Legislature(2013 - 2014)BARNES 124

02/18/2013 01:00 PM RESOURCES


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01:03:31 PM Start
01:03:49 PM HB72
07:13:47 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued at 5:30 pm Today --
+= HB 72 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
Presentations by:
- Small Producers/Explorers
- Bradford Keithley
+ Bills Previously Heard/Scheduled TELECONFERENCED
                HB 72-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                                
1:03:49 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  announced that the  only order of  business would                                                               
be HOUSE  BILL NO.  72, "An Act  relating to  appropriations from                                                               
taxes paid under  the Alaska Net Income Tax Act;  relating to the                                                               
oil and  gas production  tax rate;  relating to  gas used  in the                                                               
state; relating  to monthly installment  payments of the  oil and                                                               
gas  production  tax; relating  to  oil  and gas  production  tax                                                               
credits for certain losses and  expenditures; relating to oil and                                                               
gas   production    tax   credit   certificates;    relating   to                                                               
nontransferable tax credits based  on production; relating to the                                                               
oil and  gas tax  credit fund; relating  to annual  statements by                                                               
producers and explorers; relating  to the determination of annual                                                               
oil and gas production tax  values including adjustments based on                                                               
a  percentage of  gross value  at  the point  of production  from                                                               
certain leases  or properties; making conforming  amendments; and                                                               
providing for an effective date."                                                                                               
                                                                                                                                
1:04:28 PM                                                                                                                    
                                                                                                                                
WILLIAM ARMSTRONG,  President, Armstrong Oil &  Gas, Inc., stated                                                               
the decline  curve of  the North  Sea, which  was similar  to the                                                               
decline of the  North Slope, was reversed in 1993  by a change in                                                               
tax laws.   He compared the North Slope of  Alaska to the Permian                                                               
Basin [Texas and  New Mexico] during the mid-1950s,  as they both                                                               
had about  5,500 wells, whereas  the Permian Basin now  had about                                                               
150,000 wells.   He offered  his belief  that the North  Slope of                                                               
Alaska could also support a similar number of oil wells.                                                                        
                                                                                                                                
1:07:11 PM                                                                                                                    
                                                                                                                                
MR.  ARMSTRONG  reported that  a  massive  oil  boom was  now  in                                                               
progress in the Lower 48,  including North Dakota, Texas, and New                                                               
Mexico.    He  declared  that  he  had  reviewed  the  PowerPoint                                                               
presentations by other  groups, and, although he had  been in the                                                               
oil  business for  30  years, he  still found  the  slides to  be                                                               
confusing.  So, he had decided  to have a discussion, rather than                                                               
present  a slide  show.   He shared  that, as  his was  a private                                                               
company, it  did not make press  releases or talk to  the public.                                                               
He said that he  was talking from the heart.   He opined that his                                                               
company  had a  unique  perspective  of Alaska,  as  it had  been                                                               
working in  Alaska for more than  12 years, and was  now the most                                                               
active independent  company in  the state.   He pointed  out that                                                               
three  of  the  most  recent   oil  developments  in  Alaska  had                                                               
originated  in his  company's  office.   Ten  years ago,  Pioneer                                                               
Natural  Resources had  partnered with  Armstrong Oil  & Gas  and                                                               
they  were currently  developing the  Oooguruk Island  Field, the                                                               
first  non-major, independent  company development  on the  North                                                               
Slope.   After  this, Armstrong  had  partnered with  ENI in  the                                                               
development of Nikaitchuq Field.   He reported that Armstrong was                                                               
the most active  exploration company on the North  Slope, and had                                                               
now  teamed up  with  Repsol on  a  multi-hundred million  dollar                                                               
exploration  program.   He stated  that Armstrong  had three  oil                                                               
rigs looking for new production  in new fields outside the Legacy                                                               
Fields.   He offered  his belief that  Armstrong was  the largest                                                               
lease holder in  Alaska, outside the Legacy fields.   He reported                                                               
that  Armstrong was  a  private  company, and  paid  for its  own                                                               
exploration, leases, engineering, and analysis.                                                                                 
                                                                                                                                
1:12:21 PM                                                                                                                    
                                                                                                                                
MR.  ARMSTRONG opined  that Armstrong  was  one of  the best  oil                                                               
finding  companies  in the  world,  explaining  that the  typical                                                               
business approach  was to  do all the  hard work,  including data                                                               
mining, geophysical,  and engineering, to find  what he described                                                               
as "the next  big idea."  He shared that,  although many of these                                                               
were dead  ends, if one  was worthwhile, Armstrong  would collect                                                               
all the leases,  buy the land, and then search  for partners.  He                                                               
noted  that,  as things  in  Alaska  were  so expensive,  it  was                                                               
necessary  to partner  with bigger,  more capitalized  companies.                                                               
He compared  his company to a  Chamber of Commerce for  the State                                                               
of Alaska,  as he  was constantly extolling  the benefits  of the                                                               
state.  He  reported that the common response to  Alaska was that                                                               
the state had  issues, and it was  often said to be  a state that                                                               
had oil but  was a terrible place  to make money, or  that it was                                                               
controlled  by ConocoPhillips  Alaska,  Inc., or  that the  rules                                                               
changed regularly for taxes, for  permitting, or for unitization.                                                               
He shared that  the most important comment he heard  was that the                                                               
state would take most all the profits.                                                                                          
                                                                                                                                
1:15:24 PM                                                                                                                    
                                                                                                                                
MR. ARMSTRONG declared there is an  absolute boom going on in the                                                               
Lower 48.   He  surmised that it  would single-handedly  pull the                                                               
U.S. out  of the current  morass.   He reported that  most states                                                               
had   similar  production   decline   problems,   but  with   the                                                               
advancements in technology,  horizontal drilling, and stimulation                                                               
techniques, most  states had  turned around  their declines.   He                                                               
emphasized   that    this   "boom   has    completely,   totally,                                                               
unequivocally skipped Alaska."   He stressed that  there was only                                                               
one number  to focus on  and that was  the number six,  which was                                                               
the rig count,  the number of rigs actively drilling  in a region                                                               
at any  one given  time.   He reported that  Alaska had  6 active                                                               
rigs, whereas Texas  had 819, North Dakota had  179, and Oklahoma                                                               
had  190.    He  exclaimed   that,  as  stewards  of  the  state,                                                               
legislators  had to  ask why  Alaska only  had six  rigs actively                                                               
drilling.  He declared that this was pathetic and anemic.                                                                       
                                                                                                                                
1:18:16 PM                                                                                                                    
                                                                                                                                
MR. ARMSTRONG  offered his  belief that  the answer  was obvious,                                                               
that Alaska had  to change on a number of  levels.  He emphasized                                                               
that  the most  important change  needed  to be  with the  fiscal                                                               
regime, which was  why his company supported proposed HB  72.  He                                                               
expressed that the  proposed bill was not perfect,  and needed to                                                               
be "tweaked  in a number  of ways, I  think, to make  it better."                                                               
He  pointed  out  that  things  were  always  going  to  be  more                                                               
expensive and slower  in Alaska.  He said that  the message could                                                               
be changed, however, and he stated "don't tell me, show me."                                                                    
                                                                                                                                
1:19:55 PM                                                                                                                    
                                                                                                                                
MR.  ARMSTRONG announced  that  oil and  gas  companies were  not                                                               
searching  for  oil  and  gas, they  were  searching  for  money;                                                               
therefore, the more money they made  and the faster they made it,                                                               
the better.   He relayed that "they're voting with  their feet in                                                               
this state,  and they're goin'  somewhere else."  He  pointed out                                                               
that many  opportunities still  existed for  oil drilling  on the                                                               
North Slope; however the  man-made investment framework inhibited                                                               
future exploration.                                                                                                             
                                                                                                                                
1:21:44 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE expressed  his agreement that proposed  HB 72 "was                                                               
a good starting  point."  He asked what could  be done to improve                                                               
the proposed bill and increase the rig count.                                                                                   
                                                                                                                                
MR. ARMSTRONG  offered his  belief that  the proposed  bill moved                                                               
clearly in the  right direction.  He recognized that  there was a                                                               
battle between  the three  major oil companies  and the  State of                                                               
Alaska, expressing  his belief that  a state should "cozy  up" to                                                               
businesses that contribute  90 percent to the state  revenue.  He                                                               
declared  that, even  though Armstrong  Oil &  Gas was  a serious                                                               
competitor with  the major oil  companies, they  needed something                                                               
to help them out within the  existing units because that is where                                                               
there would  be the  fastest increase in  production.   He shared                                                               
that top  personnel at  the major oil  companies had  stated that                                                               
there was not  the same return in Alaska, as  was currently being                                                               
returned for investments  in the Lower 48.  He  stated that there                                                               
was consensus  among the  oil producers  that Alaska's  Clear and                                                               
Equitable  Share  (ACES) "outside  the  existing  fields is  just                                                               
gonna kill us."   He reported that the three  major oil producers                                                               
were not  as actively exploring for  oil as Armstrong Oil  & Gas,                                                               
and were  instead focused  on production  in the  existing units.                                                               
He remarked that, as things  moved slowly in Alaska, there needed                                                               
to be  an improvement for  production timeframes,  especially for                                                               
new entries  outside the existing  units.  He offered  his belief                                                               
that it was  necessary to make investment in  Alaska "better than                                                               
any other place,"  as there were expenses and  time delays unlike                                                               
anywhere else.   He declared  that, as  the state share  from oil                                                               
production in Alaska was not a  fixed amount, it was necessary to                                                               
make the share such that companies wanted to invest in Alaska.                                                                  
                                                                                                                                
MR. ARMSTRONG  suggested that  an increase  to the  gross revenue                                                               
exclusion   (GRE),  an   extension  of   the  qualified   capital                                                               
expenditures (QCE) tax credits for  a few more years before being                                                               
phased out,  and a  relief from corporate  taxes until  there was                                                               
pay-out would all help induce more oil investment in Alaska.                                                                    
                                                                                                                                
1:27:40 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOHNSON  asked  if   Armstrong  would  invest  or                                                               
partner in  new production if they  were aware that ACES  "was on                                                               
the horizon."                                                                                                                   
                                                                                                                                
MR. ARMSTRONG  replied that  most companies,  when looking  at an                                                               
area to  invest, would first  determine if there was  any profit.                                                               
He reported that his first  investments in Alaska had been during                                                               
the Economic  Limit Factor  (ELF) tax  system, which  he declared                                                               
was an attractive  situation for new entry.   He emphasized that,                                                               
had  ACES been  in place,  Armstrong would  not have  invested in                                                               
Alaska, and  he opined  that the other  oil companies  would have                                                               
had similar determinations.                                                                                                     
                                                                                                                                
1:29:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOHNSON asked for a  response to the comments that                                                               
new  companies  were investing  in  Alaska,  therefore, ACES  was                                                               
working.                                                                                                                        
                                                                                                                                
MR. ARMSTRONG  questioned who  would make  those statements.   He                                                               
pointed to the rig count as evidence that ACES was not working.                                                                 
                                                                                                                                
1:29:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOHNSON  suggested that Mr. Armstrong  listen, and                                                               
he would hear these comments regarding the success of ACES.                                                                     
                                                                                                                                
MR. ARMSTRONG  offered that  many things were  said in  Alaska by                                                               
people  who were  nervous about  reprisal.   He  shared that  his                                                               
experience had been  that new producers did not  invest in Alaska                                                               
because of ACES.                                                                                                                
                                                                                                                                
1:30:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   P.  WILSON   suggested   that  Alaska   increase                                                               
incentives for  increased production, and asked  whether it would                                                               
be worthwhile  for Alaska  to also  incentivize getting  more oil                                                               
rigs into the state.                                                                                                            
                                                                                                                                
MR.  ARMSTRONG replied  that  production  followed activity,  and                                                               
that  service contractors  followed those  companies "making  the                                                               
action happen."  He declared that  a vibrant oil and gas industry                                                               
would induce  the services to  follow, and  that he was  not sure                                                               
how to incentivize for more  oil rigs in Alaska without available                                                               
work.                                                                                                                           
                                                                                                                                
1:31:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK expressed  his surprise  that Mr.  Armstrong                                                               
had not heard the comments regarding  the success of ACES, and he                                                               
pointed to  the activity on  the North  Slope.  He  expressed his                                                               
understanding   that   increased   technology,   especially   for                                                               
horizontal   drilling,  required   fewer  drilling   rigs.     He                                                               
recognized that  the seasonal limitations for  drilling in Alaska                                                               
reduced the  drilling schedules.   He  noted that  Doug Sheridan,                                                               
managing director  of Energy  Point Research,  had stated:   "the                                                               
vast  improvement in  drilling efficiency  has  caused rig  count                                                               
comparisons  between  now  and   prior  periods  to  become  less                                                               
meaningful."  He asked if  this new drilling technology was being                                                               
used in Alaska.                                                                                                                 
                                                                                                                                
MR.  ARMSTRONG replied  that the  new technology  was "definitely                                                               
being applied a little bit."   He expressed his agreement for its                                                               
increased efficiency.   Referring to the testimony  in support of                                                               
ACES, he  suggested that this  support would likely focus  on the                                                               
credits,  whereas any  discussion for  the take  by the  State of                                                               
Alaska would have a very different response from producers.                                                                     
                                                                                                                                
1:34:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK asked about the  impact of proposed HB 72, as                                                               
it eliminated almost all the credits.                                                                                           
                                                                                                                                
MR. ARMSTRONG  replied that this  would have  a lot of  impact on                                                               
some companies  as they  had been  operating under  that business                                                               
strategy.  He  suggested that any elimination of  the tax credits                                                               
should be phased, as business  strategies were based on these tax                                                               
credits.    He  addressed  the   efficiencies  of  drilling,  and                                                               
explained  that  the  breakthroughs currently  happening  in  the                                                               
Lower 48,  long, lateral wells with  multi-stage frac technology,                                                               
were just  getting started in Alaska.   He commented on  the only                                                               
new  technology attempt  that he  was aware  of, a  really modern                                                               
approach to  a well  on the  North Slope,  which he  described as                                                               
"off the hook  successful."  He offered his belief  that it was a                                                               
harbinger  of  future  technology,  if companies  would  come  to                                                               
Alaska.  He  noted, though, that compared to those  in the Bakken                                                               
Field,  North  Dakota, this  oil  well  would be  called  "Bakken                                                               
Light."   He opined that this  was the future in  Alaska, stating                                                               
that it would work fantastically.                                                                                               
                                                                                                                                
1:36:49 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SADDLER  surmised that ACES had  been conceived as                                                               
a balance of  upfront incentives and credits, with  high taxes on                                                               
the production.   He  asked about the  importance of  tax credits                                                               
versus  progressivity for  the investment  decision making  by an                                                               
oil producer.                                                                                                                   
                                                                                                                                
MR. ARMSTRONG  replied that the  credits really helped,  but that                                                               
he  was  unsure  if  it  had been  tested,  as  the  majority  of                                                               
companies operating  under ACES had  not yet gotten to  the point                                                               
of "really making  big profits."  Returning to  the discussion of                                                               
rig  count, he  declared that  this  was a  clear indicator  that                                                               
something was wrong with the current tax system.                                                                                
                                                                                                                                
1:37:54 PM                                                                                                                    
                                                                                                                                
MR. ARMSTRONG, in response  to Representative Saddler, emphasized                                                               
that ACES  needed to be  completely revamped, suggesting  that it                                                               
be deleted.                                                                                                                     
                                                                                                                                
1:38:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOHNSON  asked to  clarify  that  the rig  counts                                                               
mentioned earlier were up to date.                                                                                              
                                                                                                                                
MR. ARMSTRONG  replied that these  counts were  correct, although                                                               
he expressed agreement  that oil rigs had  gotten more efficient.                                                               
He reported  that there had  been 300 rigs  in the Lower  48 four                                                               
years prior,  and that currently  there were  1300 oil rigs.   He                                                               
pointed out that this was not happening in Alaska.                                                                              
                                                                                                                                
1:39:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  asked for the  rig count in  Alaska during                                                               
ELF.                                                                                                                            
                                                                                                                                
MR. ARMSTRONG offered his belief that  it had been higher than it                                                               
was currently.                                                                                                                  
                                                                                                                                
REPRESENTATIVE SEATON pointed out that  there had been a very low                                                               
rig count during  the PPT and ACES legislation, which  had led to                                                               
a production  tax.  He questioned  whether there had also  been a                                                               
very low rig count during the zero tax rates on many oil fields.                                                                
                                                                                                                                
MR.  ARMSTRONG noted  that when  Armstrong Oil  & Gas  arrived in                                                               
Alaska in 1999, the price of oil  was $25 per barrel.  Since that                                                               
time, the technological breakthroughs  had been astounding, which                                                               
made it  difficult to compare  the current rig counts  with those                                                               
at that time.                                                                                                                   
                                                                                                                                
REPRESENTATIVE  SEATON   asked  to  ensure  that   discussion  of                                                               
comparisons included the different parameters in Alaska.                                                                        
                                                                                                                                
MR. ARMSTRONG  pointed out that  there had  been a low  rig count                                                               
everywhere in 1999.                                                                                                             
                                                                                                                                
1:40:54 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  OLSON   asked  if  the  regulatory   climate  had                                                               
improved, specifically for the Cook Inlet gas.                                                                                  
                                                                                                                                
