Legislature(2013 - 2014)BARNES 124

02/20/2013 01:00 PM RESOURCES


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01:04:17 PM Start
01:04:35 PM HB72
03:08:07 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 72 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
- Presentation: Large Producers
+ Bills Previously Heard/Scheduled TELECONFERENCED
                HB 72-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                                
1:04:35 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."                                                                                               
                                                                                                                                
1:06:12 PM                                                                                                                    
                                                                                                                                
THOMAS  K.   WILLIAMS,  Senior  Royalty   and  Tax   Counsel,  BP                                                               
Exploration  (Alaska) Inc.,  presented  a  PowerPoint titled  "BP                                                               
Testimony  to House  Resources" and  paraphrased from  a prepared                                                               
statement:                                                                                                                      
                                                                                                                                
     Thank  you for  inviting us  here to  testify on  House                                                                    
     Bill 72, which has  been introduced by Governor Parnell                                                                    
     and proposes  to amend the so  called "ACES" production                                                                    
     tax on oil and gas produced in Alaska.                                                                                     
                                                                                                                                
     There are three  primary changes that HB  72 would make                                                                    
     to ACES:  one, repeal progressivity, which  we think is                                                                    
     good; two,  change the system  of tax credits  that now                                                                    
     exists, which threatens to harm  some producers even if                                                                    
     it  may help  others; and  three, create  a new  "gross                                                                    
     revenue exclusion"  for new production that  we view as                                                                    
     innovative but largely  misdirected. My testimony today                                                                    
     will review  these changes  in the  context of  the tax                                                                    
     issues that  my employer  faces under the  present tax,                                                                    
     which   the   Governor   and  apparently   the   entire                                                                    
     Legislature, with  the introduction of Senate  Bill 50,                                                                    
     agree needs to be reformed.                                                                                                
                                                                                                                                
     First, progressivity.  As you know, progressivity  is a                                                                    
     sliding-rate tax that  runs quickly up to  a 25 percent                                                                    
     rate and  then rises more  slowly above 25  percent. It                                                                    
     is  in addition  to the  basic 25  percent tax  that is                                                                    
     also  levied  on  the  "production   tax  value"  of  a                                                                    
     producer's taxable  production. Repealing progressivity                                                                    
     is a good idea for a  number of reasons, which AOGA has                                                                    
     identified in  its testimony on Monday  and which other                                                                    
     taxpayers will  probably present  to you as  well. Many                                                                    
     of those objections are  for effects from progressivity                                                                    
     that were intentional as part  of the way progressivity                                                                    
     was designed. What I'd like  to do today is to describe                                                                    
     two  significant, unintended  effects of  progressivity                                                                    
     that seem  largely unknown and even  less understood. I                                                                    
     have  eight  slides  to  present  that  will  show  you                                                                    
     exactly what these unintended consequences are.                                                                            
                                                                                                                                
1:08:01 PM                                                                                                                    
                                                                                                                                
MR. WILLIAMS directed attention to slide 3, "How ACES works,"                                                                   
and continued:                                                                                                                  
                                                                                                                                
     To  begin,  let  me  quickly  review  how  the  tax  is                                                                    
     calculated for the example I will use.                                                                                     
                                                                                                                                
     If you look  at this first slide, you will  see the tax                                                                    
     calculation  for a  hypothetical  producer with  10,000                                                                    
     barrels of oil who sells it  on the West Coast for $100                                                                    
     a  barrel  and  receives  a million  dollars.  It  cost                                                                    
     $150,000  - or  $15 a  barrel -  to transport  that oil                                                                    
     from  the field  in  Alaska to  the  West Coast,  which                                                                    
     leaves  $850,000 as  the gross  value at  the point  of                                                                    
     production  or "GVPP."  The  producer  had $300,000  of                                                                    
     allowable  lease  expenditures,  or field  expense,  to                                                                    
     produce the oil, which leaves  a taxable production tax                                                                    
     value, or "PTV," of $550,000  or $55 a barrel. The base                                                                    
     tax is 25%  of the PTV, or  $137,500. The progressivity                                                                    
     rate  equals four  tenths of  a percentage  point times                                                                    
     the difference  between $30 and the  producer's PTV per                                                                    
     barrel.  Here the  difference between  $30  and $55  is                                                                    
     $25, and  $25 times four  tenths of a point  per dollar                                                                    
     equals 10  percent. Ten percent of  $550,000 is $55,000                                                                    
     of  progressivity  tax.  That  plus  the  base  tax  of                                                                    
     $137,500 equals a  total tax of $192,500.  So far there                                                                    
     is nothing here that is new to you.                                                                                        
                                                                                                                                
     So now let me begin  to show you something you probably                                                                    
     have not seen  before. This scenario is  not about what                                                                    
     the  producer  has  actually  produced,  but  about  an                                                                    
     evaluation of  what could  happen from  the development                                                                    
     of a new reservoir or  field if the investment is made.                                                                    
     And  let's  suppose  that   this  producer  sees  three                                                                    
     different ways that she  could potentially improve this                                                                    
     investment. One  is that she  knows of a  buyer willing                                                                    
     to  pay a  premium of  a dollar  a barrel  for the  oil                                                                    
     delivered on  the West  Coast, the second  is a  way to                                                                    
     save $20,000 in transportation  costs, and the third is                                                                    
     a  way  to  cut  the  costs  for  field  operations  by                                                                    
     $30,000. If  she can do  all three, what is  the change                                                                    
     in the tax?                                                                                                                
                                                                                                                                
1:10:08 PM                                                                                                                    
                                                                                                                                
MR. WILLIAMS presented slide 4, "Example - The three changes                                                                    
together, and continued his explanation:                                                                                        
                                                                                                                                
     In  this slide  we  see the  three  changes. The  extra                                                                    
     dollar  a  barrel  in the  price  increases  the  sales                                                                    
     revenue from the oil  to $1,010,000. The transportation                                                                    
     savings reduces  that cost  from $150,000  to $130,000.                                                                    
     Between  the  increased  price and  the  transportation                                                                    
     savings,  the GVPP  of the  oil  back in  the field  is                                                                    
     $880,000  instead of  $850,000.  And  the reduction  in                                                                    
     upstream lease  expenditures raises the taxable  PTV by                                                                    
     another  $30,000,  for  a  total  increase  in  PTV  of                                                                    
     $60,000 from $550,000 to $610,000.                                                                                         
                                                                                                                                
     The 25% base  tax is now $152,500  instead of $137,500.                                                                    
     And  with PTV  per  barrel now  $61, the  progressivity                                                                    
     rate is $61  minus $30, or $31, times four  tenths of a                                                                    
     percentage point  per dollar, or 12.4  percent. Twelve-                                                                    
     point-four  percent of  $610,000  is  $75,640, and  the                                                                    
     total tax is  $228,140 instead of $192,500.  This is an                                                                    
     increase of $35,640.                                                                                                       
                                                                                                                                
     I have  highlighted this change in  yellow and recorded                                                                    
     it in the  upper right corner of the slide  in order to                                                                    
     keep  it on  screen so  we  can remember  what it  was,                                                                    
     because in  this scenario the  producer next  asks what                                                                    
     the  tax  change  is  separately   for  each  of  these                                                                    
     improvements to  the investment. This next  slide shows                                                                    
     the change resulting only from  the extra dollar in the                                                                    
     West Coast price.                                                                                                          
                                                                                                                                
1:11:48 PM                                                                                                                    
                                                                                                                                
MR. WILLIAMS pointed to slide 5, "Price change only," and                                                                       
described:                                                                                                                      
                                                                                                                                
