                                    
tax,  which  would  result  in less  investment.    He  felt                                                                    
confident that there  could be an agreement  and movement on                                                                    
a gas pipeline.                                                                                                                 
                                                                                                                                
9:51:39 AM                                                                                                                    
                                                                                                                                
Co-Chair Chenault read question 4:                                                                                              
                                                                                                                                
     4. What issues are different when considering a                                                                            
     progressivity surcharge on gas?                                                                                            
                                                                                                                                
Ms. Kah  noted that the industry  doesn't like progressivity                                                                    
on anything,  but it is worse  on gas.  The  economics would                                                                    
be more  difficult.   Mr. Walker noted  that the  gas fiscal                                                                    
contract would  govern the  terms on the  North Slope.   The                                                                    
issue  is   appropriate  for  the   Cook  Inlet   and  other                                                                    
producers.                                                                                                                      
                                                                                                                                
9:53:19 AM                                                                                                                    
                                                                                                                                
Mr.  Dickinson  noted that  in  the  Cook Inlet,  Henry  Hub                                                                    
prices are  used to  index the gas,  while few  are actually                                                                    
getting  that price.    There are  many  contracts that  are                                                                    
lower priced than that.                                                                                                         
                                                                                                                                
Representative Kelly  asked if Cook  Inlet was taken  out of                                                                    
the equation,  if a "WTI/ANS-type comparison"  applies.  Ms.                                                                    
Kah stressed that  it is important to go back  to a wellhead                                                                    
value.  The  world's supply is getting more sour.   She said                                                                    
she expects  the differential between light  sweet crude and                                                                    
sour crudes to widen over time.   Over time, WTI is becoming                                                                    
an increasingly poor indicator for all of the world's                                                                           
crude.  There are similar issues for natural gas.                                                                               
                                                                                                                                
HB 488 was heard and HELD in Committee for further                                                                              
consideration.                                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 9:58 AM.                                                                                           

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