MR.  ARMSTRONG  replied  that  it   was  better,  and  he  lauded                                                               
Anchorage  Mayor  Sullivan  for  changing  and  streamlining  the                                                               
rules.   He declared  that a change  for the tax  laws was  not a                                                               
silver bullet  because the regulatory system  and permitting also                                                               
needed to be changed.  He  offered an anecdote for one project in                                                               
Alaska compared to a project  in Texas, declaring that Alaska had                                                               
to become more competitive.                                                                                                     
                                                                                                                                
1:42:23 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE encouraged  Mr. Armstrong  to provide  additional                                                               
written  testimony   and  suggestions  for  improvement   to  the                                                               
proposed bill.                                                                                                                  
                                                                                                                                
1:43:19 PM                                                                                                                    
                                                                                                                                
BART  ARMFIELD, Chief  Operating Office,  Brooks Range  Petroleum                                                               
Corporation, presented  a PowerPoint.   He reviewed slide  2, "HB
72   Support/Considerations."      Directing  attention   to   AS                                                               
43.55.023(a), he said that proposed  HB 72 allowed the payment of                                                               
single year certificates,  as opposed to 50 percent  in the first                                                               
year,  and then  50 percent  again in  the second  year; however,                                                               
this would be  eliminated after 12/31/13.  He  proposed either an                                                               
extension  of  this or  the  adoption  of AS  43.55.023(l)  which                                                               
should  be applied  to  the North  Slope.   He  also suggested  a                                                               
redefinition   of   AS  43.55.025.      Referring   back  to   AS                                                               
43.55.023(l),  he  shared that  this  allowed  a 40  percent  tax                                                               
credit for  intangible well  work, as  opposed to  subsection (a)                                                               
which included the entire capital budget.                                                                                       
                                                                                                                                
1:46:22 PM                                                                                                                    
                                                                                                                                
MR.  ARMFIELD addressed  his support  for AS  43.055.011(e) which                                                               
eliminated progressivity and maintained the 25 percent base tax.                                                                
                                                                                                                                
MR. ARMFIELD pointed  out that AS 43.55.023(b) was  a credit that                                                               
his company  would prefer to not  receive, as it would  mean that                                                               
his  company  was  losing  money   in  Alaska.    He  noted  that                                                               
subsection (b) also  expired, in its current form, at  the end of                                                               
the year, and that those credits  could not be cashed.  He stated                                                               
that they would  be applied, after two years, to  the tax burden,                                                               
and could  be used to  offset that  burden.  He  declared support                                                               
for the 15 percent interest on those unused credits.                                                                            
                                                                                                                                
MR.  ARMFIELD  shared that  AS  43.55.024(c),  which proposed  to                                                               
extend the small  producer credit to 2022, had  been suggested by                                                               
his company.                                                                                                                    
                                                                                                                                
MR. ARMFIELD  declared support for  the concept in  AS 43.55.160,                                                               
although the  proposed language "does  not contain land  that was                                                               
in  a unit  on January  1, 2003."   He  reported that  this would                                                               
cause a  problem for his company  as his first two  projects were                                                               
in a unit on January 1, 2003,  and would not be eligible for this                                                               
credit.                                                                                                                         
                                                                                                                                
1:48:25 PM                                                                                                                    
                                                                                                                                
MR.  ARMFIELD  directed  attention   to  slide  3,  "Reasons  for                                                               
Entering Alaska," which  listed the reasons why  his company came                                                               
to Alaska in 2000.  He pointed  out that oil prices had been very                                                               
low, and that  the Lower 48 wells had struggled  to break even or                                                               
recover operating  expenses.  He  noted that, as his  company was                                                               
very small, it did not warrant pursuit  of a low oil price as the                                                               
prospect  reserve base  was not  attractive.   In  the Lower  48,                                                               
deals coming through the office were  few and far between and did                                                               
not justify  the cash  or the  risk that would  be entailed.   He                                                               
reported that  the big  reserves, high  production rates,  and an                                                               
acceptable cost  of doing business  finally prompted  the company                                                               
move to  Alaska.  He emphasized  that the ELF tax  policy was not                                                               
an  impact  consideration  in  2000,  as  it  was  a  common  tax                                                               
structure  in the  Lower  48.   He shared  that  his company  had                                                               
arrived under ELF, had worked  through the Production Profits Tax                                                               
(PPT), had been exposed to ACES,  and was now preparing for a new                                                               
system.  He  explained that another factor  promoting his company                                                               
move to  Alaska was  the expectation  that industry  cycles would                                                               
reveal  that the  big companies  would lessen  their efforts  and                                                               
that  the   independent  companies   would  "backfill   that,  as                                                               
traditionally been  done" in  other regions.   He  concluded that                                                               
these had been the reasons and drivers for the move to Alaska.                                                                  
                                                                                                                                
1:51:22 PM                                                                                                                    
                                                                                                                                
MR.  ARMFIELD  presented  slide  4, "What  does  Alaska  have  to                                                               
offer??"  He  stated that the world class reserve  base in Alaska                                                               
in 2000 had been instrumental.   He explained that because of the                                                               
current  high oil  prices, the  technology  discussed in  earlier                                                               
testimony, and the  advancements being made, the  huge amounts of                                                               
reserves in  the Lower 48 were  now being opened up  as they were                                                               
economical.   He  declared that  the  big reserves  and big  flow                                                               
rates were  now swaying  this current  economic environment.   He                                                               
noted that the Lower 48  had a more accessible infrastructure and                                                               
a better cost environment for  cheaper well drilling than Alaska.                                                               
Referring  to  the relative  oil  price,  he explained  that  the                                                               
differential  had shifted,  as Alaska  oil was  now trading  at a                                                               
higher price, although  developments in the Lower  48 could shift                                                               
the  prices once  again.   He  noted that  he  would discuss  the                                                               
credit structure a bit later.   He declared that he was not going                                                               
to  debate  the  impacts  of  the  tax  policy,  as  it  was  the                                                               
perception of tax consequence that  was more widely recognized in                                                               
the  Lower 48.   He  addressed the  final point  on slide  4, the                                                               
"confidence in a 5 to 10  year business plan," and announced that                                                               
people had more confidence with investments in the Lower 48.                                                                    
                                                                                                                                
1:54:32 PM                                                                                                                    
                                                                                                                                
MR. ARMFIELD  presenting slide  5, "Why more  players are  not in                                                               
Alaska," stated  that his company  looked for three  key elements                                                               
with new partners  in Alaska.  He listed an  aggressive desire to                                                               
be   in  Alaska;   a  knowledge   base  to   understand  geology,                                                               
operations,   lease   administration,   native   relations,   and                                                               
politics; and  the financial capacity  to execute in Alaska.   He                                                               
declared  that  very  few  companies   had  all  three  of  these                                                               
prerequisites.                                                                                                                  
                                                                                                                                
1:56:09 PM                                                                                                                    
                                                                                                                                
MR.  ARMFIELD stated  that the  reality was  that most  companies                                                               
were  "very content  to stay  in their  own backyard,  their core                                                               
business areas."   He noted  that high  oil prices had  taken the                                                               
focus  off Alaska  and  onto the  Lower  48.   As  most of  these                                                               
companies  had  established   relationships  with  investors  and                                                               
traditional capital  sources, there  was not a  compelling reason                                                               
for them  to move to  Alaska.   He declared that  most businesses                                                               
wanted to be able to plan  and execute a five-year business plan,                                                               
at  the least,  yet the  current  changes made  the process  very                                                               
difficult.    He emphasized  that  Alaska  required very  patient                                                               
capital,  noting that  his  company  had yet  to  make a  revenue                                                               
stream in its 12  years in the state.  He  opined that Alaska was                                                               
an educational  process for all  three of the  aforementioned key                                                               
elements, and  that finding new  investors for Alaska was  a long                                                               
process.                                                                                                                        
                                                                                                                                
1:58:27 PM                                                                                                                    
                                                                                                                                
MR. ARMFIELD quickly reviewed slide  6, "Credits have helped keep                                                               
us  in the  game," which  identified the  four credit  structures                                                               
that  affected his  company.   He  explained  that the  Qualified                                                               
Capital Expenditures  (QCE) was  the most relied  on credit.   He                                                               
confirmed that  the carry forward  loss credits (CFL)  meant that                                                               
the company  was losing  money.  He  indicated that  although the                                                               
small producer credit  (SPC) was good, he hoped  that his company                                                               
grew  beyond  the  need  for  that  credit.    He  expressed  his                                                               
displeasure with  the exploration incentive credits  (EIC) and he                                                               
pointed  out that  his  company  did not  qualify  and had  never                                                               
received this credit.                                                                                                           
                                                                                                                                
MR.  ARMFIELD  directed  attention  to  slide  7,  "AS  43.55.025                                                               
Limitations," which  mapped the  limits for the  EIC credit.   He                                                               
explained that the  mass of wells in the center  were Prudhoe and                                                               
Kuparuk,  the   small  dots  were   individual  wells,   and  the                                                               
surrounding ring was  a three mile buffer around  each well, with                                                               
a 25 mile  buffer around the producing units.   He noted that the                                                               
Brooks Range Petroleum leasehold position  was right in the heart                                                               
of that,  hence it would  never be able to  qualify for EIC.   He                                                               
stated that  it was necessary to  move quite a way  from existing                                                               
activity to  qualify.   He referenced slide  1, and  reminded the                                                               
committee  that he  had  suggested a  redefinition  for EIC  that                                                               
would  eliminate  some  of  the  limitations  and  make  it  more                                                               
accessible to activity.                                                                                                         
                                                                                                                                
2:01:26 PM                                                                                                                    
                                                                                                                                
MR. ARMFIELD said  that a similar chart to slide  8, "Tax Credits                                                               
History & Forecast,"  had been seen previously  by the committee,                                                               
although this was a re-creation  to show Brooks Range Petroleum's                                                               
share of  credits that had  been refunded.   He pointed  out that                                                               
the grey reflected the refunded  credits, versus credits received                                                               
through a reduction to tax burden  in red.  He indicated that the                                                               
2013 Brooks Range  Petroleum share, about $3  million, was stated                                                               
on the  bottom left.  He  reported that the company  had received                                                               
$69 million  in credits, and  he pointed  out that, in  2011, his                                                               
was the  only exploration company  with a well drilling  on state                                                               
land on the North Slope, although it was of minimal impact.                                                                     
                                                                                                                                
2:02:55 PM                                                                                                                    
                                                                                                                                
MR. ARMFIELD  provided slide 9,  "Impacts to  Mustang Development                                                               
Funding."  He reported that an  ice road was being constructed in                                                               
order to allow  a gravel access road to  the Mustang development.                                                               
Referring to the bar graph on  slide 9, he explained that the top                                                               
section reflected  the impact  under ACES:   the green  bars were                                                               
CapEx to Brooks  Range Petroleum, the blue bars  were the capital                                                               
credit and  loss carry  forward contributions  from the  State of                                                               
Alaska, and  the right  side was  a summary of  those years.   He                                                               
observed that  the red box in  the right corner showed  that $205                                                               
million in received credits had  a $1.2 billion revenue stream to                                                               
the State of  Alaska with royalty, base  taxes, and progressivity                                                               
under ACES.   He indicated the lower graph,  which compared these                                                               
same numbers under  proposed HB 72, with the  applicable share of                                                               
credits  for the  State of  Alaska eliminated  after 2013.   This                                                               
would  reduce the  capital exposure  from $205  million to  $81.5                                                               
million,  and would  require Brooks  Range Petroleum  to increase                                                               
its  funding request  by $124  million because  of de-sanctioning                                                               
under ACES.                                                                                                                     
                                                                                                                                
2:05:32 PM                                                                                                                    
                                                                                                                                
MR.  ARMFIELD moved  on  to slide  10,  "Forecast by  Development                                                               
Project," which  detailed five planned  developments.   The first                                                               
was the  Mustang Development, with  peak throughput of  just less                                                               
than 15,000 barrels of oil each  day, and revenue to the State of                                                               
Alaska of  $1.2 billion.   He  expressed his  hope that  the peak                                                               
production of  all five  projects would  reach 55,000  barrels of                                                               
oil  each day,  with  revenue of  $4.4 billion  to  the State  of                                                               
Alaska.    He  clarified  that this  revenue  included  the  $561                                                               
million  of credit  support under  ACES.   He explained  that the                                                               
annual average  was derived from  the 15 year life  expectancy of                                                               
each  field, divided  into the  State of  Alaska revenue  of $4.4                                                               
billion, with an  average return to the State of  just under $300                                                               
million each year.  He theorized  that 10 new entrants of similar                                                               
size  would replicate  annual average  revenues to  the State  of                                                               
Alaska of almost $3 billion.                                                                                                    
                                                                                                                                
2:07:24 PM                                                                                                                    
                                                                                                                                
MR. ARMFIELD introduced slide  11, "Combined Development Projects                                                               
and   Throughput  Forecast,"   which  projected   the  throughput                                                               
forecast  of 55,000  barrels of  oil per  day, and  the projected                                                               
capital budget  of $2.2  billion.  He  reported that  the royalty                                                               
and production  tax would  equal $4.4 billion  of revenue  to the                                                               
State of  Alaska.  Directing attention  to the right side  of the                                                               
slide, he  explained that the  projected leasehold  royalty share                                                               
to the  state was for  1/6, however this  was a 33  percent bonus                                                               
over the  1/8 royalty share.   He  combined this loss  of revenue                                                               
with the loss  of credits in proposed HB 72,  a projected loss of                                                               
revenue of $1.1 billion for the projects.                                                                                       
                                                                                                                                
2:09:17 PM                                                                                                                    
                                                                                                                                
MR. ARMFIELD  indicated slide  12, "One Size  Does NOT  Fit All,"                                                               
and offered his  belief that there were four tiers  of players in                                                               
Alaska.   He suggested that  Brooks Range Petroleum  was included                                                               
in the Exploration  and Discovery Tier, whereas  the New Entrants                                                               
Tier would include  as yet unknown companies.  He  urged that the                                                               
committee consider  all four tiers  and the effects  generated on                                                               
each tier, as it moved forward in reviewing tax policy.                                                                         
                                                                                                                                
MR.   ARMFIELD  concluded   with  slide   13,  "HB   72  Support/                                                               
Considerations,"  which was  the same  as slide  2, and  he asked                                                               
that the committee review these considerations.                                                                                 
                                                                                                                                
2:10:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON  referred to slide 11, and  asked if the                                                               
preference  was for  ACES  over  proposed HB  74  because of  the                                                               
difference in royalty shares.                                                                                                   
                                                                                                                                
MR. ARMFIELD responded that the  royalty shares had nothing to do                                                               
with ACES.  It was "just a burden  of fact that I wanted to point                                                               
out,"  although  it was  not  in  ACES or  proposed  HB  72.   He                                                               
clarified that  this royalty, in  addition to the  elimination of                                                               
capital credits, would reduce his revenue.                                                                                      
                                                                                                                                
2:12:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON asked for more clarification.                                                                          
                                                                                                                                
MR. ARMFIELD explained  that the royalty share  was determined by                                                               
his company's lease  position of 1/6 on the North  Slope, and, in                                                               
this case, it was 16.67 percent  (1/6) of revenue, which was paid                                                               
to the State  of Alaska.  He reported that  there were also lease                                                               
positions  of  1/8 on  the  North  Slope, which  generated  12.25                                                               
percent of revenue to the state.   He pointed out that, for these                                                               
projects, the  revenue difference  between 1/8  and 1/6  was $542                                                               
million,  which  he declared  to  be  an additional  burden  that                                                               
needed  to  be considered,  especially  in  consideration of  the                                                               
elimination of the capital credits.                                                                                             
                                                                                                                                
2:13:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P.  WILSON  asked  to clarify  that  the  royalty                                                               
differential  of  $542 million  could  be  used by  Brooks  Range                                                               
Petroleum instead.                                                                                                              
                                                                                                                                
MR. ARMFIELD expressed his agreement.                                                                                           
                                                                                                                                
2:13:27 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  confirmed that  the State of  Alaska had  ways to                                                               
apply  for  royalty relief,  as  the  original economics  of  the                                                               
project had  been based on  a previous tax regime,  assuming that                                                               
proposed HB  72 was passed.   He asked if the  existing rules for                                                               
application  for   royalty  relief  were  sufficient,   or  would                                                               
additional provisions be necessary.                                                                                             
                                                                                                                                
MR.  ARMFIELD  replied that  he  had  not  yet modeled  that,  as                                                               
everything under ACES was the  one-sixth royalty.  He established                                                               
that  an elimination  of capital  credits, with  an increase  for                                                               
near  term capital  needs, could  require reconsideration  of the                                                               
royalty position, if proposed HB 72 was passed.                                                                                 
                                                                                                                                
2:14:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK, referencing  the carryforward  tax credits,                                                               
noted  that development  was seasonal  due  to the  weather.   He                                                               
asked  if 10  years  was  an adequate  amount  of  time to  reach                                                               
production, in order to take advantage of these credits.                                                                        
                                                                                                                                
MR. ARMFIELD  responded it was a  project-by-project calculation.                                                               
Noting that his company was  currently 12 years into its projects                                                               
in Alaska,  he suggested  that it now  had momentum,  which would                                                               
reduce   that   timeframe   between  discovery   and   production                                                               
throughput.                                                                                                                     
                                                                                                                                
2:15:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK asked  to clarify that the  10 year timeframe                                                               
was feasible.                                                                                                                   
                                                                                                                                