     The  higher  price  increases  the  sales  proceeds  by                                                                    
     $10,000  to $1,010,000.  And  as you  go  down the  "As                                                                    
     Revised" column you see this  $10,000 flowing down into                                                                    
     the  $860,000  GVPP  and then  into  the  taxable  PTV,                                                                    
     raising it  to $560,000. The  25% base tax  on $560,000                                                                    
     is $140,000.  The progressivity rate is  $56 minus $30,                                                                    
     or $26,  times four  tenths of  a percentage  point per                                                                    
     dollar, which  is 10.4 percent.  Ten-point-four percent                                                                    
     of $560,000 is  $58,240 and the total  tax is $198,240,                                                                    
     an  increase of  $5,740 from  the base  case. Again,  I                                                                    
     have recorded  this at the  right side of the  table so                                                                    
     we can remember what it  is without having to flip back                                                                    
     and forth between slides.                                                                                                  
                                                                                                                                
     The  next  slide  shows  the change  in  tax  from  the                                                                    
     $20,000 savings in transportation costs.                                                                                   
                                                                                                                                
1:12:44 PM                                                                                                                    
                                                                                                                                
MR. WILLIAMS summarized slide 6, "Transportation cost savings,"                                                                 
and informed the committee:                                                                                                     
                                                                                                                                
     The $20,000 again flows straight  down into the taxable                                                                    
     PTV,  increasing  it  from $550,000  to  $570,000.  The                                                                    
     progressivity  rate is  now $57  dollars minus  $30, or                                                                    
     $27,  times  four  tenths of  a  percentage  point  per                                                                    
     dollar or 10.8  percent. That plus the  25 percent base                                                                    
     rate  on  $570,000  of  PTV   yields  a  total  tax  of                                                                    
     $204,060, an  increase of $11,560  from the  base case.                                                                    
     This, too,  I have  recorded on the  right side  of the                                                                    
     table.                                                                                                                     
                                                                                                                                
1:13:24 PM                                                                                                                    
                                                                                                                                
MR. WILLIAMS furnished slide 7, "Whole is greater than the sum                                                                  
of its parts," and indicated:                                                                                                   
                                                                                                                                
     Finally,  this next  slide shows  the effect  of saving                                                                    
     $30,000 in field expense. The  PTV increases by $30,000                                                                    
     to $580,000,  the progressivity  rate is  11.2 percent.                                                                    
     The base tax and progressivity  add up to $209,960 - an                                                                    
     increase of $17,460 from the base case.                                                                                    
                                                                                                                                
     And here at last, this slide  shows what it is that you                                                                    
     probably have  not seen before.  The sum for  the three                                                                    
     changes separately  is $34,760,  which is in  bold font                                                                    
     to  make it  easier  to  spot. This  is  less than  the                                                                    
     $35,640 change  in tax when  all three are  factored in                                                                    
     at  once (also  in  bold font).  In  other words,  with                                                                    
     progressivity,  the whole  is greater  than the  sum of                                                                    
     its parts. And  that's not all. The amount  of tax that                                                                    
     is  calculated   for  each  individual   part  changes,                                                                    
     depending on what order you look at them.                                                                                  
                                                                                                                                
1:14:24 PM                                                                                                                    
                                                                                                                                
MR. WILLIAMS directed attention to slide 8, "ACE's continuously                                                                 
changing tax effect," and continued his discussion:                                                                             
                                                                                                                                
     Here's a  slide that  looks at  the $20,000  savings in                                                                    
     transportation cost and the  $30,000 reduction in field                                                                    
     expense together.                                                                                                          
                                                                                                                                
     The  two  cost  reductions  together  increase  PTV  by                                                                    
     $50,000,  to   $600,000.  The  base  tax   on  that  is                                                                    
     $150,000. Progressivity  for $60  of PTV per  barrel is                                                                    
     $60  minus  $30,  or  $30,   times  four  tenths  of  a                                                                    
     percentage  point  per  dollar, or  12  percent,  times                                                                    
     $600,000, which  is $72,000. The total  tax change from                                                                    
     the two  is $29,500. From  the previous cases  where we                                                                    
     considered  each  cost  reduction separately,  the  tax                                                                    
     increase with  transportation only was $11,560  and for                                                                    
     field BP expense only was  $17,640, and these appear in                                                                    
     the upper right of the slide.                                                                                              
                                                                                                                                
     If we  look at transportation  first, it  is equivalent                                                                    
     to looking  at it standing  alone, and we  have already                                                                    
     calculated what  that is -  $11,560. So $11,560  of the                                                                    
     combined  $29,500 tax  increase is  from the  change in                                                                    
     transportation cost,  and the rest  - $17,940 -  is for                                                                    
     the change in  field expense. But this  means the field                                                                    
     expense is  almost $500  greater than  what it  is when                                                                    
     it's  standing alone.  And if  you  reverse the  order,                                                                    
     then  the field-expense  tax increase  is  the same  as                                                                    
     when it stands alone, but  now the tax increase for the                                                                    
     transportation  savings is  different -$12,040  instead                                                                    
     of the $11,560 when it stands alone or is taken first.                                                                     
                                                                                                                                
     What we  have done  here on this  [eighth] slide  is to                                                                    
     look  at  the  pair  of  cost  savings  for  downstream                                                                    
     transportation  and  upstream lease  expenditures,  and                                                                    
     we've looked  at that pair  first, ahead of  the change                                                                    
     in market price.  If we go back to  the previous slide,                                                                    
     we  see  that  if  we  take  transportation  first  and                                                                    
     subtract its  $5,740 from the total  $35,640 tax effect                                                                    
     for all  three, then that  leaves a different  number -                                                                    
     $29,900  - for  this  pair of  changes  instead of  the                                                                    
     $29,500 we  have here  on slide  six when  we calculate                                                                    
     that pair back first.                                                                                                      
                                                                                                                                
     There is nothing special about  this particular pair of                                                                    
     changes that creates this difference.  There would be a                                                                    
     similar    difference   if    we   pair    price   with                                                                    
     transportation or  price with lease  expenditures. With                                                                    
     either one,  we'd get one  set of tax effects  for this                                                                    
     pair if  we calculate them  first, and a  different set                                                                    
     of  tax  effects if  we  calculate  the effect  of  the                                                                    
     unpaired change first. And, as  here, within each pair,                                                                    
     there  is a  different  cost for  each  change in  that                                                                    
     pairing depending  on whether its effect  is calculated                                                                    
     first or the other's effect is first.                                                                                      
                                                                                                                                
     These  examples  involve  a triplet  of  categories  of                                                                    
     change that could  be made to improve  the economics of                                                                    
     the  project:  an increase  in  price,  a reduction  in                                                                    
     transportation costs to  market, and greater efficiency                                                                    
     in  field  operations.  But  I  have  simplified  these                                                                    
     examples by  using lease expenditures generically  as a                                                                    
     single  cost category.  In the  real  world a  would-be                                                                    
     investor would look  at capital expenditures separately                                                                    
     from operating  costs because the  timing for  when the                                                                    
     two  kinds of  cost  are incurred  is  different and  -                                                                    
     especially important  in the  context of  analyzing tax                                                                    
     effects -  the capex  generates a 20  percent Qualified                                                                    
     Capital Expenditure tax credit  in addition to changing                                                                    
     the  PTV  and  the  progressivity rate.  So  there  are                                                                    
     really four  categories of change  to look  at: changes                                                                    
     in  sales  price,   changes  in  transportation  costs,                                                                    
     changes in  operating expense,  and changes  in capital                                                                    
     expenditures.                                                                                                              
                                                                                                                                
     For each  one of these four  categories, its respective                                                                    
     tax effect can be  calculated separately from the other                                                                    
     three, either  ahead of  them or  after them.  And each                                                                    
     such triplet of  changes has the same  analysis and the                                                                    
     same variations  in tax  effect for  individual changes                                                                    
     that we have  seen in the entire analysis  that we have                                                                    
     just gone through in this and the four earlier slides.                                                                     
                                                                                                                                
1:19:35 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  asked for clarification  to the same  change in                                                               
tax, $29,500, for both the revised and change in tax on slide 8.                                                                
                                                                                                                                
MR. WILLIAMS  explained that  when they  were paired  together it                                                               
was $29,500,  but if  the previous slide  was reviewed,  he noted                                                               
the total  of $35,640, which,  when $5,740 was  subtracted, would                                                               
leave  $29,900 as  the difference.   He  clarified that  this was                                                               
different than the $29,500 on  slide 8, the result of calculating                                                               
the pair.  He declared that the  point was that "even for a pair,                                                               
its  value  changes depending  on  the  order  that you  do  with                                                               
respect to the unpaired one."                                                                                                   
                                                                                                                                
1:20:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON compared this  calculation to the education                                                               
funding formula, as  the regulations for both  dictated the order                                                               
for  the calculations.   He  expressed his  presumption that  the                                                               
Department of Revenue (DOR) had  regulations for the order of the                                                               
calculations for the  production tax value.  He  pointed out that                                                               
this  was  a  "step-wise  calculation"   and  he  asked  for  the                                                               
difference  of this  to any  other important  sequential formulas                                                               
used by the state.                                                                                                              
                                                                                                                                
MR. WILLIAMS responded  that DOR had regulations  about the order                                                               
in which to take the tax  credits, but there were not regulations                                                               
for the  order in which to  calculate the tax.   He declared that                                                               
the aggregate amount was being  used in this sensitivity analysis                                                               
to compare the effects of changes  on other parts, and that there                                                               
was not  a correct answer for  the amount of tax  on a particular                                                               
parameter in the equation.                                                                                                      
                                                                                                                                
REPRESENTATIVE SEATON opined  that, as there had not  yet been an                                                               
audit, DOR needed  to specify the order of  calculations to allow                                                               
an answer.                                                                                                                      
                                                                                                                                
1:23:18 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE pointed  out that this assumption was  not so much                                                               
for the actual  payment of the tax, but rather  for the "what if"                                                               
analysis  when  determining  the  effect on  the  company  of  an                                                               
investment.                                                                                                                     
                                                                                                                                
MR. WILLIAMS  agreed and explained  that the tax  calculation was                                                               
simple, as  it was  all three components  taken together,  and it                                                               
was  affected by  the sequence.    He clarified  that these  were                                                               
examples  of investment  scenarios when  it was  not possible  to                                                               
make all the individual changes.   He stated that these "what if"                                                               
analyses would not  offer a clear answer, and  could vary greatly                                                               
when  applied   to  many  components.     He  noted   that  these                                                               
differences were small until applied on a large scale.                                                                          
                                                                                                                                
1:25:14 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER directed attention to  slide 7, and asked for an                                                               
explanation to the  $35,640 total for all three  taxes, which was                                                               
different than the $34,760 when each was added together.                                                                        
                                                                                                                                
MR. WILLIAMS replied that this was  a result of the three numbers                                                               
being calculated separately.                                                                                                    
                                                                                                                                
1:26:02 PM                                                                                                                    
                                                                                                                                
MR. WILLIAMS declared that the point  of slide 7 was to show that                                                               
for each  of the categories,  its respective tax effect  could be                                                               
calculated separately from  the others.  If you looked  at one at                                                               
a  time,  the  effect  for  each  triplet  would  vary,  and  the                                                               
complexity would  compound on itself, especially  when the fourth                                                               
category  for capital  expenditures was  added.   He stated  that                                                               
"each triplet  will again have  the same  effect that the  sum of                                                               
the individual  components will  be smaller  than the  tax effect                                                               
from looking at  all three of them together...   and if it sounds                                                               
complicated, that's  the problem."   Directing attention  back to                                                               
slide 8, he stated:                                                                                                             
                                                                                                                                
     the  tax effect  for the  entire triplet  being greater                                                                    
     than  the  sum  of   the  effects  for  the  individual                                                                    
     categories  in   it;  the  different  amount   for  the                                                                    
     unpaired category in each triplet  relative to the pair                                                                    
     of other  categories, depending  on whether  the effect                                                                    
     of the pair  is calculated first or  second; and within                                                                    
     each  such  pair,  the different  amount  depending  on                                                                    
     which category  in that pair is  calculated first. Each                                                                    
     of  these  numerous  variations and  combinations  will                                                                    
     divide  the   $35,640  total  tax  effect   up  into  a                                                                    
     different  set  of  amounts  calculated  for  the  four                                                                    
     categories. Yet even with all  those sets of calculated                                                                    
     amounts  for the  categories, none  of those  sets will                                                                    
     add  up to  the tax  effect for  all the  changes taken                                                                    
     together as  a whole.  And all this  complexity doesn't                                                                    
     begin to reflect the likelihood  that there may well be                                                                    
     several  different changes  that could  be made  within                                                                    
     one or more of these  four basic cost categories. These                                                                    
     bizarre effects  are not mere abstract  curiosities. If                                                                    
     you are an  investor and you have a variety  of ways to                                                                    
     try to improve the  performance of an investment, these                                                                    
     effects  from progressivity  mean  there  is no  single                                                                    
     correct answer about how much  each one changes the tax                                                                    
     and improves the investment. The  more ways you have to                                                                    
     improve the investment, the more  the change in tax for                                                                    
     each one  depends on where  you put it in  the sequence                                                                    
     of   calculating   the   changes   for   all   of   the                                                                    
     opportunities.  This  is  because each  opportunity  in                                                                    
     that sequence not  only increases the PTV,  but it also                                                                    
     increases  the  progressivity  rate applicable  to  the                                                                    
     base case PTV  plus all the PTV that has  been added by                                                                    
     the prior opportunities in the sequence.                                                                                   
                                                                                                                                
     Interestingly,  the Department  of Revenue  has exactly                                                                    
     the same  problem when it  audits a taxpayer  and makes                                                                    
     multiple changes to figures reported  on the tax return                                                                    
     and  increases  the  amount of  tax.  The  auditor  can                                                                    
     quantify the  whole tax increase from  all the changes,                                                                    
     but  he  or  she  cannot make  a  definitively  correct                                                                    
     determination  of  the  amount  of  any  one  of  those                                                                    
     changes.                                                                                                                   
                                                                                                                                
     A taxpayer might have an  interesting time in an appeal                                                                    
     having an auditor admit, issue  by issue, that there is                                                                    
     no correct amount for each one.                                                                                            
                                                                                                                                
1:29:44 PM                                                                                                                    
                                                                                                                                
MR. WILLIAMS briefed the committee on slide 9, "Flat price                                                                      
scenario."                                                                                                                      
                                                                                                                                
     There   is   a   second   unintended   consequence   of                                                                    
     progressivity that is  also important. I call  it a tax                                                                    
     on price  volatility because it increases  the tax when                                                                    
     prices change during  a tax year even  though the total                                                                    
     PTV is  exactly the  same as if  the prices  had stayed                                                                    
     constant at the average price for the year.                                                                                
                                                                                                                                