MR. ARMFIELD  said that  he was comfortable  with the  time frame                                                               
under the  current credit structure; however,  with the increased                                                               
pressure to  come up with  an additional $124 million  of capital                                                               
budget for  one project,  some of the  projects would  be delayed                                                               
due  to   a  need   for  more  upfront   cash  to   move  forward                                                               
aggressively.                                                                                                                   
                                                                                                                                
2:16:52 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   SEATON,   expressing   his  desire   to   better                                                               
understand  the  limitations of  proposed  HB  72, asked  if  the                                                               
restriction on  the effective  use of the  offered credits  was a                                                               
hindrance when seeking financing.                                                                                               
                                                                                                                                
2:18:07 PM                                                                                                                    
                                                                                                                                
MR.  ARMFIELD, in  response to  Representative Seaton,  said that                                                               
although loss carry  forward credits were important  on the front                                                               
side, business  decisions were  not based on  these credits.   He                                                               
declared  that the  restrictions on  credits would  make it  more                                                               
difficult,  but that  the company  goal  was to  not qualify  for                                                               
those credits.                                                                                                                  
                                                                                                                                
2:18:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   SEATON   asked   whether  those   credits   were                                                               
meaningless for financing, as it  was uncertain for qualification                                                               
for the  credits.  He  surmised that  cash flow was  difficult to                                                               
project before the  project came on-line and  the taxes generated                                                               
would offset the 25 percent base rate for previous investment.                                                                  
                                                                                                                                
MR. ARMFIELD,  clarifying that the  project financers  would view                                                               
the loss  carry forward as  an assured bankable  position, stated                                                               
that  this would  present an  uncertainty, although  any business                                                               
model that  projected continued  losses over 10  years was  not a                                                               
good funding prospect.                                                                                                          
                                                                                                                                
2:21:07 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE encouraged  Mr.  Armfield  to provide  additional                                                               
written  testimony   and  suggestions  for  improvement   to  the                                                               
proposed bill.                                                                                                                  
                                                                                                                                
2:21:52 PM                                                                                                                    
                                                                                                                                
BRAD KEITHLEY,  Partner, Oil and  Gas Practice, Perkins  Coie Law                                                               
Firm, stated the importance of  this proposed bill for the future                                                               
of  Alaska.    He  clarified  that  he  was  not  speaking  as  a                                                               
representative for any  clients, noting that he  had been working                                                               
in the oil industry for 35 years and in Alaska since 1993.                                                                      
                                                                                                                                
2:23:27 PM                                                                                                                    
                                                                                                                                
MR.  KEITHLEY  directed  attention   to  the  PowerPoint,  titled                                                               
"Comments  on SB  21/HB 72."   Addressing  slide 3,  "Five things                                                               
...", he  stated that there were  five things to look  for in oil                                                               
tax   reform:     competitive   rates,  durability,   neutrality,                                                               
simplicity/predictability, and  alignment.  He declared  that the                                                               
core goal  for these  five was  to find  a way  to grow  the pie,                                                               
slide 4,  "Goal: Grow the  pie."  He  declared that there  was an                                                               
opportunity  in  Alaska  to  significantly  improve  the  state's                                                               
position, and  he referred  to the  chart on  slide 4,  which had                                                               
been taken from  testimony submitted to the  legislature in 2006.                                                               
He explained that  the chart reflected three  futures for Alaska.                                                               
The first  of these production  decline curves showed  the result                                                               
if no  additional investment  in Alaska, which  was a  15 percent                                                               
decline.    The second  curve  was  a  6 percent  decline,  which                                                               
reflected business as usual.  He  opined that the third curve was                                                               
the future of Alaska, which depicted  a 3 percent decline, and he                                                               
pointed to the  chart which shared the additional  barrels of oil                                                               
for  each  change in  decline.    He  declared  that it  was  the                                                               
investment dollars  that would drive  each rate of decline.   The                                                               
15  percent decline  curve was  the result  of a  zero additional                                                               
investment,  the 6  percent decline  curve was  the result  of an                                                               
additional in the ground investment for  oil and gas of $1 - $1.5                                                               
billion each year,  and the 3 percent decline  curve would result                                                               
from a $2 -  $3 billion investment each year.   He noted that the                                                               
annual  investment  needed  to  increase in  order  to  move  the                                                               
decline  curve further  to the  right, "growing  the pie  for the                                                               
State of Alaska."                                                                                                               
                                                                                                                                
2:26:30 PM                                                                                                                    
                                                                                                                                
MR.  KEITHLEY  referred  to slide  5,  "Competitive  Rates,"  and                                                               
pointed  out that  Commissioner Sullivan,  Department of  Natural                                                               
Resources, had projected  a need to invest $4 billion  in the oil                                                               
industry  each year.   Commissioner  Sullivan  had observed  that                                                               
"we're not  even close  to that  now... "   He affirmed  that the                                                               
five things previously  mentioned, competitive rates, durability,                                                               
neutrality,  simplicity and  predictability,  and alignment  were                                                               
all  necessary for  Alaska to  reach  its future  potential.   He                                                               
declared  that competitive  rates were  necessary to  attract the                                                               
sustained, long  term capital which  would move  Alaska's decline                                                               
curve to  the right.   He  emphasized that,  in order  to attract                                                               
this capital,  Alaska needed  to be  competitive across  the full                                                               
anticipated  long  term price  range,  which  were the  range  of                                                               
prices that  the investment could pay  out.  He explained  that a                                                               
long term investment  necessitated pay out across  the full price                                                               
range during the investment cycle.                                                                                              
                                                                                                                                
2:28:02 PM                                                                                                                    
                                                                                                                                
MR. KEITHLEY  referenced slide  6, "Competitive  Rates," pointing                                                               
to the  chart on the upper  right which depicted the  cost of oil                                                               
as low as $70 per barrel,  and he repeated that the fiscal regime                                                               
needed  to be  competitive across  the  entire price  range.   He                                                               
determined that  a problem with  ACES was  its un-competitiveness                                                               
at the  higher end  of the  price range,  whereas proposed  HB 72                                                               
could just  reverse the problem.   If  it was not  competitive at                                                               
the lower  end of the  range, this would  just be an  exchange of                                                               
one problem for another.                                                                                                        
                                                                                                                                
MR. KEITHLEY  moved on  to slide  7, "Durability,"  and announced                                                               
that this was a major problem with  HB 72.  He explained that the                                                               
substantial long  term investments necessary to  move the decline                                                               
curve to  the right  were a 15  - 25 year  investment cycle.   He                                                               
stated that a  fiscal regime which changed  its economics halfway                                                               
through a  cycle was not  a good  investing scenario.   He shared                                                               
that some countries  used contracts to establish  a stable fiscal                                                               
system,  whereas  other  countries  used  economic  stabilization                                                               
clauses which balanced  any increase to taxes in one  area with a                                                               
decrease in another.                                                                                                            
                                                                                                                                
2:30:36 PM                                                                                                                    
                                                                                                                                
MR. KEITHLEY  referred to the  British Columbian  discussions for                                                               
changes  to  its  tax  structure, slide  8,  "Durability."    The                                                               
premier of  British Columbia had proposed  a new tax on  LNG that                                                               
could potentially  have a significant effect  on the investments,                                                               
yet  the  premier  would  not  be able  to  discuss  any  of  the                                                               
proposals   considered   until   after  the   negotiations   were                                                               
completed.  She  had stated "we have to make  sure that, first of                                                               
all,  we  are getting  maximum  benefit  for  the people  of  our                                                               
province, and  at the same  time that we aren't  imperiling their                                                               
business case, because  if we want to be competitive,  we need to                                                               
do that  through the  course of  negotiations with  (industry) so                                                               
that's what  we're working on  right now."   He cited this  to be                                                               
another means for durability, have  the government negotiate with                                                               
industry for the long term durability.   He pointed out that this                                                               
had been a significant problem in HB 72 or ACES.                                                                                
                                                                                                                                
MR.  KEITHLEY  called   attention  to  the  graph   on  slide  9,                                                               
"Durability,"  and  declared  that   durability  was  suspect  in                                                               
Alaska.   He  noted that  these slides  had been  prepared for  a                                                               
study by  the Institute of  Social and Economic  Research (ISER),                                                               
which  had  analyzed  the  current state  of  the  Alaska  fiscal                                                               
situation  and had  reached  this conclusion:    "In its  10-year                                                               
fiscal  plan, the  state Office  of Management  and Budget  (OMB)                                                               
projects  that spending  the cash  reserves might  fill this  gap                                                               
until  2023."    He  explained  that  the  Constitutional  Budget                                                               
Reserve might  fill the  gap between  this projected  revenue and                                                               
the projected  annually increased spending of  4.5 percent, which                                                               
he assessed  as less than  was historically recognized.   He went                                                               
on  to  quote the  ISER  study:   "Reasonable  assumptions  about                                                               
potential new revenue sources suggest  we do not have enough cash                                                               
in reserves to avoid a severe  fiscal crunch soon after 2023, and                                                               
with that fiscal crisis will come an economic crash."                                                                           
                                                                                                                                
2:33:30 PM                                                                                                                    
                                                                                                                                
MR.  KEITHLEY  assessed that  a  producer  reviewing the  various                                                               
investments needed to  move the decline curve to  the right would                                                               
not invest  in a  situation that  projected a  fiscal gap  in the                                                               
middle of  the economic  cycle, especially in  a state  which had                                                               
historically taxed  the industry  as a  solution.   He questioned                                                               
whether the current system was  durable, offering his belief that                                                               
it would  lead investors to  have substantial concerns  for doing                                                               
business in Alaska.                                                                                                             
                                                                                                                                
MR. KEITHLEY furnished  slide 10 and slide  11, "Neutrality," and                                                               
he offered  his belief that  the government should not  favor one                                                               
investment  over  another.   He  declared  that  market  dynamics                                                               
changed too  rapidly for  government to  attempt to  second guess                                                               
the market.   He endorsed that exploration  and production should                                                               
be  treated  equally, and  that  the  government should  maintain                                                               
neutrality.    He  expressed  that  proposed  HB  72  had  better                                                               
neutrality  than  ACES,  as  it   expanded  incentives  for  both                                                               
exploration and production in new  fields.  However, the proposed                                                               
bill overlooked  an important area, the  significant potential to                                                               
realize  improved recovery  rates  from  inside existing  fields.                                                               
"When production  started at the  Prudhoe Bay field  the recovery                                                               
rate of  the 25 billion barrels  of oil in place  was expected to                                                               
reach 40  percent.  Today,  using new technologies  that estimate                                                               
has increased to  more than 60 percent."  He  explained that each                                                               
1 percent of  improvement in recovery rate  equaled an additional                                                               
250 million barrels  of oil.  He referenced the  chart on the top                                                               
right of slide  11, which listed the expected field  size, and he                                                               
stated the necessity to not  discourage work inside the fields to                                                               
increase the recovery rate.                                                                                                     
                                                                                                                                
2:37:12 PM                                                                                                                    
                                                                                                                                
MR.  KEITHLEY  indicated slide  12,  "Simplicity/Predictability,"                                                               
and offered his belief that proposed  HB 72 was much simpler than                                                               
ACES,  and that  it  measured well  globally  for simplicity  and                                                               
predictability.                                                                                                                 
                                                                                                                                
MR.  KEITHLEY  presented  slides  13 and  14,  "Alignment."    He                                                               
defined this  as the  alignment between  the state  and investors                                                               
for growing  the pie.   He  reflected that  too often  Alaska had                                                               
argued about the state's fair share  rather than work to grow the                                                               
pie.  He pointed out that  there were many worldwide examples for                                                               
governments and  investors successfully working together,  and he                                                               
suggested a review of these  arrangements.  He opined that Alaska                                                               
relied on indirect  policy tools, citing the use  of the "carrot"                                                               
for  fiscal investment,  and the  "stick" for  regulatory action.                                                               
He offered  his belief that a  base rate of 25  percent would not                                                               
encourage investment.   He offered  an analogy that the  State of                                                               
Alaska was  attempting to drive  the industry from the  back seat                                                               
of the  vehicle.  He opined  that better ways had  been developed                                                               
for alignment with  the oil industry.  He pointed  to Norway as a                                                               
successful  example for  increasing  investment  and growing  the                                                               
pie.  He cited Petoro as  a leader in driving industry investment                                                               
and identifying new opportunities  for Norway, which had resulted                                                               
in a much better success rate than Alaska for growing the pie.                                                                  
                                                                                                                                
2:39:54 PM                                                                                                                    
                                                                                                                                
MR.  KEITHLEY,  recapping  slide 15,  "Summary  of  Conclusions,"                                                               
declared that proposed HB 72 was  not competitive at a full range                                                               
of  anticipated  prices,  specifically   at  lower  prices.    He                                                               
announced that durability  was "a huge problem" as  there was not                                                               
any  mechanism  to  ensure  durability  with  the  Alaska  fiscal                                                               
policy.  He explained that  neutrality still had some tilt, which                                                               
could  discourage  investment  in  existing  fields  to  increase                                                               
recovery  rates.   He stated  that, although  the simplicity  had                                                               
been  substantially improved,  the alignment  was not  configured                                                               
with the goal for growing the pie.                                                                                              
                                                                                                                                
2:40:45 PM                                                                                                                    
                                                                                                                                
MR.  KEITHLEY concluded  with  slide  16, "Recommendations,"  and                                                               
offered  three   specific  suggestions.    First,   he  suggested                                                               
adoption of HB 72, with  amendments to make it competitive across                                                               
all  anticipated price  ranges,  and to  provide  GRE or  similar                                                               
incentives   for  investments   designed  to   increase  ultimate                                                               
recovery rates  in the existing  fields, which he declared  to be                                                               
the greatest  source of  oil that could  be developed  in Alaska.                                                               
He stated  that it  was necessary  for the  proposed bill  to not                                                               
distort  the economics  for this  recovery.   He opined  that the                                                               
committee  "would  be  well  served  to  identify  fiscal  policy                                                               
concerns  in forwarding  the bill  to  the Senate  and the  House                                                               
Finance Committees."   He  shared that,  even should  this become                                                               
the perfect tax bill, the  oil industry would still project where                                                               
Alaska's fiscal  policy was leading.   With the  projected fiscal                                                               
gap  in 2023,  as well  as the  ISER analysis,  the oil  industry                                                               
would  still not  want  to  invest in  this  investment cycle  of                                                               
fiscal uncertainty.   Lastly, he  urged that the  House Resources                                                               
Standing Committee  hold hearings on  a shift from  the "royalty"                                                               
to the  "co-investment" model, as  Norway had done.   He reported                                                               
that Norway had  found the "royalty model" to  be inefficient and                                                               
not attractive for the levels of required investment.                                                                           
                                                                                                                                
2:43:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON,  noting that the oil  companies did not                                                               
have any reason to trust  Alaska, asked how discussion could move                                                               
to co-investment, instead of "see what we can each get."                                                                        
                                                                                                                                
MR. KEITHLEY, in response to  Representative P. Wilson, explained                                                               
that this was one of the  reasons for the policy shift in Norway,                                                               
that co-investment with the oil industry  was the best way to get                                                               
government and industry aligned.                                                                                                
                                                                                                                                
2:46:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON asked  if the  earlier witnesses  would be                                                               
available for questions.                                                                                                        
                                                                                                                                
CO-CHAIR FEIGE said that he would ask.                                                                                          
                                                                                                                                
REPRESENTATIVE  SEATON suggested  that  it would  be helpful  for                                                               
committee, instead of individual, discussions.                                                                                  
                                                                                                                                
2:47:10 PM                                                                                                                    
                                                                                                                                
J.  PATRICK FOLEY,  Manager, Land  and External  Affairs, Pioneer                                                               
Natural  Resources Alaska,  Inc., offered  to share  the thoughts                                                               
and suggestions from Pioneer for  what affected and motivated its                                                               
business, and how  they made investment decisions  for the future                                                               
in Alaska.   He said that he would have  comments and suggestions                                                               
specific to proposed HB 72.                                                                                                     
                                                                                                                                
MR.  FOLEY presented  an overview  of Pioneer  Natural Resources,                                                               
and stated that it had a  $19 billion enterprise value, with 3500                                                               
employees, and  a $3  billion capital budget  with $2  billion of                                                               
cash  flow  for  those  operations,  slide  4,  "Pioneer  Natural                                                               
Resources."    He  declared  that   the  company  was  a  leading                                                               
performer  within  its  peer  group, and  initially  had  been  a                                                               
partner with  Armstrong Oil and Gas,  in 2002.  He  reported that                                                               
success in the first year led  to the development of the Oooguruk                                                               
oil  field.   He  shared  that  there  were  about 70  full  time                                                               
employees  in  Alaska, with  an  additional  150 -  300  contract                                                               
workers  in-state, and  an annual  payroll  of $14  million.   He                                                               
listed  the  contract  companies  that  Pioneer  worked  with  in                                                               
Alaska, reported that the capital  budget for 2013 was about $180                                                               
million, and that current production  was about 6,000 barrels per                                                               
day,  with a  projection of  40 percent  growth in  the next  two                                                               
years.                                                                                                                          
                                                                                                                                
2:50:32 PM                                                                                                                    
                                                                                                                                
MR. FOLEY considered slide 5  "Pioneer Alaska Profile: Oooguruk,"                                                               
and relayed  that the  company had  drilled 11  exploration wells                                                               
resulting  in 1  commercial project,  Oooguruk, and  that Pioneer                                                               
was the  operator, with  70 percent ownership.   He  offered that                                                               
their experience  had shown  that there  was about  a one  in ten                                                               
success  rate  for drilling.    He  revealed  that more  than  $1                                                               
billion had been  spent in development of  Oooguruk, resulting in                                                               
production  of 12  million barrels  of oil,  and credits  of $270                                                               
million  from the  State of  Alaska, equivalent  to 7  percent of                                                               
total credits issues by the state.   He declared the necessity to                                                               
preserve  the credits,  especially  when  modifying the  proposed                                                               
bill.                                                                                                                           
                                                                                                                                