     On this slide  we see such a "flat  price" scenario. To                                                                    
     fit  conveniently  within  the  space  available  in  a                                                                    
     slide, the  table omits columns for  West Coast prices,                                                                    
     transportation  costs and  field  expenses, and  starts                                                                    
     instead  with the  PTV that  is  calculated from  them.                                                                    
     Here the PTV  is $61.25 per barrel, and  with 2 million                                                                    
     barrels  of  production  a month,  the  amount  of  the                                                                    
     taxable PTV  is $122.5  million a  month. Progressivity                                                                    
     starts  when the  PTV per  barrel exceeds  $30, and  it                                                                    
     reaches 25  percent at a PTV  Progressivity starts when                                                                    
     the  PTV per  barrel  exceeds $30,  and  it reaches  25                                                                    
     percent at a PTV per barrel of $92.50.                                                                                     
                                                                                                                                
     I  have chosen  $61.25 as  the PTV  per barrel  in this                                                                    
     base  case  because it  is  half  way between  $30  and                                                                    
     $92.50. The progressivity rate at  this price is $61.25                                                                    
     minus  $30,   or  $31.25,  times   four  tenths   of  a                                                                    
     percentage  point per  dollar,  or  12.5 percent.  This                                                                    
     also is half  way between the zero rate at  $30 and the                                                                    
     25% rate at $92.50. As you  can see, each month the PTV                                                                    
     is  $122.5 million,  the progressivity  rate is  always                                                                    
     12.5 percent, and the progressivity  tax is exactly the                                                                    
     same   for  each   month  as   $15.31  million.   Total                                                                    
     progressivity for the year is $183.75 million.                                                                             
                                                                                                                                
1:31:22 PM                                                                                                                    
                                                                                                                                
MR. WILLIAMS moved on to slide 10, "Progressivity increases                                                                     
taxes with fluctuating price even when the economics don't                                                                      
change."                                                                                                                        
                                                                                                                                
     In this  next slide the  left half is exactly  the same                                                                    
     as the  previous one with the  flat-price scenario. The                                                                    
     right half of  the table shows what  happens when there                                                                    
     are six months  in the year when the PTV  per barrel is                                                                    
     $30 and six  when it is $92.50. In this  case the first                                                                    
     three months  and the last  three have the $30  PTV per                                                                    
     barrel,  and   the  middle   six  from   April  through                                                                    
     September   have  the   $92.50.   This  price   profile                                                                    
     resembles  what  actually   happened  with  West  Coast                                                                    
     prices  for  North Slope  oil  during  2008, when  they                                                                    
     peaked at  the all-time record  of $144.59 a  barrel on                                                                    
     July 3rd.                                                                                                                  
                                                                                                                                
     For the six months when the  PTV per barrel is $30, the                                                                    
     progressivity tax rate  is zero because $30  of PTV per                                                                    
     barrel  minus the  $30 threshold  for progressivity  is                                                                    
     zero. So,  as you  can see,  there is  no progressivity                                                                    
     tax  for the  first three  months of  the year  and the                                                                    
     last three.  In the middle  six, the PTV per  barrel is                                                                    
     $92.50. That  is $62.50 higher than  the $30 threshold,                                                                    
     so  the   progressivity  rate  is  four   tenths  of  a                                                                    
     percentage  point times  62.50,  or  25.00 percent.  At                                                                    
     $92.50 a  barrel, the progressivity tax  on two million                                                                    
     barrels  a  month  is  $46.25  million,  so  the  total                                                                    
     progressivity  tax  for  the  six  non-zero  months  is                                                                    
     $277.5 million.                                                                                                            
                                                                                                                                
     The   progressivity   tax  under   the   changing-price                                                                    
     scenario is 51 percent  higher than the $183.75 million                                                                    
     of progressivity for the flat-rate scenario.                                                                               
                                                                                                                                
     This tax  increase is entirely  the result of  the fact                                                                    
     that prices  changed during the  year instead  of being                                                                    
     flat. You  can see this  for yourselves. The  total PTV                                                                    
     for  the  year  in   the  right-hand  column  is  1,470                                                                    
     millions  of dollars,  or $1.47  billion -  exactly the                                                                    
     same as in  the flat-price scenario on  the left. Total                                                                    
     production  for  the year  is  exactly  the same  -  24                                                                    
     million barrels.  Dividing $1.47  billion of PTV  by 24                                                                    
     million barrels  equals $61.25 per barrel,  exactly the                                                                    
     same. But  progressivity is 51  percent higher.  And if                                                                    
     you look  at the monthly calculations  in the changing-                                                                    
     price   scenario,  you   can  see   that  the   monthly                                                                    
     progressivity tax will be exactly  the same for each of                                                                    
     the  $30 months  no  matter what  order  you put  those                                                                    
     months in. The  same is true for the  $92.50 months. So                                                                    
     this  phenomenon is  different from  what I  showed you                                                                    
     earlier about the  whole being greater than  the sum of                                                                    
     its parts,  because here  there are  no changes  in the                                                                    
     actual progressivity  calculation for a $30  month or a                                                                    
     $92.50 one.                                                                                                                
                                                                                                                                
1:34:31 PM                                                                                                                    
                                                                                                                                
MR. WILLIAMS continued:                                                                                                         
                                                                                                                                
     The  bottom  line here  is  this.  The year  under  the                                                                    
     changing-price scenario  is just  as profitable  as the                                                                    
     flat-price one, and for the  same amount of production.                                                                    
     The tax base to  which progressivity applies is exactly                                                                    
     the  same for  the  year.  Yet the  tax  is 51  percent                                                                    
     higher when prices change during the year.                                                                                 
                                                                                                                                
     Now,  I have  chosen  these  PTV-per-barrel figures  so                                                                    
     they  would show  the greatest  amount of  tax increase                                                                    
     resulting from prices that are  not flat all year long.                                                                    
     I did this  because, if I showed you an  example with a                                                                    
     smaller effect,  someone would surely  ask me  what the                                                                    
     maximum  effect could  be. My  example  gives you  that                                                                    
     answer at the same time it explains the phenomenon.                                                                        
                                                                                                                                
1:35:05 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  asked to clarify  that this reflected  one real                                                               
scenario.                                                                                                                       
                                                                                                                                
MR. WILLIAMS replied that it  resembled what happened in 2008, as                                                               
the year started  out with lower prices, spiked  in mid-year, and                                                               
then declined later in the year.                                                                                                
                                                                                                                                
1:35:37 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON noted  that  the  monthly calculation  was                                                               
specifically designed as a windfall  profits tax calculation.  He                                                               
asked to clarify that the  objection was for the windfall profits                                                               
section  to progressivity  which was  calculated monthly  to take                                                               
into  account this  scenario  of a  huge spike,  and  not to  the                                                               
mechanics.                                                                                                                      
                                                                                                                                
MR. WILLIAMS clarified  his objection, stating that  there was no                                                               
windfall for  the year,  as it  was a  yearly tax  with estimated                                                               
monthly payments.   He stated  that part  of the reason  was that                                                               
the  source was  the  calculation of  progressivity with  monthly                                                               
prices and an average for the annual cost.                                                                                      
                                                                                                                                
1:37:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  questioned whether  this was a  yearly tax                                                               
or a monthly tax calculation with an annual true-up.                                                                            
                                                                                                                                
MR. WILLIAMS  agreed that it was  part of the design,  but he did                                                               
not know if  the intent was for  the tax to add up  for the year,                                                               
without a windfall.  He declared  that the tax was potentially 51                                                               
percent higher  because prices changed,  and that the  tax worked                                                               
as if there was a windfall, even if there was not one.                                                                          
                                                                                                                                
1:38:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER  declared that  it  had  been a  conscious                                                               
policy call of the legislature.                                                                                                 
                                                                                                                                