MR. FOLEY referenced  the fiscal policy timeline on  slide 5, and                                                               
pointed  to the  changes in  the last  10 years.   He  said that,                                                               
under ELF, the expectation had been  for a production tax rate of                                                               
zero percent.   However, under  Governor Murkowski, PPT  had been                                                               
introduced, which  was a short  lived modest improvement  for the                                                               
oil companies.   Shortly after  this, the tax rate  increased and                                                               
progressivity was introduced under ACES,  all of which made for a                                                               
worsening fiscal metric  for the oil companies.   He declared the                                                               
need for stability  and favorability with a tax  program in order                                                               
to make investment decisions.                                                                                                   
                                                                                                                                
2:53:17 PM                                                                                                                    
                                                                                                                                
MR. FOLEY  indicated slide 7,  "What's Next?" and  explained that                                                               
the Nuna Project,  an onshore drill site  with offshore reserves,                                                               
was  Pioneer's next  development.   This required  extended reach                                                               
wells, and  he pointed to  the map  on the slide,  which outlined                                                               
the Pioneer  leases.   He reported  that a  second well  had just                                                               
been finished, and he touted  the immediate production success of                                                               
the  first well,  almost  4,000  barrels of  oil  each  day.   He                                                               
reported that, a year later, the  well was still producing 1500 -                                                               
1700 barrels each  day.  He informed that the  cost to drill each                                                               
well  was  $50  million,  as   the  reservoir  was  "tight  rock,                                                               
laminated,  and  requires very  large  fracture  treatment."   He                                                               
explained that the  first well had caused a shift  in business to                                                               
now drill long  horizontal wells with large frac  treatments.  He                                                               
noted that  fracs were measured  by the  volume of sand  that was                                                               
pumped.   He said that  these were substantially bigger  than any                                                               
in Alaska,  although small  in comparison to  the super  fracs in                                                               
the Lower 48.                                                                                                                   
                                                                                                                                
2:56:07 PM                                                                                                                    
                                                                                                                                
MR. FOLEY offered his hope to  take the Nuna Project to Pioneer's                                                               
investment committee and request approval  for $1 billion to move                                                               
"full  speed ahead  with  development."   He  reported that  this                                                               
project  had an  oil  accumulation of  50  million barrels,  with                                                               
projected peak production of 14,000  barrels each day.  He opined                                                               
that these  projects would not "be  a needle mover for  the State                                                               
of Alaska" and  would not solve the  financial problems, although                                                               
they would make  a contribution.  The  biggest contribution would                                                               
come through jobs and the associated economic impact, he said.                                                                  
                                                                                                                                
MR.  FOLEY  moved  to  slide  7, "Competition  For  Alaska  -  An                                                               
Independent's  View,"   and  explained   that  this   provided  a                                                               
comparison   for    key   investment   decisions    on   Alaska's                                                               
competitiveness  with  the  Lower  48,  which  included  resource                                                               
potential, geologic risk, and oil  bias.  He observed that things                                                               
had  changed since  Pioneer arrived  in  Alaska in  2002, as  the                                                               
resource potential, specifically with shale,  in the Lower 48 was                                                               
now at  least as attractive as  Alaska.  He pointed  out that the                                                               
profitability report card  was all weighted toward  the Lower 48,                                                               
as projects  had less risk,  faster cycle times,  faster payback,                                                               
and easier  execution with greater  operational flexibility.   He                                                               
identified that Pioneer had an  island development that would run                                                               
365 days  a year, and that  it could not be  started and stopped,                                                               
which was in contrast to the  Lower 48 projects which could react                                                               
monthly to changes  in the market environment  by moving drilling                                                               
rigs or adding people.   He declared that the Lower  48 had a lot                                                               
more operational flexibility.                                                                                                   
                                                                                                                                
2:58:57 PM                                                                                                                    
                                                                                                                                
MR.  FOLEY  provided  slide   8,  "Pioneer  Competitive  Resource                                                               
Opportunities,"  which compared  the  various  Pioneer shale  oil                                                               
projects  in  Texas  competing  for  investment  funding  against                                                               
Alaska.  He  reported that these areas would drill  more than 300                                                               
wells,  with a  $2.5 billion  budget for  the 40  operating drill                                                               
rigs.  He shared that there  were 20,000 locations to be drilled.                                                               
By  comparison, there  were  about 6  wells  drilled annually  in                                                               
Alaska.   He offered this, not  as a criticism of  Alaska, but in                                                               
the  hope  to craft  better  fiscal  policy for  more  attractive                                                               
investments in Alaska.                                                                                                          
                                                                                                                                
3:00:47 PM                                                                                                                    
                                                                                                                                
MR.  FOLEY reviewed  slide 9,  "2013E Capital  Spending and  Cash                                                               
Flow," and  stated that Pioneer  had a $3 billion  capital budget                                                               
for 2013;  although the  majority would be  spent in  Texas, $190                                                               
million, about 7 percent of  the total drilling capital, would be                                                               
spent in  Alaska.  Describing  the source of the  capital budget,                                                               
he noted  that $2 billion  would be  sourced from cash  flow, and                                                               
about  $600  million  would  come   from  a  joint  venture  with                                                               
Sinochem,  an arm  of  the  Chinese national  oil  company.   The                                                               
remainder, $400  million, would be  raised from sales  of company                                                               
stock.    He  commented  that,  as  Pioneer  was  an  independent                                                               
company, it was  important for them to manage its  debt, and even                                                               
a  low interest  loan  would  increase debt.    For this  reason,                                                               
capital credits were important to his company.                                                                                  
                                                                                                                                
3:03:05 PM                                                                                                                    
                                                                                                                                
The House Resources Standing Committee recessed until 5:30 p.m.                                                                 
                                                                                                                                
5:31:49 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE called  the  House  Resources Standing  Committee                                                               
meeting  back to  order  at 5:31  p.m.   Representatives  Hawker,                                                               
Johnson, Olson, Seaton, P. Wilson,  and Feige were present at the                                                               
call  back to  order.   Representatives Tarr,  Tuck, and  Saddler                                                               
arrived as the meeting was in progress.                                                                                         
                                                                                                                                
5:31:58 PM                                                                                                                    
                                                                                                                                
MR. FOLEY  continued his  presentation with  slide 10,  "SB 21/HB
72," and  announced that the  proposed bill had derived  from the                                                               
Governor's  four guiding  principles for  changes to  tax policy:                                                               
to  be  fair, to  stimulate  new  production,  to be  simple  and                                                               
balanced, and to  be competitive.  He confirmed  support for each                                                               
of these  goals, although  there were  some changes  necessary in                                                               
the proposed bill to accomplish each of these goals.                                                                            
                                                                                                                                
MR. FOLEY established  that it was necessary for  the North Slope                                                               
oil producers to  have a healthy industry with a  tax policy that                                                               
motivated investment.   He affirmed that positive  aspects of the                                                               
proposed   bill  included   the  elimination   of  progressivity,                                                               
extension of the small producer  credit, gross revenue exclusions                                                               
(GRE)  for  the   fields  outside  the  legacy   fields,  and  an                                                               
escalating  loss carry  forward.   Some of  the negative  aspects                                                               
included the  loss of capital  credits and the lack  of inclusion                                                               
of GRE for the legacy fields.                                                                                                   
                                                                                                                                
5:34:55 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  asked for  a suggested change  to the  loss carry                                                               
forward credit.                                                                                                                 
                                                                                                                                
MR. FOLEY  said the rest  of his presentation will  be explaining                                                               
the costs and advantages, although  the upside does not match the                                                               
downside, at least for a company like his.                                                                                      
                                                                                                                                
5:35:49 PM                                                                                                                    
                                                                                                                                
MR. FOLEY introduced slide 11,  "Relative Rankings," and reviewed                                                               
the  companies in  Alaska.   He listed  Exxon as  a $400  billion                                                               
market capital  company, Shell, Chevron,  and BP as  $200 billion                                                               
companies,  and finally  Pioneer,  a $19  billion market  capital                                                               
company.   He stated  that the  financials for  private companies                                                               
were not public.  He suggested  that tax policy to help the state                                                               
move forward  would incentivize  all of  the companies,  not just                                                               
some, so  that all the  companies were flourishing  and investing                                                               
in projects throughout Alaska.   He reported that the development                                                               
from first idea  to first oil could  be 7 - 10  years, as modeled                                                               
by  the Oooguruk  development.   He offered  his belief  that new                                                               
production in  Alaska during  the next  decade would  most likely                                                               
come from one these companies already in Alaska.                                                                                
                                                                                                                                
5:37:36 PM                                                                                                                    
                                                                                                                                
MR. FOLEY  addressed slide  12, "What is  an Independent  Oil and                                                               
Gas  Company?"   He  defined  an independent  company  as a  non-                                                               
integrated oil company, which focused  on the exploration and the                                                               
production side of  the industry, with no  refining or marketing.                                                               
He stated  that the  18,000 independent oil  companies in  the US                                                               
came in  all sizes, drilled about  94 percent of all  the oil and                                                               
natural  gas wells,  and  accounted  for 2.1  million  jobs.   He                                                               
acknowledged that  independent companies had  different financial                                                               
motivation, in so  far as investors were rewarded  for growth and                                                               
debt management,  not for  dividend or return.   He  referenced a                                                               
quote  by Doug  Smith,  which stated  that  small companies  were                                                               
important because  they spend  money, they  offer jobs,  and they                                                               
help with the economy.                                                                                                          
                                                                                                                                
5:39:24 PM                                                                                                                    
                                                                                                                                
MR.  FOLEY   furnished  slide  13,  "Eagle   Ford  Operators  and                                                               
Companies,"  and explained  that  the core  business for  Pioneer                                                               
included  heavy involvement  in Eagle  Ford.   He pointed  to the                                                               
large list of  companies actively involved in  Eagle Ford, noting                                                               
that some of  them were also doing business in  Alaska.  He asked                                                               
what  could  be done  with  the  tax  policy to  encourage  these                                                               
investors to come to Alaska.   He directed attention to the chart                                                               
on  the right  of slide  13, which  graphed the  required Capital                                                               
Expenditure per  barrel and Operating Cost  per barrel, revealing                                                               
that Alaska  projects were  more expensive  than projects  in the                                                               
Lower  48.   He reported  that  the Pioneer  production costs  in                                                               
Oooguruk  would   be  about  $15-$20   per  barrel   for  capital                                                               
expenditures and  about $10-$20  for operating costs  per barrel.                                                               
He pointed  out that,  in Alaska,  there was a  lot of  water per                                                               
barrel, which caused an increase in operating costs.                                                                            
                                                                                                                                
5:41:07 PM                                                                                                                    
                                                                                                                                
MR. FOLEY  moved on to slide  14, "SB 21/HB 72:  Econ One Initial                                                               
Project Evaluation,"  which represented a conceptual  project for                                                               
a $1  billion capital investment  for 50 million barrels  of oil.                                                               
The slide  evaluated the project  using ACES and proposed  HB 72,                                                               
using  common  operating   expenses,  capital  expenditures,  and                                                               
rates.  This conceptual project  would be $115 million better off                                                               
using the new tax idea in  proposed HB 72 rather than using ACES.                                                               
He said that it did  not describe the opportunities presented for                                                               
Pioneer.                                                                                                                        
                                                                                                                                
5:42:27 PM                                                                                                                    
                                                                                                                                
MR.  FOLEY detailed  that slide  15, "Typical  New Project  Spend                                                               
Profile," depicted  that same  project for  a $1  billion capital                                                               
investment for 50 million barrels  of oil with a spending profile                                                               
that matched the various opportunities  presented to Pioneer.  He                                                               
explained  that there  was very  substantial capital  expenditure                                                               
for  the  first eight  years,  which  was  followed by  the  peak                                                               
production, and corresponding  revenue.  He compared  this to the                                                               
previous  slide,  which  depicted capital  expenditure  for  four                                                               
years, and then  peak production, noting this  difference for the                                                               
typical  Pioneer projects.   He  confirmed that  this information                                                               
had been shared with Econ One  and PFC for their projections, and                                                               
that he  wanted the opportunity  to share this overview  with the                                                               
committee  to  evaluate  in  connection  with  the  proposed  tax                                                               
changes.                                                                                                                        
                                                                                                                                
5:44:13 PM                                                                                                                    
                                                                                                                                
MR. FOLEY  explained that  slide 16, "New  Entrant -  Stand Alone                                                               
Project," was  a reevaluation of  the project for a  new entrant,                                                               
slide 17, "Current Small Producer,"  was for a company similar to                                                               
Pioneer with small base production,  and slide 18, "Current Large                                                               
Producer with GRE,"  was for a much larger  company than Pioneer,                                                               
by a factor  ten.  He explained  that the grey bars  on the chart                                                               
showed  the  negative and  positive  cash  flow on  a  discounted                                                               
basis, under  ACES.  The red  bars reflected proposed HB  72, and                                                               
that there was 20 percent  more negative investment because there                                                               
was not  the benefit of credits.   He stated that  the upside was                                                               
for lesser tax.                                                                                                                 
                                                                                                                                
5:45:17 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER asked for clarification to the color bars.                                                                     
                                                                                                                                
MR. FOLEY  replied that  the grey  bar represented  ACES, whereas                                                               
the  red  bar  was  the  additional negative  from  the  loss  of                                                               
credits,  and the  green bar  was the  benefit of  the lower  tax                                                               
rates.  He  explained that this was discounted at  12 percent, in                                                               
order to  exactly match the  earlier Econ  One data on  slide 14.                                                               
He disclosed that  the project for a new entrant  was $92 million                                                               
worse off  with the proposed bill,  than under ACES, as  the loss                                                               
of credits far outweighed the benefit of the lower tax rate.                                                                    
                                                                                                                                
5:46:48 PM                                                                                                                    
                                                                                                                                
MR. FOLEY moved on to slide  17, explaining that this premise for                                                               
a current  small producer was  similar to the base  production of                                                               
Pioneer Natural Resources.   He observed that  this project would                                                               
be $66 million worse off with  the proposed bill than under ACES.                                                               
He explained that  the current small producer  had better results                                                               
than  the new  entrant  because, although  all  the credits  were                                                               
gone,  the loss  carry forward  allowed the  company a  lower tax                                                               
rate.   The current producer would  have the benefit of  paying a                                                               
lower tax rate sooner than a new entrant, hence a greater value.                                                                
                                                                                                                                
5:48:11 PM                                                                                                                    
                                                                                                                                
MR. FOLEY,  in response to Representative  Seaton, clarified that                                                               
currently Pioneer did  not pay tax, as it was  a profit-based tax                                                               
and Pioneer had not yet made  a profit.  He reported that Pioneer                                                               
had  made  investments in  Alaska  since  2002, that  every  year                                                               
Pioneer was  a net investor  in the  state, and that  the company                                                               
had not yet generated a profit.   He projected that, depending on                                                               
the price  of oil and  the future investments, the  company would                                                               
turn the corner, and pay a  production tax, in a couple of years;                                                               
however, the Nuna Project could push it out several more years.                                                                 
                                                                                                                                
5:49:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  asked to  clarify that  continued projects                                                               
would extend the net operating  loss, and that, under proposed HB
72, the net operating loss would disappear after ten years.                                                                     
                                                                                                                                
MR. FOLEY,  in response,  acknowledged that  continual investment                                                               
would postpone the tax.                                                                                                         
                                                                                                                                
5:50:39 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   SEATON  asked   to   clarify  if   this  was   a                                                               
disincentive  for  project  expansion,  as it  was  still  a  net                                                               
operating loss  with no tax due,  yet proposed HB 72  allowed the                                                               
loss carry  forward to  disappear if not  used against  the taxes                                                               
within ten years.                                                                                                               
                                                                                                                                
MR.  FOLEY replied  that he  would need  "to think  about that  a                                                               
little bit."                                                                                                                    
                                                                                                                                
5:51:36 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER asked to clarify if  both ACES and SB 21 [HB 72]                                                               
were included in the grey bars.                                                                                                 
                                                                                                                                
MR. FOLEY suggested  ignoring all the red and green  bars, and to                                                               
only look at  the grey bars, which reflected the  impact of ACES.                                                               
He  explained that  the red  bars, which  increased the  negative                                                               
costs as there was no longer  a credit, and the green bars, which                                                               
increased the positive  cash flow as there was a  lower tax rate,                                                               
reflected the impact of the proposed bill.                                                                                      
                                                                                                                                
CO-CHAIR FEIGE  asked to clarify  that the  cash flow was  to the                                                               
company, and not to the State of Alaska.                                                                                        
                                                                                                                                
MR. FOLEY acknowledged that the cash flow was to Pioneer.                                                                       
                                                                                                                                