MR. WILLIAMS recalled  it had been intended to  avoid tax payment                                                               
when prices  fell at the  end of  the year, instead  using higher                                                               
price estimates that had occurred  earlier.  He opined that there                                                               
was  not  an intended  effect  for  taxes merely  because  prices                                                               
changed,  but there  was intent  to  provide tax  relief for  the                                                               
installment payments at the end of  the year if prices were going                                                               
down.    He  offered  an  apology  if  he  had  misunderstood  or                                                               
mischaracterized the intent.                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER  agreed that  there  was  not a  point  to                                                               
debate,  although he  emphasized that  this  was the  way it  was                                                               
intended to work, "right or wrong, good or bad."                                                                                
                                                                                                                                
1:40:51 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE expressed  his belief  that  Mr. Williams'  point                                                               
that "it is the way it is" made a forecast much trickier.                                                                       
                                                                                                                                
MR. WILLIAMS repeated that for one  scenario there was still a 51                                                               
percent higher tax on the same production.                                                                                      
                                                                                                                                
1:41:14 PM                                                                                                                    
                                                                                                                                
CO-CHAIR   SADDLER   offered    a   metaphorical   comment   that                                                               
progressivity  treated "the  peak of  a storm  surge as  the mean                                                               
high tide level in taxes accordingly."                                                                                          
                                                                                                                                
MR. WILLIAMS agreed.                                                                                                            
                                                                                                                                
1:41:28 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON reflected  that, with all  the activity                                                               
and amendments  on the floor  at the  time of ACES,  some members                                                               
did not  understand the  ramifications.   She offered  her belief                                                               
that   there   had  not   been   adequate   discussion  for   the                                                               
relationships.                                                                                                                  
                                                                                                                                
1:42:21 PM                                                                                                                    
                                                                                                                                
DAMIAN  BILBAO, Head  of Finance,  BP Exploration  (Alaska) Inc.,                                                               
affirmed  that,  whatever  the   intent,  there  were  unintended                                                               
consequences from  this policy,  one of those  being that  it was                                                               
not  possible to  fix  just  one piece,  as  another piece  would                                                               
impact  the   model.     He  declared  that   it  was   not  just                                                               
progressivity, but the  fundamental effect of each  piece on each                                                               
other, including  the credits and  the base rate.   He emphasized                                                               
that it was important to understand  the effect of each factor on                                                               
each other.                                                                                                                     
                                                                                                                                
1:43:23 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  offered  some  background  on  the  early                                                               
decisions  regarding  progressivity.    He stated  that,  as  the                                                               
original PPT  bill was designed,  progressivity was  reviewed and                                                               
established  as  a  windfall  profits   component  in  the  first                                                               
committee  of referral,  the House  Resources Standing  Committee                                                               
(HRES), and not  on the House floor.  He  reported that, although                                                               
the  numbers  may have  changed,  progressivity  was included  in                                                               
ACES.   He clarified  that HRES had  designed progressivity  as a                                                               
"fundamental  building block"  of the  original PPT  legislation,                                                               
and it was ultimately included in ACES.                                                                                         
                                                                                                                                
1:45:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   P.  WILSON   reflected  that   there  had   been                                                               
discussion about a windfall tax.                                                                                                
                                                                                                                                
1:45:18 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE suggested a continuation of the presentation.                                                                    
                                                                                                                                
1:45:27 PM                                                                                                                    
                                                                                                                                
MR. BILBAO  pointed out  that this was  an attempt  to illustrate                                                               
the impact of  that intent, whatever that intent was,  and how it                                                               
affected the  decision making.   He declared  that, as  there was                                                               
not  a flat  price, the  average price  produced a  significantly                                                               
different  yearend  tax,  which  had  consequences  for  business                                                               
decisions.                                                                                                                      
                                                                                                                                
1:45:56 PM                                                                                                                    
                                                                                                                                
MR.  WILLIAMS announced  that, in  light of  this discussion,  he                                                               
would  modify somewhat  from his  written testimony.   He  stated                                                               
that progressivity  had at least one  unintended consequence, and                                                               
another  consequence that  was larger  than originally  intended.                                                               
He summarized:                                                                                                                  
                                                                                                                                
                                                                                                                                
     First, when you are  analyzing combinations of steps to                                                                    
     take to  improve an  investment opportunity,  the whole                                                                    
     is greater  than the sum  of its parts. Second,  if you                                                                    
     do  not  take  into   account  the  effect  from  price                                                                    
     volatility during  each year  in an  investment's life,                                                                    
     the  progressivity  could turn  out  to  be 50  percent                                                                    
     higher  than what  you have  estimated.  Both of  these                                                                    
     unintended effects  promise to  increase the  risks and                                                                    
     reduce  the competitiveness  of  an Alaskan  investment                                                                    
     relative to a comparable one elsewhere.                                                                                    
                                                                                                                                
     These negatives  of progressivity complement  what AOGA                                                                    
     told  you during  its  testimony  last Monday.  Without                                                                    
     repeating that testimony here, I  will only list AOGA's                                                                    
     main  points.  One,  progressivity sacrifices  the  one                                                                    
     advantage  Alaska has  from its  economic remoteness  -                                                                    
     namely,   the   greater    improvement   in   financial                                                                    
     performance  for investments  here if  prices turn  out                                                                    
     better  than projected  -  because progressivity  taxes                                                                    
     away more  and more of  that improvement the  better it                                                                    
     turns out to  be. And two, progressivity  makes the tax                                                                    
     extraordinarily  complex and  inconsistent to  compute,                                                                    
     and to analyze.                                                                                                            
                                                                                                                                
     For  these  reasons  BP  fully  endorses  the  proposed                                                                    
     repeal of progressivity that House Bill 72 proposes.                                                                       
                                                                                                                                
1:48:17 PM                                                                                                                    
                                                                                                                                
MR. WILLIAMS addressed slide 11, "Production Decline is Real,"                                                                  
and continued with his testimony:                                                                                               
                                                                                                                                
     Let  me now  turn to  the second  main feature  in this                                                                    
     Bill -  the changes it  proposes to the  present system                                                                    
     of tax credits, and in  particular to the sunset of the                                                                    
     credit  for "qualified  capital expenditures"  or "QCE"                                                                    
     at the end of this calendar year.                                                                                          
                                                                                                                                
     The first,  and probably  most important  observation I                                                                    
     can offer  about tax credits  in general is  they would                                                                    
     not be so significant for  the economics of oil and gas                                                                    
     production  here  if the  production  tax  were not  so                                                                    
     high.                                                                                                                      
                                                                                                                                
     Second, the QCE  tax credit depends solely  on how much                                                                    
     a  company   invests  for  oil  and   gas  exploration,                                                                    
     development and  production in  Alaska. Period.  If you                                                                    
     want to  address the North  Slope decline  curve, there                                                                    
     have to be investments  here leading to more production                                                                    
     - not  just by  finding and  developing new  fields and                                                                    
     new reservoirs,  but also by getting  more recovery out                                                                    
     of fields already in production.  The QCE tax credit is                                                                    
     a direct  incentive for  making these  investments. And                                                                    
     it   costs  the   State   nothing   unless  there   are                                                                    
     investments: if investment is zero,  then 20 percent of                                                                    
     zero is  zero. The QCE  tax credit arises only  when it                                                                    
     succeeds, and costs nothing if it doesn't.                                                                                 
                                                                                                                                
     The QCE tax  credit is not affected by  oil prices, the                                                                    
     costs of  transporting oil and  gas to market,  nor the                                                                    
     operating costs  of the  field. Consequently  its value                                                                    
     to a business like BP's is  the same for a given amount                                                                    
     of  QCE expenditure,  regardless of  the price  and the                                                                    
     transportation and field  operating cost scenarios that                                                                    
     the  business estimates  in  its investment  decisions.                                                                    
     And it is  the same regardless of how  prices and those                                                                    
     other costs  actually turn  out. Progressivity,  on the                                                                    
     other  hand, is  dependent  on prices  and  costs in  a                                                                    
     twofold  way: once  in determining  the  amount of  PTV                                                                    
     that is  subject to tax,  and again in  calculating the                                                                    
     tax rate that progressivity will apply to that PTV.                                                                        
                                                                                                                                
     Thus,  the  point where  the  cost  of losing  the  QCE                                                                    
     credit  year  begins  to   outweigh  the  benefit  from                                                                    
     repealing progressivity  depends both  on the  price of                                                                    
     oil  and,   for  each  individual  producer,   on  that                                                                    
     producer's   own   unique    portion   of   the   lease                                                                    
     expenditures for the North Slope.                                                                                          
                                                                                                                                
1:50:23 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER, noting that this was a key point, requested it                                                                
be repeated.                                                                                                                    
                                                                                                                                
MR. WILLIAMS  repeated that "the  point where the cost  of losing                                                               
the  QCE  credit  year  begins   to  outweigh  the  benefit  from                                                               
repealing progressivity  depends both  on the  price of  oil and,                                                               
for  each  individual producer,  on  that  producer's own  unique                                                               
portion of the lease expenditures for  the North Slope."  He then                                                               
continued with his presentation:                                                                                                
                                                                                                                                
     For BP's own business  and expenditures, this crossover                                                                    
     comes at  a higher price  level -  in the mid  to upper                                                                    
     90s  -  than  that  which   Econ  One  and  others  are                                                                    
     presenting  for North  Slope producers  as a  whole. So                                                                    
     the improvement  to our  investment economics  from the                                                                    
     repeal  of  progressivity  stands to  be  substantially                                                                    
     undone by the sunset of the  QCE tax credit. Since I am                                                                    
     a tax  man who  is here  to testify  about this  tax, I                                                                    
     would ask,  please, for  your patience  for just  a few                                                                    
     minutes if you have  questions regarding this point, so                                                                    
     I can quickly finish up and Mr. Bilbao can testify.                                                                        
                                                                                                                                
     The  third  major feature  in  HB  72 is  its  proposed                                                                    
     "gross revenue  exclusion" or "GRE" which  is something                                                                    
     new. It would exclude  from the taxable PTV (production                                                                    
     tax  value) a  percentage  of the  gross  value at  the                                                                    
     point of  production for additional  or new  volumes of                                                                    
     oil  or gas  being  produced. This  concept could  have                                                                    
     significant  potential, and  indeed it  may prove  very                                                                    
     valuable  for explorers  and others  who can  bring new                                                                    
     fields and reservoirs into production.                                                                                     
                                                                                                                                
     Unfortunately,  the proposed  GRE  aims  away from  the                                                                    
     significant  opportunities for  new production  that BP                                                                    
     has identified  for its business.  HB 72 would  allow a                                                                    
     GRE only for production "from  a lease or property that                                                                    
     does  not  contain  land  that was  within  a  unit  on                                                                    
     January 1,  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."  BP's  business  centers  primarily                                                                    
     around units  that were established  before 2003  - the                                                                    
     Prudhoe Bay Unit, Kuparuk River  Unit, Duck Island Unit                                                                    
     and Milne  Point Unit. These units  are fully explored,                                                                    
     and the  likelihood is small  that any  significant new                                                                    
     participating  area will  be established  in them  that                                                                    
     "does not contain a reservoir  that had previously been                                                                    
     in a  participating area established before  ... 2012."                                                                    
     So these units are unlikely  to receive any GRE, as the                                                                    
     Bill reads now.                                                                                                            
                                                                                                                                
1:52:56 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE asked if this indicated that there were                                                                          
reservoirs within the unit and that a previous participating                                                                    
area was contracted.                                                                                                            
                                                                                                                                
MR.  BILBAO asked  to clarify  that the  question was  whether BP                                                               
expected to see any producing areas extended in the future.                                                                     
                                                                                                                                
CO-CHAIR FEIGE  referred to  the statement,  "does not  contain a                                                               
reservoir  that  had  previously  been in  a  participating  area                                                               
established before ... 2012."   He asked if there were reservoirs                                                               
that had  previously been  in a participating  area, but  were no                                                               
longer.                                                                                                                         
                                                                                                                                
MR.  BILBAO, offering  a short  answer,  stated that  BP did  not                                                               
envision the necessity  for expansion of any  producing areas for                                                               
the ongoing development of the fields.                                                                                          
                                                                                                                                
MR. WILLIAMS mused that the  confusion could arise from his quote                                                               
of the statute, rather than a paraphrase for clarity.                                                                           
                                                                                                                                
CO-CHAIR FEIGE expressed his understanding.                                                                                     
                                                                                                                                
1:54:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK,  noting that some previously  explored units                                                               
would not  qualify for the GRE,  asked if BP planned  for any new                                                               
exploration.                                                                                                                    
                                                                                                                                
MR.  BILBAO replied  that  the  BP focus  in  Alaska  was in  the                                                               
existing  units,  as these  had  more  resource opportunity  than                                                               
anywhere in the  world, other than the Lower 48.   He stated that                                                               
the  concentration would  be on  development of  those resources,                                                               
not in exploration for new units, either on or off shore.                                                                       
                                                                                                                                
1:55:28 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK asked  to  clarify that  the  GRE would  not                                                               
benefit BP, specifically for the already explored units.                                                                        
                                                                                                                                
MR. BILBAO expressed agreement that  there was not an expectation                                                               
for expansion,  or creation  of new  producing areas,  that would                                                               
fall under this characterization.                                                                                               
                                                                                                                                
1:56:02 PM                                                                                                                    
                                                                                                                                
MR. WILLIAMS, continuing with this presentation, stated:                                                                        
                                                                                                                                
     The present  focus of the proposed  GRE is misdirected.                                                                    
     Econ One  a week  ago told you  that an  estimated 29.1                                                                    
     billion barrels  of oil  and barrel-equivalents  of gas                                                                    
     on  the  North  Slope  and   offshore  in  the  OCS  is                                                                    
     "Economically  Recoverable  @  $90/bbl". But,  as  AOGA                                                                    
     pointed  out  it  its  testimony  on  Monday,  only  10                                                                    
     percent of that resource is  in an area that Alaska has                                                                    
     any direct  economic stake  in and  control over  - the                                                                    
     central  North Slope.  Of the  3 billion  barrels there                                                                    
     that Econ  One identified,  AOGA's testimony  (in which                                                                    
     we  and  the  other  members  of  AOGA  all  concurred)                                                                    
     estimated that  "2.5 billion barrels or  more stands to                                                                    
     come from Prudhoe Bay, Kuparuk  and other legacy fields                                                                    
     already in  production" that have  little or  no chance                                                                    
     of getting any GRE under the Bill.                                                                                         
                                                                                                                                
     If  you're going  to hunt  for eggs,  you have  to look                                                                    
     where the hens  nest. The same is true for  oil. If you                                                                    
     are  going   to  provide   an  incentive   to  increase                                                                    
     production rates and ultimate  recovery, offer it where                                                                    
     the oil is.                                                                                                                
                                                                                                                                
     There are  several problems with  the present  ACES law                                                                    
     that HB 72  does not address, and I  will quickly brief                                                                    
     you about them.                                                                                                            
                                                                                                                                