5:52:43 PM                                                                                                                    
                                                                                                                                
MR.  FOLEY moved  on  to slide  18, announcing  that  this was  a                                                               
reevaluation of the project for  a large producer, defined as ten                                                               
times  the operating  base costs  of Pioneer.   He  declared that                                                               
there was  not an attempt to  mimic a legacy owner,  but rather a                                                               
company that could  enjoy that benefit of the  loss carry forward                                                               
sooner.    He reported  that  this  producer  would only  be  $13                                                               
million  worse off  with the  proposed bill  than under  ACES. He                                                               
emphasized that  this was discounted  at 12 percent,  even though                                                               
Pioneer projected  a 10 percent  discount.  He  acknowledged that                                                               
the  higher rate  increased the  gap, overstating  the difference                                                               
between  the  two  regimes,  but  explained  that  the  Econ  One                                                               
presentation had  also used  12 percent so  he was  attempting to                                                               
maintain a consistent comparison.                                                                                               
                                                                                                                                
5:54:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON asked if  Pioneer would be included as a                                                               
large producer.                                                                                                                 
                                                                                                                                
MR.  FOLEY  replied that  Pioneer  would  be considered  a  small                                                               
producer.   He directed attention  to slide 19, "New  Field: ACES                                                               
vs. SB21/HB72 Summary,"  which was a comparison for  each type of                                                               
producer.                                                                                                                       
                                                                                                                                
REPRESENTATIVE  P.  WILSON  asked   to  clarify  that  the  large                                                               
producers  were ConocoPhillips  Alaska, Inc.,  British Petroleum,                                                               
and others.                                                                                                                     
                                                                                                                                
MR.  FOLEY explained  that  those  aforementioned companies  were                                                               
substantially  bigger, and  that the  example was  for a  company                                                               
with daily production of about  40,000 barrels per day, ten times                                                               
the production of Pioneer.                                                                                                      
                                                                                                                                
REPRESENTATIVE  P.  WILSON  asked  if he  was  referring  to  the                                                               
producers listed on slide 11.                                                                                                   
                                                                                                                                
MR. FOLEY  replied that slide 11  was just an attempt  to reflect                                                               
"the relative size  of the current players."  He  stated that his                                                               
point had  been to have a  tax policy that was  attractive to all                                                               
the producers,  as each  was motivated by  different things.   He                                                               
defined the  new entrants as  companies with no  base production,                                                               
and that  it would take  a long time  to realize any  benefit for                                                               
the loss  carry forward credit.   The small producer  was similar                                                               
to Pioneer.  The large producer  was a company ten times the size                                                               
of Pioneer.   He  summarized that the  exact same  project placed                                                               
with   different  investors   would   have  different   financial                                                               
outcomes, possibly unintended, under proposed HB 72.                                                                            
                                                                                                                                
5:57:23 PM                                                                                                                    
                                                                                                                                
MR. FOLEY offered his belief  that there were several complicated                                                               
restrictions on  how that loss  carry forward  balance escalated,                                                               
and he listed  that neither the first two years  or the last year                                                               
were counted,  and that  there was  not any  unpaid tax  from the                                                               
small  producer   credit.    He   clarified  that  not   all  the                                                               
expenditures would  grow at 15  percent, and it was  truncated at                                                               
the end.   He  concluded that  the escalation  of the  loss carry                                                               
forward did not offset the value of the credits.                                                                                
                                                                                                                                
5:58:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK asked  to compare  the presentation  by Brad                                                               
Keithley for  decline rates before  the net present value,  so no                                                               
discount rate, with  the Pioneer estimate without  the 12 percent                                                               
discount.                                                                                                                       
                                                                                                                                
MR.  FOLEY, in  response to  Representative Tuck,  said that  the                                                               
result would be  "very, very different."  He  explained that this                                                               
presentation work  was done by Palantir,  an economics evaluation                                                               
consultant  company.   He  reported  that  Palantir had  built  a                                                               
commercial  model to  exactly match  both ACES  and the  proposed                                                               
bill.  He  declared that the tax structure  was very complicated,                                                               
and  not a  simple cash  flow analysis,  as it  was a  profit tax                                                               
based  on the  entire integrated  business.   He opined  that ten                                                               
model developers would each have a different result to this.                                                                    
                                                                                                                                
REPRESENTATIVE TUCK  asked to  clarify that  it was  necessary to                                                               
have a discounted rate to compare the models.                                                                                   
                                                                                                                                
MR.  FOLEY,  in   response,  offered  his  belief   that  it  was                                                               
absolutely necessary to look at it on a discounted basis.                                                                       
                                                                                                                                
6:00:45 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked  to clarify that slide  11 viewed the                                                               
companies by their capitalization  size, whereas the other slides                                                               
recognized companies by production size.                                                                                        
                                                                                                                                
MR. FOLEY expressed  agreement, noting that slide  19 had nothing                                                               
to do  with the size  of the company,  but everything to  do with                                                               
the in-state investment and the base tax rate.                                                                                  
                                                                                                                                
6:01:39 PM                                                                                                                    
                                                                                                                                
MR. FOLEY returned attention to  slide 19, and explained that the                                                               
gap  would be  less  if  it modeled  at  a  10 percent  discount,                                                               
instead of 12 percent.                                                                                                          
                                                                                                                                
6:02:11 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  asked to clarify  slide 16, that a  new entrant                                                               
would lose  $92 million more  under the proposed bill  than under                                                               
ACES.                                                                                                                           
                                                                                                                                
MR. FOLEY  expressed agreement.   He clarified that this  did not                                                               
describe  every project  in Alaska,  just the  projects in  which                                                               
Pioneer was involved.                                                                                                           
                                                                                                                                
6:03:02 PM                                                                                                                    
                                                                                                                                
MR. FOLEY provided slide 21,  "Industry Spending on North Slope,"                                                               
explaining  that  this  was  a  five year  snapshot  of  all  the                                                               
expenditures eligible  for credits,  about $2 billion  each year.                                                               
The  red bars  reflected  that amount  spent  on facilities,  the                                                               
green bars showed  the amount spent on  development drilling, and                                                               
the orange bars  showed the amount for exploration  drilling.  He                                                               
projected that, on  average, about 42 percent of  all the capital                                                               
expenditures  was spent  on facilities,  with another  43 percent                                                               
spent   on  drilling   development  wells   and  12   percent  on                                                               
exploration wells.   He declared that every  development well had                                                               
resulted in new  oil, and he opined that a  lot of the facilities                                                               
capital was spent  on new installations or  to refurbish existing                                                               
facilities.   He  endorsed  that every  dollar  spent helped  the                                                               
state  with   its  production.    He   indicated  that,  although                                                               
exploration was a  risky business, without it there  would not be                                                               
any new oil production.                                                                                                         
                                                                                                                                
6:05:06 PM                                                                                                                    
                                                                                                                                
MR. FOLEY  declared that the  tax rate  in the proposed  bill was                                                               
too high, and  that the credits really mattered,  as it minimized                                                               
the  capital investment.   He  encouraged  that the  tax rate  be                                                               
lowered.  He  observed that, although the  Pioneer projects would                                                               
not save  Alaska, it  was a  contributor.   He said  that Pioneer                                                               
would  bring jobs,  and  he referred  to  the multiplier  effect,                                                               
whereby  every  job  in  the  oil field  resulted  in  nine  more                                                               
indirect   jobs.     Referring  to   slide  22,   "Fostering  New                                                               
Production: Why  Credits Matter," he informed  the committee that                                                               
credits helped  with investment,  as there  would be  more wells,                                                               
more oil, more royalty, and more throughput.                                                                                    
                                                                                                                                
6:07:31 PM                                                                                                                    
                                                                                                                                
MR. FOLEY concluded with slide 23,  "HB 72 Closing Thoughts."  He                                                               
stated  that the  proposed bill  had  many favorable  attributes,                                                               
including the elimination of progressivity,  and extension of the                                                               
small producer  credit, but that the  tax rate was too  high.  He                                                               
observed that  the playing  field would never  be level  with the                                                               
current  players,  because  of the  infrastructure,  people,  and                                                               
data,  but that  the small  producer credit  did help  level that                                                               
playing field a little bit.                                                                                                     
                                                                                                                                
MR.  FOLEY  offered  some  suggestions   and  he  encouraged  the                                                               
maintenance of a credit program,  even if it meant including some                                                               
targeted investments  to encourage.   He said  that a  credit for                                                               
drilling  new wells,  or  a credit  for a  new  project with  new                                                               
facilities,  even for  a limited  time, would  encourage it.   He                                                               
pointed out  that the  gross revenue exclusion  did not  apply to                                                               
the  legacy  fields,   so  there  was  not   any  stimulation  or                                                               
motivation for additional investment in  those fields.  He opined                                                               
that new  production was necessary  in both the existing  and new                                                               
fields, as "there's a ton of  additional oil resource" and it was                                                               
necessary to motivate the three big producers.                                                                                  
                                                                                                                                
6:09:37 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK relayed  that  the  bar needed  to  be at  a                                                               
competitive level,  in order  for investment  to occur,  and that                                                               
the existing fields  had the quickest potential  for putting more                                                               
oil into the  pipeline.  He asked if bringing  tax credits closer                                                               
to the wellhead would enable more investment.                                                                                   
                                                                                                                                
MR. FOLEY,  in response,  replied the  guiding principles  of the                                                               
governor's  bill were  to  incent new  oil  production, and  that                                                               
could be accomplished  by giving credits for  drilling wells, and                                                               
developing existing facilities.  He  encouraged a system that was                                                               
fair and balanced for all the diverse investors.                                                                                
                                                                                                                                
6:11:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  relayed  that   the  elimination  of  the                                                               
capital  credits was  due  to  an upcoming  payout  of almost  $1                                                               
billion.   He  asked if  the relationship  of the  percentages in                                                               
investments between facilities,  developmental well drilling, and                                                               
exploratory well drilling was remaining steady.                                                                                 
                                                                                                                                
MR. FOLEY replied that he was  not an expert, and merely reviewed                                                               
this as  data produced by  the Department  of Revenue (DOR).   He                                                               
opined  that this  data  could be  used  for future  projections,                                                               
though  he  had  difficulty believing  the  capital  expenditures                                                               
would increase  from $2  billion to  $5 billion  in the  next few                                                               
years.    He   applauded  the  possibility  for   a  doubling  of                                                               
investment, which  would lead to  a greater production,  and that                                                               
was exactly what the state should be motivating.                                                                                
                                                                                                                                
6:13:40 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON expressed  his agreement,  except that  it                                                               
was  necessary  to balance  the  reduction  in revenue  from  the                                                               
elimination  of  progressivity.   He  listed  the  aforementioned                                                               
problems  cited  by  Mr.  Foley  that  would  not  stimulate  new                                                               
investment,  as  new  investors  would  be  worse  off  with  the                                                               
proposed bill than with ACES.                                                                                                   
                                                                                                                                
MR. FOLEY  commented that  the information  he had  presented was                                                               
just sharing  the oil world view  through his eyes.   He stressed                                                               
that the credits were very important  to his company.  He pointed                                                               
out  that the  legislature  was  the policy  maker  and that  the                                                               
industry would respond to whatever  policy was approved; however,                                                               
if the intent was to incent  new oil wells, then design a program                                                               
that rewarded the behaviors to produce new wells.                                                                               
                                                                                                                                
6:15:44 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked whether  he was projecting that there                                                               
would  be a  greater  margin  than $30  per  barrel,  as a  small                                                               
producer.    He opined  that  Pioneer  would  not be  paying  any                                                               
progressivity in the near future on any of the expansions.                                                                      
                                                                                                                                
MR.  FOLEY  replied that  Representative  Seaton  had hit  a  key                                                               
point.  He  declared that paying a lot of  taxes was desirable in                                                               
a profit based  system.  He explained that  the system encouraged                                                               
investment, because, as a  harvester without capital investments,                                                               
there  would   be  the   difficulty  of   high  taxes   and  high                                                               
progressivity.   He pointed  out that  the smaller  projects were                                                               
just  not  that profitable.    With  the  profit based  tax,  and                                                               
without progressivity on a new  small marginal project, there was                                                               
a focus on the credit rather than the reduction in the tax rate.                                                                
                                                                                                                                
REPRESENTATIVE  SEATON declared  that  he  better understood  the                                                               
position.                                                                                                                       
                                                                                                                                
6:18:46 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  offered his belief that  the committee understood                                                               
what Mr.  Foley was  saying about the  legacy fields,  that there                                                               
was a  lot of  oil to still  be gained.   He recognized  that the                                                               
gross  revenue exclusion  for  the  new projects  may  not be  as                                                               
achievable in  the legacy  fields.  He  stated that  an incentive                                                               
needed to  be tied  to new  production, and  it was  necessary to                                                               
define "new oil," which was more  difficult to define in a legacy                                                               
field.   He  asked  if there  was a  methodology  to identify  or                                                               
define the percentage of new oil in a legacy field.                                                                             
                                                                                                                                
MR. FOLEY replied that he was  not the right person to comment on                                                               
this;  however, he  stated that  new  opportunities and  projects                                                               
existed on  the North  Slope, and  it seemed  like the  same rule                                                               
should apply everywhere, as it was all new oil.                                                                                 
                                                                                                                                
6:20:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON commented that  the gross revenue exclusion                                                               
(GRE)  for a  specific development  was a  "big reduction  in tax                                                               
rate," and, depending on the expenditures  and as it came off the                                                               
top,  could have  a big  effect on  profitability.   He asked  to                                                               
clarify that  the GRE  for proposed  specific dates  and specific                                                               
units was  "the administration ...  sitting there trying  to pick                                                               
winners  and  losers."    He  offered his  belief  that  not  all                                                               
projects were considered  the same based on  their economics, but                                                               
instead, whether  they fit  into a window  created for  a certain                                                               
production.   He asked if Mr.  Foley saw that same  issue for who                                                               
would receive a GRE.                                                                                                            
                                                                                                                                
MR. FOLEY responded that the  current proposal rewarded different                                                               
players differently.   Although he  was unsure whether  it picked                                                               
winners and  losers, he  declared that it  depended "who  you are                                                               
and where  you are,"  whether inside or  outside a  legacy field,                                                               
current tax  payer or  not.   He stated  that everyone  should be                                                               
treated the  same.  He expressed  his agreement that the  GRE had                                                               
the effect  of lowering the  tax rate.   He endorsed the  need to                                                               
grow the  pie by creating  a fiscal environment  which encouraged                                                               
incentive and resulted  in new oil production.   He affirmed that                                                               
a lower tax rate would create a bigger tax base.                                                                                
                                                                                                                                
6:23:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON   expressed  his  understanding   for  the                                                               
implications of the  tax rate, though he considered  that the GRE                                                               
was  very complex  as it  changed tremendously  depending on  the                                                               
base  economics  of  the  project.    He  explained  that  taking                                                               
something  off  the  top related  differently  depending  on  the                                                               
economics of  the project.   He suggested  visiting the  tax rate                                                               
rather than the  GRE, which had multiple facets  dependent on the                                                               
economics of each project.                                                                                                      
                                                                                                                                
MR. FOLEY expressed  his agreement that this was complex.   As it                                                               
was a  profit-based tax, the  elimination of some  things through                                                               
GRE in  the calculation of  profit resulted  in lower taxes.   He                                                               
declared the  need to keep  it simple  by lowering the  tax rate,                                                               
changing progressivity,  and creating credits for  the encouraged                                                               
investments.                                                                                                                    
                                                                                                                                
6:25:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOHNSON  asked if  Pioneer  would  be in  Alaska,                                                               
knowing what they know today.                                                                                                   
                                                                                                                                
MR. FOLEY  responded that, when  Pioneer came to Alaska  in 2002,                                                               
it had  a very strict  need for an  oil project, and  that Alaska                                                               
was   a   perfect  strategic   fit.      Since  then,   Pioneer's                                                               
opportunities in Texas had exploded  and he declared "without any                                                               
regard  for the  tax system,  would we  be here  today?   I don't                                                               
know."   He noted that Pioneer  came to Alaska under  the ELF tax                                                               
system of  zero tax, which  then became  a 20 percent  profit tax                                                               
which  was  better  because  of   the  credits  and  the  timing.                                                               
However, as  the tax rate  went up, it got  worse and worse.   He                                                               
confirmed that costs  were higher in Alaska, and  that the fiscal                                                               
environment was not as attractive.                                                                                              
                                                                                                                                
6:27:04 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOHNSON asked  whether he considered ACES  to be a                                                               
success.                                                                                                                        
                                                                                                                                
MR. FOLEY respectfully declined to comment.                                                                                     
                                                                                                                                
6:27:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK  asked if  Pioneer had been  able to  use the                                                               
transitional investment credit and  the royalty relief during the                                                               
changes in tax systems.                                                                                                         
                                                                                                                                
MR.  FOLEY  said  that  Pioneer did  have  investments  when  PPT                                                               
originally came  into play, and,  although they were  entitled to                                                               
the credits which expired by a  certain date, Pioneer was not yet                                                               
tax  positive and  had  not used  the credits.    He opined  that                                                               
Pioneer would not see any benefit from those tax credits.                                                                       
                                                                                                                                
6:28:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK   directed  attention  to  the   graphs  for                                                               
proposed HB 72, and asked  if a transitional credit would enhance                                                               
the proposed bill.                                                                                                              
                                                                                                                                
MR. FOLEY said that Nuna was  the only project on the horizon for                                                               
Pioneer, and that most of the  expenditure would be during 2013 -                                                               
2016.   He  affirmed  that  capital credits  would  not make  any                                                               
difference to Pioneer, unless they invested in another project.                                                                 
                                                                                                                                
6:29:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR  surmised  that this  reflected  investments                                                               
currently  made  under  ACES,   and  influenced  by  the  capital                                                               
credits.                                                                                                                        
                                                                                                                                
MR. FOLEY  replied that  it was  necessary to  look at  the whole                                                               
system.   He  agreed  that  the credits,  under  ACES, were  very                                                               
attractive,  but that  the  tax  rate was  very  high.   However,                                                               
Pioneer did  not yet have a  profit, and therefore was  not yet a                                                               
taxpayer.  He disclosed that  currently they were most focused on                                                               
the credits; however,  in the future, the tax rate  would be more                                                               
important.                                                                                                                      
                                                                                                                                
REPRESENTATIVE  TARR referred  to an  earlier presentation  which                                                               
indicated  that  tax credits  were  not  influential in  decision                                                               
making, as  bottom line cash  flow was  the most important.   She                                                               
asked if that was not as true for a small producer.                                                                             
                                                                                                                                
MR. FOLEY observed  that there were two  really important points:                                                               
the  credits were  important for  Pioneer's project  economics as                                                               
they reduced the capital expenditure  and increased efficiency on                                                               
the investment, the  discounted return on investment  (DRI).  The                                                               
credits reduced  the necessary capital,  and allowed  funding for                                                               
other  opportunities.   These credits  allowed Pioneer  to do  20                                                               
percent more than without.                                                                                                      
                                                                                                                                
6:32:12 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  encouraged  Mr.   Foley  to  provide  additional                                                               
written  testimony   and  suggestions  for  improvement   to  the                                                               
proposed bill.                                                                                                                  
                                                                                                                                
6:33:11 PM                                                                                                                    
                                                                                                                                
KARA   MORIARTY,  Executive   Director,   Alaska   Oil  and   Gas                                                               
Association  (AOGA),  declared  that AOGA  was  the  professional                                                               
trade  association  for the  industry,  and  that the  15  member                                                               
companies accounted  for the majority  of oil and gas  in Alaska.                                                               
She declared that  her comments had been  unanimously approved by                                                               
the  member companies,  and she  paraphrased  from the  following                                                               
written statement:                                                                                                              
                                                                                                                                
     The greatest  and most  urgent challenge  facing Alaska                                                                    
     today is the  decline of oil production  from the North                                                                    
     Slope. And the greatest,  most urgent issue facing this                                                                    
     Legislature is how you will address this problem.                                                                          
                                                                                                                                
     For  someone who  is happy  and content  to see  Alaska                                                                    
     continue along the path it  is headed on, the answer to                                                                    
     this question  is - do  nothing; leave the  present tax                                                                    
     system alone.                                                                                                              
                                                                                                                                
     But  most  Alaskans would  disagree  that  this is  the                                                                    
     future they  want. They hope  for a robust  industry on                                                                    
     the North  Slope beyond their own  lifetimes. They want                                                                    
     their children  and grandchildren to have  the benefits                                                                    
     from  the   oil  industry   that  this   generation  of                                                                    
     Alaskans, and  the one before, have  enjoyed. They want                                                                    
     the  good jobs  that the  industry offers  to continue,                                                                    
     and  they  want industry  to  continue  to support  the                                                                    
     education  and  skills  training  that  are  needed  to                                                                    
     qualify  for  many  of  those  jobs.  They  want  their                                                                    
     friends  and neighbors  who work  for  the industry  to                                                                    
     stay  here.  They  want  all  the  volunteer  community                                                                    
     services to  continue that industry  employees perform,                                                                    
     and  that companies  themselves do  directly. The  want                                                                    
     the  activity and  growth in  the Alaskan  economy that                                                                    
     industry stimulates  to continue. And, of  course, they                                                                    
     like the fact  that industry pays for  a great majority                                                                    
     of the  costs of  government and  hope that  this, too,                                                                    
     will continue.                                                                                                             
                                                                                                                                
     The  role of  AOGA, and  of individual  companies doing                                                                    
     business here, is not to  tell Alaska how much it ought                                                                    
     to collect  from oil  and gas, nor  should that  be our                                                                    
     role.  Rather, we  should tell  you about  how Alaska's                                                                    
     tax  regime  is  affecting our  businesses,  about  the                                                                    
     parts of the  present tax laws that are  not working as                                                                    
     intended, and  about ways to improve  the tax structure                                                                    
     to  get  more  of   the  intended  results.  With  that                                                                    
     knowledge, you can then  make sound, informed decisions                                                                    
     about  how much  tax to  collect, how  to collect  that                                                                    
     amount, and when to collect it.                                                                                            
                                                                                                                                
     For several years  there has been a red  herring in the                                                                    
     public discussion  about oil taxes. This  is the notion                                                                    
     that  any  change in  tax  structure  that reduces  tax                                                                    
     revenues below  the projections in the  Revenue Sources                                                                    
     Book  is a  "giveaway."   This  reflects an  assumption                                                                    
     that those forecasted  oil and gas taxes  are somehow a                                                                    
     "given"  - something  like money  already in  the bank,                                                                    
     and all the  State Treasury needs to do is  wait for it                                                                    
     to  be deposited  into the  State's account.  The fact,                                                                    
     however,  is  that industry  has  to  spend roughly  $2                                                                    
     billion dollars  each year just to  slow the production                                                                    
     decline from what it would  naturally be, in order even                                                                    
     to approach  the level of  production published  in the                                                                    
     Revenue  Sources   Book.  And   just  like   any  other                                                                    
     investment  industry  makes   here,  these  production-                                                                    
     sustaining  investments have  to  beat the  competition                                                                    
     elsewhere for  those investment dollars: they  are both                                                                    
     not a "given."                                                                                                             
                                                                                                                                
     Worse,   the  "tax   giveaway"  argument   assumes  the                                                                    
     production  in the  Revenue Sources  Book  is all  that                                                                    
     will be  produced. These critics factor  in nothing for                                                                    
     any additional production and  revenue resulting from a                                                                    
     tax reduction.  Instead it looks  only at  the downside                                                                    
     and ignores  the upside. The  upside, though,  is real.                                                                    
     If  a   tax  reduction  makes  investments   here  more                                                                    
     competitive,   companies  will   want   to  make   more                                                                    
     investments here for  that upside. And they  will do so                                                                    
     even  though they,  like the  State, lack  the gift  of                                                                    
     prophecy and  cannot know  beforehand exactly  what the                                                                    
     upside  will   turn  out  to  be   for  any  particular                                                                    
     investment.                                                                                                                
                                                                                                                                
     As you  consider solutions  to the  momentous challenge                                                                    
     that production  decline creates,  it will be  wise and                                                                    
     useful  to identify  the principles  you  want the  tax                                                                    
     system to earn,  and the specific goals you  want it to                                                                    
     achieve.  AOGA believes  Governor Parnell's  four "core                                                                    
     principles" offer an excellent cornerstone for this:                                                                       
                                                                                                                                
     "First, tax reform must be fair to Alaskans."                                                                              
                                                                                                                                
     "Second, it must encourage new production.                                                                                 
                                                                                                                                
     "Third, it must be simple,  so that it restores balance                                                                    
     to the system."                                                                                                            
     "Fourth, it must be durable for the long term."                                                                            
                                                                                                                                
     We believe  a fifth such  principle will be  prudent as                                                                    
     well, because  the challenge facing Alaska  is not that                                                                    
     there  are too  many  companies pursuing  opportunities                                                                    
     they  see here,  but  that there  are  too few.  Alaska                                                                    
     should  therefore avoid  tax changes  that artificially                                                                    
     create "winners" and "losers."                                                                                             
                                                                                                                                
     With respect  to House  Bill 72,  there are  four major                                                                    
     features in  it that we  wish to address, and  the Bill                                                                    
     omits several  others that we  would like to  draw your                                                                    
     attention to.  The major features  in the Bill  are the                                                                    
     elimination  of progressivity,  changes to  the present                                                                    
     system of tax credits,  a "gross revenue exclusion" for                                                                    
     certain  new  production,  and  the  timing  for  these                                                                    
     changes to occur. Here are our thoughts on them.                                                                           
                                                                                                                                
     1.   Repeal  of   Progressivity.   AOGA  endorses   the                                                                  
     elimination  of   progressivity.  First,  progressivity                                                                    
     directly attacks and destroys  one of the few strategic                                                                    
     advantages that Alaska has, which  lies in its economic                                                                    
     remoteness. It costs $9.42 on  average to ship a barrel                                                                    
     of  oil  from  the  North  Slope  to  the  West  Coast,                                                                    
     according  to  the  Fall  2012  Revenue  Sources  Book,                                                                    
     Appendix D-  1b. This  means Alaska  starts off  with a                                                                    
     disadvantage   of  $9.42   a  barrel   against  Outside                                                                    
     competition, so  other parts  of an  Alaskan investment                                                                    
     must  be  pretty  strong  in  order  to  overcome  this                                                                    
     disadvantage. Otherwise they won't be made.                                                                                
                                                                                                                                
     If  oil prices  turn out  to be  higher than  what they                                                                    
     were  projected  to  be  in  the  investment  analysis,                                                                    
     nearly 100 percent of each  extra dollar in price flows                                                                    
     directly  into   the  Gross  Value  at   the  Point  of                                                                    
     production (GVPP) and then,  after royalties and taxes,                                                                    
     flows straight  into the investor's bottom  line. This,                                                                    
     in  turn,  improves  the  economic  performance  of  an                                                                    
     Alaskan investment  relative to an  equally competitive                                                                    
     one Outside, because the  Alaskan baseline was $9.42-a-                                                                    
     barrel lower  and an  additional dollar  in price  is a                                                                    
     larger  percentage  of  that   baseline  than  for  the                                                                    
     percentage  for the  Outside  investment.  This can  be                                                                    
     particularly  significant for  potential investors  who                                                                    
     are bullish on oil prices.                                                                                                 
                                                                                                                                
     Currently,  progressivity  in  conjunction  with  a  25                                                                    
     percent base  tax will  take half  of each  dollar from                                                                    
     higher  prices when  the West  Coast  price is  $132.38                                                                    
     (using  the Fall  2012 Source  Book  numbers) -a  price                                                                    
     that has  already been  seen, although  somewhat higher                                                                    
     than today's.  So, even for  investors who  are bullish                                                                    
     on oil  prices, progressivity destroys half  of the one                                                                    
     strategic advantage  that Alaska's  economic remoteness                                                                    
     provides. And the more bullish  they are, the more this                                                                    
     advantage is undone because they  will see higher rates                                                                    
     for progressivity  at those prices in  their investment                                                                    
     analysis.                                                                                                                  
                                                                                                                                
     Second,  progressivity brings  extraordinary complexity                                                                    
     to the  tax, not only  in calculating what the  tax is,                                                                    
     but  also   in  analyzing   what  the  amount   of  the                                                                    
     progressivity is  for any particular item  that affects                                                                    
     a   taxpayer's  Production   Tax   Value  (PTV).   This                                                                    
     complexity   exists   because    the   tax   rate   for                                                                    
     progressivity  depends   on  the  taxpayer's   PTV  per                                                                    
     barrel, and then  the resulting rate is  applied to the                                                                    
     very same  PTV that set  the rate. This  circularity in                                                                    
     the  tax  calculation  leads to  bizarre  effects.  For                                                                    
     instance,  simply the  fact that  oil prices  fluctuate                                                                    
     during  a  year  instead of  remaining  perfectly  flat                                                                    
     increases  the  tax  even though  the  average  of  the                                                                    
     fluctuating prices is the same  as the flat price - and                                                                    
     the greater  the fluctuation, the greater  the tax from                                                                    
     progressivity becomes.  There is no  objective economic                                                                    
     or  financial reason  for the  tax to  go up;  instead,                                                                    
     this   occurs   entirely  because   the   progressivity                                                                    
     calculation is circular.                                                                                                   
                                                                                                                                
     2. Tax Credits                                                                                                           
                                                                                                                                
     In general,  tax credits, whether they  be for drilling                                                                    
     a well,  building a facility  to gather new oil  or the                                                                    
     pipe to build a  flowline, represent a direct reduction                                                                    
     in the  amount that a  potential investor puts  at risk                                                                    
     by spending  money on the equipment  and facilities. It                                                                    
     is important to  reinforce that there is  no tax credit                                                                    
     liability  for  the  State at  all  until  an  investor                                                                    
     invests here. So  it costs nothing to  offer the credit                                                                    
     until the  investment is made  here, and at  that point                                                                    
     the  tax credit  has already  succeeded in  what it  is                                                                    
     supposed to  do - namely to  attract investment dollars                                                                    
     here.                                                                                                                      
                                                                                                                                
     A. Repeal of the  Qualified Capital Expenditure ("QCE")                                                                  
     Tax Credit.                                                                                                              
                                                                                                                                
     Even  while  the  elimination  of  progressivity  would                                                                    
     improve  the  competitiveness  of  Alaskan  investments                                                                    
     from the present  ACES tax, the elimination  of the QCE                                                                    
     Credit would  claw back a  big chunk of that  money and                                                                    
     undo   a   significant   part   of   that   competitive                                                                    
     improvement.  This is  because the  benefit of  the QCE                                                                    
     Credit  depends  only on  how  much  is invested  here,                                                                    
     while the benefit from  ending progressivity depends on                                                                    
     the  price  of  oil  relative  to  a  producer's  lease                                                                    
     expenditures.  For every  producer,  there  is a  price                                                                    
     below  which  the  lost  QCE   Credit  would  start  to                                                                    
     outweigh  the benefit  from the  end of  progressivity,                                                                    
     and exactly where that crossover  comes would depend on                                                                    
     factors that are specific  to each individual producer,                                                                    
     such as  how much oil  it produces, where it  sells the                                                                    
     oil,  its costs  to  deliver it  there,  and its  lease                                                                    
     expenditures.                                                                                                              
                                                                                                                                
     AOGA fears  the repeal of  the QCE Credit is  likely to                                                                    
     create  "winners"   and  "losers"   artificially  among                                                                    
     producers,   and   we   see   no   sound   tax   policy                                                                    
     justification for doing so.                                                                                                
                                                                                                                                
     B.   Small-Producer  and   Exploration  Credits.   AOGA                                                                  
     endorses the  proposal in  HB 72  to extend  the small-                                                                    
     producer  tax  credit  under   AS  43.55.024  from  the                                                                    
     present sunset dates at the  start or middle of 2016 to                                                                    
     2022 and encourages the  same extension the exploration                                                                    
     tax  credits under  AS 43.55.025.  The State  had sound                                                                    
     policy  reasons for  creating  these  tax credits,  and                                                                    
     those  reasons are  just as  valid today  as they  were                                                                    
     then.                                                                                                                      
                                                                                                                                
     The  purpose of  the small-producer  tax credit  was to                                                                    
     attract new players to Alaska  who might otherwise have                                                                    
     been  deterred  from  coming here  by  its  remoteness,                                                                    
     northern  climate,  and  the  resulting  challenges  of                                                                    
     higher-than-average costs and  expenses. The success of                                                                    
     the  credit in  doing this  is  a fact  that cannot  be                                                                    
     denied. AOGA  sees this success  in its  own membership                                                                    
     and  in other  companies that  have come  here and  are                                                                    
     active. The  importance of having a  healthy contingent                                                                    
     of smaller producers comes from  the facts, first, that                                                                    
     they  often  have  a different  perspective  about  the                                                                    
     opportunities around them, and  second, that no company                                                                    
     or  group of  companies  can have  a  monopoly on  good                                                                    
     ideas and innovation. For  both reasons, the continuing                                                                    
     and  increasing  presence  of these  smaller  producers                                                                    
     strengthens   and   improves  the   Alaskan   petroleum                                                                    
     industry.  We  know  from   testimony  that  the  small                                                                    
     producer tax  credit has made a  material difference in                                                                    
     individual  companies'  decisions  to do  business  and                                                                    
     invest in Alaska.                                                                                                          
                                                                                                                                
     The purpose  and justification for the  exploration tax                                                                    
     credits  under  AS  43.55.025  are  equally  plain  and                                                                    
     clear. Huge  geographical swaths  of this  state remain                                                                    
     unexplored for  oil and gas,  or have been  explored in                                                                    
     little more  than a rudimentary way.  If exploration is                                                                    
     to  occur   in  a  timely  fashion   so  any  resulting                                                                    
     production   can   be  transported   through   existing                                                                    
     infrastructure,  the  exploration  tax  credits  are  a                                                                    
     direct  way  of  bringing that  exploration  about  and                                                                    
     these type of credits should  be extended as well. Just                                                                    
     as with the QCE  credits for capital investments, there                                                                    
     is no exploration tax credit  without real money having                                                                    
     first  been spent  on exploration  work that  qualifies                                                                    
     for these tax credits.                                                                                                     
                                                                                                                                
     C.  Limiting  the transferability  of  "carried-forward                                                                  
     annual  loss" tax  credits.  We  have some  reservation                                                                  
     about the  proposal in HB  72 to bar  almost completely                                                                    
     the  transferability  of the  current  "carried-forward                                                                    
     annual loss"  tax credits under AS  43.55.023(b). These                                                                    
     credits arise every year for  any active explorer until                                                                    
     it finds something and finally  has production that has                                                                    
     a  tax   to  apply  the  credit   against.  At  present                                                                    
     explorers  can  only  realize  immediate  benefit  from                                                                    
     these  credits by  selling them  to other  taxpayers or                                                                    
     cashing them  in at  the state Oil  and Gas  Tax Credit                                                                    
     Fund established in AS 43.55.028.                                                                                          
                                                                                                                                