     The    first    is    the   disallowance    under    AS                                                                    
     43.55.165(e)(19)   of  "costs   incurred  for   repair,                                                                    
     replacement,  or  deferred maintenance"  of  production                                                                    
     facilities  "in  response  to a  failure,  problem,  or                                                                    
     event that  results in  the unscheduled  interruption …                                                                    
     or  reduction in  the  rate  of …  production  … or  in                                                                    
     response  to …  an unpermitted  release of  a hazardous                                                                    
     substance  or [natural]  gas[.]"  This  was enacted  in                                                                    
     2007  in response  to the  partial shutdown  of Prudhoe                                                                    
     Bay  in  2006  after two  corrosion-caused  leaks  were                                                                    
     discovered. BP  is not seeking change  to the substance                                                                    
     of the disallowance itself, but  we think the statutory                                                                    
     language should be improved  to establish clarity about                                                                    
     its   applicability.  There   are   minor  hiccups   in                                                                    
     production  operations  almost   every  day  in  fields                                                                    
     around   the  world,   and  Alaska's   fields  are   no                                                                    
     exception.  The present  statute  sets  no standard  of                                                                    
     materiality  for  an  "unscheduled interruption  ..  or                                                                    
     reduction" in  production. If production at  a facility                                                                    
     is  "interrupted"   for  five  minutes  because   of  a                                                                    
     temporary  hiccup  in  operations, does  that  cause  a                                                                    
     disallowed expense? If production  is "reduced" by five                                                                    
     barrels  a  day  for  a field  producing  over  400,000                                                                    
     barrels daily,  does that  cause a  disallowed expense?                                                                    
     If production  is interrupted for a  material period of                                                                    
     time, but ultimately  it turns out to cost  only $10 to                                                                    
     respond  to  it,  is  it  worthwhile  to  identify  and                                                                    
     quantify this $10 so it  can be disallowed? There is no                                                                    
     answer to  these and similar questions  in the statute,                                                                    
     and  the   Department  of   Revenue  has   not  adopted                                                                    
     regulations that answer them. We  are not asking you to                                                                    
     try  to write  the answers  to these  questions in  the                                                                    
     statute, although  you certainly  could if you  want do                                                                    
     to all  that work.  But we  suggest, instead,  that you                                                                    
     expressly give  the Department of Revenue  not only the                                                                    
     authority, but the duty, to  adopt regulations that set                                                                    
     reasonable  thresholds for  materiality about  how long                                                                    
     an  "interruption"  has  to last,  about  how  large  a                                                                    
     "reduction" in production has to  be, about how much an                                                                    
     unauthorized   release   has   to   be   or   in   what                                                                    
     circumstances  must it  occur, and  about how  much the                                                                    
     cost "incurred  … in response  to" such  situations has                                                                    
     to be, in order to trigger the disallowance.                                                                               
                                                                                                                                
     As  you know,  I worked  in the  Department of  Revenue                                                                    
     some 30-odd years ago, and  if I had to administer this                                                                    
     statute in  light of the circumstances  and controversy                                                                    
     that  led to  its enactment,  I would  be reluctant  to                                                                    
     adopt  regulations on  my own  initiative to  establish                                                                    
     such thresholds unless  I had some kind  of go-ahead or                                                                    
     permission   from   the    Legislature.   Perhaps   the                                                                    
     Department is waiting for such a sign from you.                                                                            
                                                                                                                                
     The second  unaddressed problem comes from  the changes                                                                    
     that  ACES  made  to AS  43.55.150,  the  statute  that                                                                    
     determines the  gross value at the  point of production                                                                    
     on the basis of destination  prices or values minus the                                                                    
     costs  of   transporting  the  oil  or   gas  to  those                                                                    
     destinations  from  the  point  of  production  in  the                                                                    
     field.  As amended,  the actual  cost  that a  producer                                                                    
     pays  to  a  regulated  pipeline carrier  to  ship  the                                                                    
     producer's oil could  be set aside if  the producer and                                                                    
     carrier  are "affiliated."  The Department  has adopted                                                                    
     regulations    calling    for    "cost-based"    tariff                                                                    
     calculations in  lieu of  the actual  regulated tariffs                                                                    
     that  are  paid.  But  under  those  regulations  these                                                                    
     calculations of  the "cost-based"  tariffs are  made by                                                                    
     the  Department,  not the  taxpayer,  and  there is  no                                                                    
     deadline in the regulations or  in AS 43.55.150 for the                                                                    
     Department  to  make  its calculations  and  share  the                                                                    
     results  with the  taxpayer. The  only deadline  is the                                                                    
     six-year statute of  limitations under AS 43.55.075(a).                                                                    
     We  concur with  AOGA's testimony  about the  interplay                                                                    
     between  this  six-year  statute  and  interest  at  11                                                                    
     percent   APR,  compounded   quarterly,  for   any  tax                                                                    
     underpayment    that,   in    this   regulated-pipeline                                                                    
     situation,   might   result   from   the   Department's                                                                    
     calculation of a  lower tariff than the  one allowed by                                                                    
     the governmental regulatory  agency having jurisdiction                                                                    
     over  that  tariff.  Six years  at  11  percent  almost                                                                    
     doubles-up the  amount of  a tax  increase from  such a                                                                    
     "cost-based" tariff.                                                                                                       
                                                                                                                                
     Further,  the  tax  laws  of   the  State  are  not  an                                                                    
     appropriate  place  for  Alaska   to  try  to  regulate                                                                    
     pipeline  tariffs. That  is a  function  of the  Police                                                                    
     Power,  and the  Regulatory  Commission  of Alaska  has                                                                    
     been established  as the  executive agency  to exercise                                                                    
     that  regulatory power.  The Federal  Energy Regulatory                                                                    
     Commission has  similarly been  created by  Congress to                                                                    
     regulate  pipeline  tariffs  for  interstate  shipments                                                                    
     under  the Congressional  power created  by the  United                                                                    
     States  Constitution   power  to   regulate  interstate                                                                    
     commerce.  State  tax   authorities  have  no  business                                                                    
     trying to supplant either of these agencies.                                                                               
                                                                                                                                
     Any  further  matters regarding  HB  72  that we  would                                                                    
     bring to your attention  have already been addressed by                                                                    
     AOGA in its testimony to you on Monday.                                                                                    
                                                                                                                                
2:03:46 PM                                                                                                                    
                                                                                                                                
MR. BILBAO added that the testimony  had gone into detail for the                                                               
committee  to better  understand  the impacts  when modeling  for                                                               
business investments.                                                                                                           
                                                                                                                                
2:04:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON, directing  attention  to  slide 4,  asked                                                               
about  the  criteria  for  analysis   which  included  a  $30,000                                                               
reduction   in   field   expense,    and   its   impact   through                                                               
progressivity.   He  declared that  the purpose  of progressivity                                                               
was  to  incentivize investment,  yet  the  analysis portrayed  a                                                               
reduction in investment.  He  asked if lowering the investment in                                                               
Alaska would cause a higher tax.                                                                                                
                                                                                                                                
MR. WILLIAMS  expressed his agreement, stating  that an incentive                                                               
was not useful  if its worth was  unknown.  He cited  this as the                                                               
point, that it was not possible  to calculate the tax benefit for                                                               
this investment.                                                                                                                
                                                                                                                                
2:05:40 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON pointed  out  that the  slide indicated  a                                                               
lowering  of  a  $30,000  investment in  field  cost  operations,                                                               
instead of increasing the investment.                                                                                           
                                                                                                                                
MR. WILLIAMS replied  that the reduction had  not been classified                                                               
as a capital  expense, and could be for  efficiency, although the                                                               
same problem still existed.   He stated that efficiency should be                                                               
encouraged, yet, in this instance, there was a penalty.                                                                         
                                                                                                                                
2:06:29 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE suggested that efficiencies  in the field could be                                                               
attained  through  investments, yet  he  agreed  that if  it  was                                                               
difficult  to  quantify  a  savings, it  would  be  difficult  to                                                               
justify an investment.                                                                                                          
                                                                                                                                