     Such  sales and  cash-ins  would stop  for North  Slope                                                                    
     explorers under the Bill, who  instead would be able to                                                                    
     hold the  credit for  up to 10  years for  possible use                                                                    
     against  tax on  their  own  production, assuming  they                                                                    
     find something  to produce. During this  l0-year shelf-                                                                    
     life  the unused  credits would  increase at  an annual                                                                    
     rate  of  15  percent, compounded  annually.  The  same                                                                    
     would  apply for  a North  Slope producer  with a  year                                                                    
     resulting in a "carried-forward annual loss."                                                                              
                                                                                                                                
     The Bill's  only exception to  this ban would be  for a                                                                    
     transfer  made  in conjunction  with  a  sale or  other                                                                    
     transfer  of an  "operating right,  operating interest,                                                                    
     or working interest" in a  lease or property the person                                                                    
     acquiring   that   interest   could  also   acquire   a                                                                    
     proportionate share of  the lease-or-property's accrual                                                                    
     loss credits arising before that transaction.                                                                              
                                                                                                                                
     To prevent  taxpayers from deliberately  hoarding these                                                                    
     credits instead  of using them  in order to get  the 15                                                                    
     percent  annual increase,  the Bill  would deny  the l5                                                                    
     percent  increase for  each year  when  they could  use                                                                    
     their credits  but don't. We  believe this would  be an                                                                    
     effective deterrent against  abuse that might otherwise                                                                    
     occur.                                                                                                                     
                                                                                                                                
     In  general, if  sales and  transfers of  these annual-                                                                    
     loss tax  credits are  to be limited  at all,  then the                                                                    
     limitations  proposed in  HB 72  would be  a reasonable                                                                    
     way  to do  it. Our  major concern  of the  proposal is                                                                    
     that  the  1O-year shelf-life  for  using  a credit  is                                                                    
     unrealistically short.  If all  the stars,  planets and                                                                    
     constellations  are in  just  the  right alignment,  it                                                                    
     might  be   possible  for  an   explorer  to   go  from                                                                    
     exploration  and discovery  to  production  in just  l0                                                                    
     years. But that  is not the norm -  particularly on the                                                                    
     North  Slope, where  the limitation  on transferability                                                                    
     would apply.  We think 15  years would be more  in line                                                                    
     with actual experience.                                                                                                    
                                                                                                                                
     The geographical  limitations on where the  tax credits                                                                    
     must  arise  in  order  still  to  be  freely  sold  or                                                                    
     transferred  may  have   unintended  consequences,  but                                                                    
     because  of  confidentiality considerations,  they  are                                                                    
     not appropriate matters to be  discussed within a trade                                                                    
     association  like AOGA.  We must  therefore leave  this                                                                    
     for  individual  companies to  address  if  there is  a                                                                    
     problem.                                                                                                                   
                                                                                                                                
     Of course,  without the l5  percent annual  increase in                                                                    
     the  unused  credits,  AOGA would  oppose  the  ban  on                                                                    
     transferability   because   it    would   destroy   the                                                                    
     incentives which  the credit is supposed  to provide to                                                                    
     explorers.                                                                                                                 
                                                                                                                                
     3.   Gross  Revenue   Exclusion.  This   is  the   most                                                                  
     innovative feature in HB 72,  and our major substantive                                                                    
     concern is that it is too narrowly focused.                                                                                
                                                                                                                                
     The   Gross   Revenue   Exclusion   (GRE)   would,   in                                                                    
     calculating the  taxable Production Tax  Value, exclude                                                                    
     20  percent  of  the  Gross   Value  at  the  Point  of                                                                    
     Production of what  we'll call "non-legacy" production.                                                                    
     Bill Section  24 calls it  production "from a  lease or                                                                    
     property that does  not contain land that  was within a                                                                    
     unit on  January l,  2003[,]" or if  it does  have land                                                                    
     that was  in a  unit before  2003, "the  oil or  gas is                                                                    
     produced   from   a  participating   area   established                                                                    
     after... 2011 [that] does not  contain a reservoir that                                                                    
     had   previously   been   in   a   participating   area                                                                    
     established before ... 2012."                                                                                              
                                                                                                                                
     What this means is, the  fields that are likely to lose                                                                    
     out on  getting any  GRE under HB  72 are  Prudhoe Bay,                                                                    
     Kuparuk,  Lisburne,  Milne   Point,  Endicott,  Niakuk,                                                                    
     Point McIntyre, and Alpine; as  well as the Prudhoe Bay                                                                    
     satellite fields Aurora,  Borealis, Midnight Sun, North                                                                    
     Prudhoe  Bay,   Orion  and  Polaris  and   the  Kuparuk                                                                    
     satellites Meltwater, NEWS, Tabasco, Tam and West Sak.                                                                     
                                                                                                                                
     Econ  One Research,  Inc. made  a presentation  to this                                                                    
     committee  just  last  Wednesday entitled  Analysis  of                                                                    
     Alaska  Tax  System,  North Slope  Investment  and  The                                                                    
     Administration's Proposal,  HB 72.  In Slide 6  of that                                                                    
     presentation  Econ One  showed  oil  and gas  resources                                                                    
     described  as  "Economically   Recoverable  @  $90/bbl"                                                                    
     totaling  29.1  billion  barrels  of  oil  and  barrel-                                                                    
     equivalents  of gas.  Of this  total,  the slide  shows                                                                    
     that  10.4  billion  are  in   ANWR  and  the  National                                                                    
     Petroleum  Reserve-Alaska, another  9.9 billion  in the                                                                    
     Chukchi Sea Outer Continental Shelf  5.8 billion in the                                                                    
     Beaufort Sea  OCS, and 3  billion in the  central North                                                                    
     Slope where  all the producing  fields are that  I just                                                                    
     named.                                                                                                                     
                                                                                                                                
     To  us,  the slide  shows  that  more  than half  -  54                                                                    
     percent - of this  29.1 billion-barrel resource lies in                                                                    
     the  federal OCS,  outside  Alaska's sea-ward  boundary                                                                    
     and  beyond its  jurisdiction to  tax. Current  federal                                                                    
     law does  not provide for any  OCS revenue-sharing with                                                                    
     Alaska,   and   even  though   Alaska's   Congressional                                                                    
     Delegation is trying  to change that, for  now the only                                                                    
     direct revenues that  the State stands to  see from OCS                                                                    
     production are  property taxes on the  in-state portion                                                                    
     of a  pipeline linking the  OCS fields to TAPS,  and an                                                                    
     increase in North Slope  wellhead values resulting from                                                                    
     the greater TAPS throughput.                                                                                               
                                                                                                                                
     Another 34 percent of the  resource is in ANWR - which,                                                                    
     again, we hope the Delegation  will be able to open up,                                                                    
     although  even Ted  Stevens was  unable  to achieve  it                                                                    
     despite four  decades of dedicated effort.  Another 1.7                                                                    
     percent is in NPRA, which  - if the Interior Department                                                                    
     gets its way  - will have its  best prospective acreage                                                                    
     turned   into  a   bird  sanctuary   despite  being   a                                                                    
     "Petroleum Reserve".                                                                                                       
                                                                                                                                
     So, of  the 29.1 billion barrels  of potential reserves                                                                    
     identified  by Econ  One,  only the  3  billion in  the                                                                    
     central  North Slope  has any  potential to  contribute                                                                    
     significantly  to Alaska's  economic well-being  in the                                                                    
     near and mid-term  future. In other words,  of the 29.1                                                                    
     billion barrel resources, only a  tenth of it is within                                                                    
     the State's power  to do anything about. And  of this 3                                                                    
     billion  barrels, 2.5  billion or  more stands  to come                                                                    
     from  Prudhoe  Bay,  Kuparuk and  other  legacy  fields                                                                    
     already  in  production.  The Governor's  second  "core                                                                    
     principle"  for  tax  legislation   is  that  "it  must                                                                    
     encourage  new  production."  But,   in  order  to  get                                                                    
     results  from such  encouragement, the  tax legislation                                                                    
     must  reflect the  opportunities  that  Alaska has  for                                                                    
     getting  results.  Maybe   the  present  Gross  Revenue                                                                    
     Exclusion in HB 72 can  get results, in some small way.                                                                    
     But in  terms of  what it  attempts to  "encourage," it                                                                    
     leaves out at  least 80 - 90 percent of  the 3 billion-                                                                    
     barrel  opportunity in  the  central  North Slope  that                                                                    
     Econ One has identified  as "Economically Recoverable @                                                                    
     $90/bbl[.]"                                                                                                                
                                                                                                                                
     AOGA  is continuing  to search  for ways  to adapt  the                                                                    
     Gross Revenue  Exclusion to include legacy  fields in a                                                                    
     way that might be  acceptable to the Administration and                                                                    
     the  Legislature.  It may  turn  out,  however, that  a                                                                    
     different approach  may be necessary to  "encourage new                                                                    
     production" in legacy fields.                                                                                              
                                                                                                                                
     For  now, though,  all we  can  say is,  not enough  is                                                                    
     being   done  in   HB  72   to  improve   the  economic                                                                    
     competitiveness of  legacy fields,  and for  the coming                                                                    
     decade or  so these legacy  fields will be  the "trunk"                                                                    
     that supports all  the rest of the  North Slope "tree."                                                                    
     Until there  is significant production from  the Arctic                                                                    
     OCS,  the tree  cannot  survive very  long without  the                                                                    
     trunk  production  to  keep  per-barrel  transportation                                                                    
     costs down  and necessary  infrastructure in  place. It                                                                    
     would be a mistake to let that trunk wither.                                                                               
                                                                                                                                
     4.  Issues  that HB  72  does  not address.  There  are                                                                  
     several significant  problems in  the present  ACES tax                                                                    
     that are not addressed in HB 72.                                                                                           
                                                                                                                                
     A.  Minimum   tax  for   North  Slope   production.  AS                                                                  
     43.55.011(f)  sets  a  minimum  tax  that  is  targeted                                                                    
     solely  against North  Slope  production.  That tax  is                                                                    
     based on the gross value  of that production instead of                                                                    
     the regular  tax based on  "net" Production  Tax Value.                                                                    
     The rationale for adopting it  was to protect the State                                                                    
     against low petroleum revenues when prices are low.                                                                        
                                                                                                                                
     The   minimum  tax   only  complicates   potential  new                                                                    
     investors' analyses of what their  tax would be if they                                                                    
     invest   here   instead    of   someplace   else,   and                                                                    
     consequently  it has,  if anything,  driven investments                                                                    
     away. AS 43.55.011(f) should be repealed.                                                                                  
                                                                                                                                
     B. Statute  of limitations  & statutory  interest. Here                                                                  
     we have two concerns that  are interrelated, but not in                                                                    
     an immediately obvious way.                                                                                                
                                                                                                                                
     The  statute of  limitations under  AS 43.55.075(a)  is                                                                    
     six years from  the date when the tax  return was filed                                                                    
     for  the  tax  being  audited,  while  the  limitations                                                                    
     period for  other taxes under AS  43.05.260(a) is three                                                                    
     years from  the filing  date of  the tax  return. Under                                                                    
     both  statutes, the  period may  be extended  by mutual                                                                    
     consent of  the taxpayer and the  Department of Revenue                                                                    
     (DOR).                                                                                                                     
                                                                                                                                
     The statutory  rate of  interest under  AS 43.05.225(l)                                                                    
     for tax underpayments is  "five percentage points above                                                                    
     the annual  rate charged member  banks for  advances by                                                                    
     the l2th Federal  Reserve District as of  the first day                                                                    
     of that calendar  quarter, or at the annual  rate of 11                                                                    
     percent, whichever is  greater, compounded quarterly as                                                                    
     of  the  last day  of  that  quarter[.]" Currently  the                                                                    
     Federal Reserve rate is very  low, so 11 percent APR is                                                                    
     the applicable rate.                                                                                                       
                                                                                                                                
     Taxpayers are required  under AS 43.55.020(a)(l)-(3) to                                                                    
     make monthly  estimated tax payments for  each calendar                                                                    
     month's  taxable  production  during a  year,  but  the                                                                    
     final tax  amount for  the entire  year is  reported on                                                                    
     March 31  of the following year  under AS 43.55.030(a).                                                                    
     And AS  43.55.020(a)(4) requires any additional  tax to                                                                    
     be paid at  that time. The statutory  interest under AS                                                                    
     43.05.225(l) starts to accrue  on any underpayment from                                                                    
     that March 3l true-up date.                                                                                                
                                                                                                                                
     In  practical terms,  what these  various statutes  all                                                                    
     mean is this.                                                                                                              
                                                                                                                                
     For each  dollar of underpaid  tax that  the Department                                                                    
     of  Revenue   may  claim  after  an   audit,  statutory                                                                    
     interest  on that  dollar  at the  end  of three  years                                                                    
     would be -                                                                                                                 
                                                                                                                                
     $1.00 x  [(l +0.11/4)(4  compoundings per year  times 3                                                                    
     years) - 1] = $1.00 x 1.38478 - 1] = $0.38.                                                                                
                                                                                                                                
     After six  years the statutory  interest on  the dollar                                                                    
     would be -                                                                                                                 
                                                                                                                                
     $1 00 x  [(l + 0.11/4)(4 compoundings per  year times 6                                                                    
     years) - l] = $1.00 x [l.91763 - 1] = - $0.92.                                                                             
                                                                                                                                
     Thus, for each  dollar of uncertainty there  is in what                                                                    
     the taxpayer  reports on its  March 31st true-up  for a                                                                    
     given  year,  there is  about  38  cents of  additional                                                                    
     uncertainty due  to statutory  interest under  a three-                                                                    
     year statute of limitations, but  92 cents under a six-                                                                    
     year statute.                                                                                                              
                                                                                                                                
     It  is  the  combination   of  a  six-year  statute  of                                                                    
     limitations plus  a minimum statutory interest  rate of                                                                    
     11 percent  APR that is  so harmful for a  taxpayer and                                                                    
     any would-be  investor. Each  dollar of  uncertainty in                                                                    
     the amount of  tax will nearly be  doubled by statutory                                                                    
     interest after six years.                                                                                                  
                                                                                                                                
     When we  speak about uncertainty and  audit assessments                                                                    
     six years after the filing  of tax returns, many people                                                                    
     will  think the  oil  companies  could calculate  their                                                                    
     correct  tax  liability  under the  ACES  tax  if  they                                                                    
     wanted to. Frankly, so did I  before I got this job. So                                                                    
     let us  take a  few moments to  illustrate why  this is                                                                    
     not the case.                                                                                                              
                                                                                                                                
     As   amended   by   ACES,   AS   43.55.150   (captioned                                                                    
     "Determination  of   gross  value   at  the   point  of                                                                    
     production")  says  the Gross  Value  at  the Point  of                                                                    
     Production  (GVPP)  "is  calculated  using  the  actual                                                                    
     costs  of  transportation"  from the  field  to  market                                                                    
     unless   the  "shipper...   is   affiliated  with   the                                                                    
     transportation  carrier[,]" or  the  "contract for  the                                                                    
     transportation ... is not a[t]  arm's length[,]" or the                                                                    
     "method or  terms of [the]  transportation ...  are not                                                                    
     reasonable    in   view    of   existing    alternative                                                                    
     transportation  options."  "If   the  department  finds                                                                    
     that"  any of  these situations  exists, then  the GVPP                                                                    
     "is  calculated  using  the actual  costs  ...  or  the                                                                    
     reasonable   costs   of   [the]   transportation   ...,                                                                    
     whichever is lower."                                                                                                       
                                                                                                                                
     The  immediate questions  about the  statute are  - How                                                                    
     does the  Department of Revenue get  the information to                                                                    
     make such a  finding? What is the  procedure for making                                                                    
     them;  is there  a hearing,  an investigation  or what?                                                                    
     How does  a taxpayer ascertain what  the Department has                                                                    
     found?                                                                                                                     
                                                                                                                                
     l5 AAC 55.193 is the  regulation with an important part                                                                    
     of the Department's answers  to these questions. Before                                                                    
     getting to  those answers, we note  that subsection (a)                                                                    
     seems  to disregard  the statutory  distinction between                                                                    
     "actual"  and  reasonable"  costs,  by  declaring  that                                                                    
     "Costs   of  transportation   are   the  ordinary   and                                                                  
     necessary costs  incurred to transport the  oil or gas"                                                                  
     - which could  get to the same result  as the statutory                                                                  
     terms, but not necessarily.                                                                                                
                                                                                                                                
     Subsection (e)  of the regulation starts  answering our                                                                    
     questions. It  says "a tariff  rate ...  adjudicated as                                                                    
     just  and reasonable  by the  Regulatory Commission  of                                                                    
     Alaska  ... establishes  the  reasonable  costs of  the                                                                    
     pipeline transportation[.]" So,  suppose there has been                                                                    
     full-blown   tariff  dispute   before  the   Regulatory                                                                    
     Commission of  Alaska, and the RCA  has "adjudicated [a                                                                    
     tariff  as just  and  reasonable[.]"  And suppose  also                                                                    
     that  a producer  ships its  oil through  its pipeline-                                                                    
     company  affiliate and  pays that  RCA-approved tariff.                                                                    
     Is this  "reasonable" cost under (e)  of the regulation                                                                    
     the same  as the "ordinary  and necessary" cost  for it                                                                    
     for purposes of subsection  (a)? Apparently so, but the                                                                    
     inconsistent terms in the  two subsections prevent this                                                                    
     from   being  completely   clear.   Moreover,  if   the                                                                    
     transportation occurs "later than  five years after the                                                                    
     end  of the  test period  on which  the tariff  rate is                                                                    
     based[,]"  then even  subsection  (e)  says the  tariff                                                                    
     ceases to  "establish [the]  reasonable costs"  for the                                                                    
     transportation.  But  it  doesn't say  what  the  right                                                                    
     tariff is  after those five  years are up, or  even how                                                                    
     to  find out  or calculate  what it  is. It  is utterly                                                                    
     silent.                                                                                                                    
                                                                                                                                
     The very next sentence in  subsection (e) after the one                                                                    
     speaking  about that  five-year  period  starts, "If  a                                                                    
     complaint challenging  [a] tariff  rate has  been filed                                                                    
     with [the  RCA] and accepted for  investigation" - this                                                                    
     is not  a situation involving an  already "adjudicated"                                                                    
     tariff, but one  that deals with a new  tariff that has                                                                    
     been   filed  for   RCA's  approval,   which  is   then                                                                    
     challenged.  Here,  too,  the  tariff on  file  is  not                                                                    
     allowed  as the  transportation cost  under (e)  of the                                                                    
     regulation. Instead,  the cost that is  allowed is "103                                                                    
     percent of  the costs  of transportation  calculated by                                                                    
     the  department  using  the methodology  under  15  AAC                                                                    
     55.197, for  the period [while  the complaint  is being                                                                    
     heard and  adjudicated by  the RCA.]"  Note that  it is                                                                    
     the Department of Revenue, not  the taxpayer that makes                                                                    
     the calculation  under l5 AAC 55.197.  It is impossible                                                                    
     for   the  taxpayer   to  know   beforehand  what   the                                                                    
     Department's calculation will turn out to be.                                                                              
                                                                                                                                
     Now it is  true that 15 AAC 197(m) says  a taxpayer may                                                                    
     each   year  "request   in  writing   the  department's                                                                    
     determination  of  the  applicable  after-tax  rate  of                                                                    
     return under  (f) of this section  [and t]he department                                                                    
     will  provide  the  department's determination  to  the                                                                    
     producer  no later  than the  later  of July  1 of  the                                                                    
     calendar year or 90 days  after the department receives                                                                    
     the  producer's request."  But the  "after-tax rate  of                                                                    
     return"  that the  Department  promises  to provide  is                                                                    
     only  one of  the parameters  in the  cost-based tariff                                                                    
     calculation under  15 AAC 55.197. The  taxpayer is left                                                                    
     on its  own to find  the correct numbers for  the other                                                                    
     parameters.  More importantly,  subsection (m)  applies                                                                    
     only to  "a producer [that]  expects to produce  oil or                                                                    
     gas  the actual  costs of  transportation of  which are                                                                    
     required  by   15  AAC  55.193(b)(6)[.]"     Section  -                                                                    
     193(b)(6)  applies only  to "transportation  of oil  or                                                                    
     gas by  a non-regulated  pipeline facility ...  that is                                                                    
     owned  or  effectively owned  ...  by  the producer  of                                                                    
     th[e] oil  or gas[.]"In  the situation  I'm describing,                                                                    
     it is a regulated pipeline,  not an unregulated one, so                                                                    
     this promise in 197(m) does not apply.                                                                                     
                                                                                                                                
     We  find nothing  else  in the  calculation-methodology                                                                    
     regulation, l5  AAC 55.197, nor  in I 5  AAC 55.193(e),                                                                    
     the  transportation-cost regulation,  that commits  the                                                                    
     Department  to make  the cost-based  tariff calculation                                                                    
     called for  in 193(e) and  inform the producer  of that                                                                    
     result  before  the  producer has  to  report  and  pay                                                                    
     estimated  tax  each  month, or  before  it  makes  its                                                                    
     annual  true-up on  March 31st  of the  following year.                                                                    
     The  only deadline  for informing  the producer  of the                                                                    
     Department's calculated  tariff is the six  years under                                                                    
     the statute of limitations.                                                                                                
                                                                                                                                
     And  the  same or  very  similar  unknowable answers  -                                                                    
     including tariff  calculations by the  Department under                                                                    
     15 AAC  55.197 -  arise under  15 AAC  55.193 regarding                                                                    
     tariffs  for  new  transportation facilities  that  are                                                                    
     just being placed  in service, and under  -193(g) - (h)                                                                    
     regarding tariffs  set under a settlement  agreement to                                                                    
     which the State of Alaska is a party.                                                                                      
                                                                                                                                
     And just  to prevent  any misunderstanding,  although I                                                                    
     have    been   testifying    about   proceedings    and                                                                    
     adjudications by the RCA,  these regulations also apply                                                                    
     to  proceedings   and  adjudications  by   some  "other                                                                    
     regulatory agency" - which would include FERC.                                                                             
                                                                                                                                
     There  is  a  built-in  uncertainty  created  by  these                                                                    
     regulations,  and others  that is  beyond a  taxpayer's                                                                    
     allowed authority  to answer and beyond  its ability to                                                                    
     know  before the  Department gives  the answer.  And to                                                                    
     see  a "Technicolor"  version where  essential elements                                                                    
     of  the  tax calculation  are  being  reserved for  the                                                                    
     Department  to "determine"  in its  discretion with  no                                                                    
     specific deadline,  one should look at  all the crucial                                                                    
     "determinations"  in 15  AAC 55.173  ("Prevailing value                                                                    
     for gas") that are reserved  for the Department to make                                                                    
     regarding the  valuation of natural  gas that  would be                                                                    
     transported to markets outside Alaska.                                                                                     
                                                                                                                                
     We  are  not   asking  for  a  statutory   fix  to  the                                                                    
     regulations. But we are asking  that, if the Department                                                                    
     chooses  to  defer   making  calculations  and  similar                                                                    
     determinations that  are necessary in order  even to be                                                                    
     able to  calculate the  correct amount  of tax  at all,                                                                    
     then  the  doubling-up   of  that  uncertainty  through                                                                    
     statutory  interest  should  be lessened  -  either  by                                                                    
     shortening    the     period    for     making    those                                                                    
     "determinations"  from  six  years back  to  the  usual                                                                    
     three,  or  by  eliminating   the  11  percent  minimum                                                                    
     interest rate on the statutory interest rate, or both.                                                                     
                                                                                                                                
     C.  Joint-interest billings.  Our concern  about joint-                                                                  
     interest billings  is also  primarily a  problem caused                                                                    
     by the approach the Department  has chosen to take with                                                                    
     its  tax  regulations.  Instead of  starting  with  the                                                                    
     joint-interest billings that participants  in a unit or                                                                    
     other joint  operation receive  from the  operator, the                                                                    
     regulations  reflect  an   assumption  that  each  non-                                                                    
     operating participant  has information, in  addition to                                                                    
     the operator's  billings to them,  that allows  them to                                                                    
     determine which expenditures  are deductible as allowed                                                                    
     "lease expenditures"  under AS 43.55.165 and  which are                                                                    
     not. This  assumption is  wholly unrealistic.  And even                                                                    
     if there were some merit  to it, the regulations opt to                                                                    
     audit  each   participant  separately   regarding  that                                                                    
     participant's interpretation of  which expenditures are                                                                    
     deductible and  which are not, instead  of auditing the                                                                    
     system  of accounts  used by  the operator  and telling                                                                    
     all participants  which cost  items in  that accounting                                                                    
     system  are  deductible and  which  are  not. In  other                                                                    
     words, instead of one audit  of the expenses by a joint                                                                    
     venture  for any  given period,  the Department  audits                                                                    
     each  participant separately  for its  respective share                                                                    
     of the same pool of expenses.                                                                                              
                                                                                                                                
     Again, we  are not  asking for  legislation to  put the                                                                    
     Department's  regulations  on  a different  track.  But                                                                    
     there are some  in the Department who  believe that the                                                                    
     repeal by the 2007  ACES legislation of AS 43.55.165(c)                                                                    
     and (d) - which  specifically authorized the Department                                                                    
     to  rely   on  joint-interest  billings  -   means  the                                                                    
     Department cannot  legally rely  on them now.  While we                                                                    
     disagree  with this  position (which  is  also at  odds                                                                    
     with  what  the  Department  testified  to  during  the                                                                    
     enactment of  the 2007 ACES  legislation), we  do think                                                                    
     it   would   be   appropriate   to   restore   language                                                                    
     specifically  authorizing  the  Department to  rely  on                                                                    
     joint-interest billings if it chooses to do so.                                                                            
                                                                                                                                
     Conclusion.  We  support  the proposed  elimination  of                                                                  
     progressivity, but we have concerns  with what the Bill                                                                    
     proposes for  tax credits -  most importantly  with the                                                                    
     proposed repeal  of tax  credits for  qualified capital                                                                    
     expenditures.    The   trade-off    between   repealing                                                                    
     progressivity and  losing the QCE  credit is not  a net                                                                    
     benefit  for industry  at low  oil prices,  although it                                                                    
     would be with prices that are high relative to costs.                                                                      
                                                                                                                                
     The  concept   of  the  Gross  Revenue   Exclusion  has                                                                    
     considerable potential,  but its narrow focus  in HB 72                                                                    
     misses  80  - 90  percent  of  the opportunity  in  the                                                                    
     central  North Slope  described  by Econ  One. We  will                                                                    
     continue  to work  with you  and the  Administration to                                                                    
     find a fair and reasonable  way to expand its scope, or                                                                    
     to find  an alternative  that will address  the central                                                                    
     North Slope appropriately.                                                                                                 
                                                                                                                                
     The reasons  that led  the State  to create  the small-                                                                    
     producer  tax   credit  under  AS  43.55.024   and  the                                                                    
     exploration  tax  credits  under  AS  43.55.025  remain                                                                    
     valid today. We are pleased  that HB 72 will extend the                                                                    
     sunset  date  for  the small-producer  tax  credit  and                                                                    
     encourage  the   same  extension  be  applied   to  the                                                                    
     exploration tax credits.                                                                                                   
                                                                                                                                
     Overall,   the   Bill   as  introduced   represents   a                                                                    
     cornerstone  for  significant  and crucial  tax  reform                                                                    
     that   move  toward   Governor  Parnell's   four  "core                                                                    
     principles"  - fairness  for Alaskans,  encouraging new                                                                    
     production,  simplicity  with balance,  and  durability                                                                    
     for the long term.                                                                                                         
                                                                                                                                
     I  have  not  mentioned,  until now,  the  North  Slope                                                                    
     decline curve  that's on the  slide I've showed  at the                                                                    
     beginning, and now  here at the end  of this testimony.                                                                    
     I don't  need to mention  it. It's the elephant  in the                                                                    
     room. As  I said  at the  beginning, the  greatest, and                                                                    
     most  urgent  challenge  facing  Alaska  today  is  the                                                                    
     decline  of oil  production  from the  North Slope.  We                                                                    
     believe it  is up  to you,  the legislative  leaders of                                                                    
     our time, and the Governor,  to shape a competitive oil                                                                    
     fiscal policy  that is  supported by  strong principles                                                                    
     and will  lead Alaska  towards a prosperous  future for                                                                    
     the  long-term. You  have a  difficult  task ahead  and                                                                    
     AOGA  stands  ready  to   assist  you  throughout  this                                                                    
     process.                                                                                                                   
                                                                                                                                
6:57:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR asked  for a  suggestion of  balance between                                                               
the  elimination  of progressivity  and  the  elimination of  QCE                                                               
credits to encourage new investment in Alaska.                                                                                  
                                                                                                                                
MS. MORIARTY  replied that earlier  testimony had  indicated that                                                               
no producer in  Alaska was the same; therefore,  the challenge to                                                               
the  legislature was  to find  the  balance that  did not  create                                                               
winners  and  losers.   She  suggested  that different  types  of                                                               
credits  specifically  geared  toward  well  lease  expenditures,                                                               
similar  to Cook  Inlet,  could be  re-established  on the  North                                                               
Slope.  She stated that AOGA  did not believe that elimination of                                                               
both progressivity and QCE would have a desired result.                                                                         
                                                                                                                                
6:59:41 PM                                                                                                                    
                                                                                                                                
MR.  ARMFIELD said  that Brooks  Range Petroleum  would become  a                                                               
member of AOGA once oil production had begun.                                                                                   
                                                                                                                                
7:00:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON, noting  that some important considerations                                                               
for a company when making a  decision for investment in a project                                                               
included net  present value, internal  rates of return,  and cash                                                               
flow, pointed out  that these had also  been considered regarding                                                               
investment in  Alaska during deliberation  for PPT and ACES.   He                                                               
stated that  testimony had  now declared  that return  on capital                                                               
was the  most important  aspect.   He asked  what metric  was the                                                               
most important for Brooks Range Petroleum.                                                                                      
                                                                                                                                
MR. ARMFIELD declared  that the metrics were  different for every                                                               
company, and that  net present value and internal  rate of return                                                               
were viewed  for the project  as a whole.   He reported  that the                                                               
key problem for  Brooks Range was initiating enough  cash to move                                                               
a project  forward.   He expressed  the difficulty  for marketing                                                               
this investment.   In the  current phase of  development, capital                                                               
credits  were  the most  important.    Any  change from  ACES  to                                                               
proposed HB 72 would impose the  need to raise an additional $124                                                               
million to  move the project forward  in the next few  years, and                                                               
he  emphasized  that  cash  up   front  was  currently  the  most                                                               
important consideration.   He stated  that net present  value and                                                               
internal  rate of  return were  "end game"  numbers, but  capital                                                               
credits were necessary today.                                                                                                   
                                                                                                                                
7:03:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  asked  to  clarify  that  the  return  of                                                               
capital invested was  now the most important criteria,  as he did                                                               
not remember  that ever  being a  criteria during  discussion for                                                               
PPT or  ACES.  He  asked if the raising  of capital was  the most                                                               
important consideration for a small producer.                                                                                   
                                                                                                                                
MR. ARMFIELD replied that this  was correct, which he called cash                                                               
on  cash,  the cash  invested  to  how  many multiples  it  would                                                               
return.    However, he  emphasized  that  low internal  rates  of                                                               
return  and  net  present  values would  keep  the  project  from                                                               
progressing forward.                                                                                                            
                                                                                                                                
7:05:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  surmised  that  progressivity  was  still                                                               
"quite  a  ways  down  the  road  where  your  company  would  be                                                               
concerned."    He asked  if  investment  attitudes and  decisions                                                               
would  change  if  the  top   25  percent  of  progressivity  was                                                               
eliminated, so it was capped at 50 percent.                                                                                     
                                                                                                                                
MR.  ARMFIELD expressed  his agreement  that any  positive change                                                               
would instill  confidence, yet  he agreed with  Mr. Foley  that a                                                               
simpler  overall  structure was  best  for  everyone in  the  oil                                                               
industry.    He  pointed  out  that it  was  still  necessary  to                                                               
convince investors about  Alaska, and he declared the  need for a                                                               
banner to  attract investors  with the  certainty that  the rules                                                               
would remain constant.                                                                                                          
                                                                                                                                
7:08:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  asked  if   the  proposed  gross  revenue                                                               
exclusion  (GRE), which  had a  highly complex  set of  matrixes,                                                               
would have  to be analyzed  to figure the  effect on the  rest of                                                               
the project.                                                                                                                    
                                                                                                                                
MR. ARMFIELD said that Brooks Range  had not presented the GRE to                                                               
any investors; however,  he opined that the 20 percent  GRE was a                                                               
tradeoff  for the  QCE,  as  it deferred  the  contribution to  a                                                               
production input base.                                                                                                          
                                                                                                                                
7:10:47 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON reported that it  was no longer tied to the                                                               
investment,   as   were  the   capital   credits,   but  to   the                                                               
profitability  of the  oil as  it  excluded a  percentage of  the                                                               
revenue generated for the duration of the project.                                                                              
                                                                                                                                
MR.  ARMFIELD suggested  that his  understanding was  for the  20                                                               
percent  to  include  the  capital  budget,  and  that  the  only                                                               
reduction  from the  gross  revenue exclusion  was  for the  TAPS                                                               
throughput  and  the  West  Coast  transportation.  Then  the  25                                                               
percent base tax was applied.                                                                                                   
                                                                                                                                
7:12:28 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  agreed  that   it  was  complex,  and  he                                                               
questioned whether  the GRE  was making the  system simpler.   He                                                               
asked for any suggestions for improvement to the proposed bill.                                                                 
                                                                                                                                
MR.  ARMFIELD agreed  to get  clarification, and  he pointed  out                                                               
that, as  his two latest projects  would not qualify for  GRE, he                                                               
did not consider it as a benefit.                                                                                               
                                                                                                                                
7:13:25 PM                                                                                                                    
                                                                                                                                
[HB 72 was held over.]                                                                                                          

Document Name Date/Time Subjects
HRES HB 72 Bradford Keithley Comments.pdf HRES 2/18/2013 1:00:00 PM
HB 72
HRES HB 72 -Keithley, Five things to look for in oil tax reform . (11.23.2012).pdf HRES 2/18/2013 1:00:00 PM
HB 72
HRES HB72 Brooks Range Petr..pdf HRES 2/18/2013 1:00:00 PM
HB 72
HRES HB 72 AOGA.pdf HRES 2/18/2013 1:00:00 PM
HB 72
HRES HB 72 Pioneer Natural Resources.pdf HRES 2/18/2013 1:00:00 PM
HB 72
HRES HB 72 AOGA Written Testimony 2.18.13.pdf HRES 2/18/2013 1:00:00 PM
HB 72