MR. WILLIAMS expressed agreement  that the calculated tax effects                                                               
had to be quantified for certainty.                                                                                             
                                                                                                                                
MR. BILBAO added that efficiency  and new technology both allowed                                                               
for more  economic production,  and that  this was  beneficial to                                                               
both the producer and the state.                                                                                                
                                                                                                                                
2:08:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER shared  his concern  that the  axiom, "the                                                               
power  to tax  necessarily involves  the power  to destroy,"  was                                                               
being proven true by the State of Alaska.                                                                                       
                                                                                                                                
2:09:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK reflected  on the  increase of  the original                                                               
Prudhoe Bay production estimate from  9 billion barrels of oil to                                                               
12 billion  barrels, and asked  how efficiency had  produced more                                                               
oil.                                                                                                                            
                                                                                                                                
MR. BILBAO replied  that the efficiency was on  a broad spectrum,                                                               
and offered an  example of rigs drilling more wells  and doing it                                                               
more efficiently,  so that cost  savings would be leveraged.   He                                                               
pointed  out that  the management  of inflation  to maintain  the                                                               
same  production  as the  previous  year  was  also a  means  for                                                               
efficiency.                                                                                                                     
                                                                                                                                
2:10:37 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK asked  for a forecast for  the oil production                                                               
in Prudhoe Bay.                                                                                                                 
                                                                                                                                
MR.  BILBAO  replied  that, first  and  foremost,  "the  resource                                                               
opportunity in  Alaska is tremendous,  unparalleled" and  that BP                                                               
did not  see many  other greater opportunities  for oil  and gas.                                                               
He declared that the challenge  was above the ground surface, and                                                               
he  offered that  the  current forecast  for  recoverable oil  in                                                               
Prudhoe Bay was now 14 billion  barrels.  He pointed out that the                                                               
fiscal  policy   would  ultimately  affect  the   amount  of  oil                                                               
recovered in all the fields.                                                                                                    
                                                                                                                                
2:12:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOHNSON  offered  his   belief  that  Alaska  was                                                               
penalizing companies  for "doing  good business,"  declaring that                                                               
efficiency was not a bad thing.                                                                                                 
                                                                                                                                
2:13:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON pointed to  the difficulties for the design                                                               
of taxes  which work to align  interests on the North  Slope.  He                                                               
referred to  testimony by an  engineering company that  a project                                                               
to enhance oil  projects had been cancelled  because one investor                                                               
had  declined  to  invest.    He asked  if  it  was  possible  to                                                               
incentivize investment  when there  was misalignment  between the                                                               
three producers in Prudhoe Bay.                                                                                                 
                                                                                                                                
MR. BILBAO declared  that his experience in  Alaska and elsewhere                                                               
dictated that when a project  made economic sense, everyone would                                                               
quickly align.   He  reported that  tax policy  had a  very clear                                                               
impact on  this, and suggested  that there had not  been enduring                                                               
misalignment on specific field projects  if the policy encouraged                                                               
good projects.   He stated  that both  the oil producers  and the                                                               
state would benefit.                                                                                                            
                                                                                                                                
2:15:04 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON clarified  that he  was not  talking about                                                               
alignment between  the state  and the  producers in  Prudhoe Bay,                                                               
but rather  between the  operators themselves.   He asked  if tax                                                               
policy would help drive the investments.                                                                                        
                                                                                                                                
MR. BILBAO  emphasized that this legislature  had the opportunity                                                               
to  make Alaska  competitive for  investment, which  would affect                                                               
the  decisions of  the  working  interest owners  in  any of  the                                                               
fields.   He affirmed that if  a fiscal policy allowed  a project                                                               
to be economic,  then the working interest owners  would agree to                                                               
move  the projects  forward.   He  observed that  a policy  which                                                               
tried to pick winners had  the unintended consequence of creating                                                               
misalignment.                                                                                                                   
                                                                                                                                
2:18:06 PM                                                                                                                    
                                                                                                                                
SCOTT  JEPSEN, Vice  President  External Affairs,  ConocoPhillips                                                               
Alaska, Inc.,  offered to  discuss the  Alaska tax  framework for                                                               
oil and gas production on the  North Slope.  He reviewed slide 2,                                                               
"Topics," which listed the topics that he would discuss.                                                                        
                                                                                                                                
MR. JEPSEN stated  that he would start with the  first topic, and                                                               
he indicated  slide 3, "Alaska  Decline Continues While  Lower 48                                                               
Production Continues to  Increase."  He pointed to  the top line,                                                               
which reflected  oil production in the  Lower 48 over the  last 8                                                               
years,   noting  that   the  incredible   resurgence  driven   by                                                               
production increases in Texas and  North Dakota correlated to the                                                               
decline in  Alaska.  He observed  that it was a  natural question                                                               
to ask  what was happening.   He explained that the  Lower 48 had                                                               
resources  which  included  the   shale  and  resurgence  in  the                                                               
conventional drilling.   He pointed  that many of these  were now                                                               
viable as oil  prices and technology had improved,  both of which                                                               
had tremendous economic impact on production.                                                                                   
                                                                                                                                
2:20:44 PM                                                                                                                    
                                                                                                                                
MR.  JEPSEN   indicated  that  the  other   favorable  point  for                                                               
production and investment in the  Lower 48 was the tax framework,                                                               
as there was a more  equitable split of revenue between producer,                                                               
investor, royalty  owners, and  government.   As the  prices went                                                               
up, everyone shared.   He pointed out that  Alaska was different.                                                               
There  were   resources,  specifically  in  the   legacy  fields.                                                               
Technology  would always  play a  role in  Alaska, and,  although                                                               
costs  were   a  challenge,  the   technology  helped   make  oil                                                               
production economic.   He  noted the challenge  for cost,  as oil                                                               
was  far from  market,  in  a remote,  hostile  environment.   He                                                               
observed  that the  current tax  framework in  Alaska was  not an                                                               
incentive for investment, and, although  some aspects of ACES had                                                               
merit, these did not offset the high progressivity and tax rate.                                                                
                                                                                                                                
2:22:11 PM                                                                                                                    
                                                                                                                                
MR.  JEPSEN   introduced  slide   4,  "Alaska  -   A  Challenging                                                               
Investment Climate  Investment Criteria:  How Alaska Ranks."   He                                                               
stated that this  addressed some of the  investment questions for                                                               
a company.  He pointed to  the arrows, either red or green, which                                                               
rated each of the categories as  favorable or not favorable.  The                                                               
first category,  exploration potential, was not  favorable as the                                                               
average  field size  discovery  was now  only  about 100  million                                                               
barrels,  which did  not compare  with  the multi-billion  barrel                                                               
prospects  found  elsewhere.   He  addressed  the next  category,                                                               
costs, and reported  that this was challenging in  Alaska, as the                                                               
transportation  costs  were  high,  and the  North  Slope  was  a                                                               
hostile   environment   for   business    in   the   winter   and                                                               
environmentally sensitive  in the  summer.   He compared  this to                                                               
the simplicity  of operating in  Texas.   He pointed to  the next                                                               
category, cycle time,  noting that it took a much  longer time to                                                               
bring a  well into production in  Alaska, and that this  was also                                                               
an unfavorable  rating.  He offered  an example of the  more than                                                               
10 years  to bring  on the  new drill site  at the  Alpine Field,                                                               
stating  that it  took "pretty  deep  pockets, a  lot of  staying                                                               
power, in order  to do business in an environment  where you have                                                               
those kinds of cycle times."                                                                                                    
                                                                                                                                
2:25:25 PM                                                                                                                    
                                                                                                                                
MR.  JEPSEN  moved  to  the  next category  on  slide  4,  Taxes,                                                               
offering  his  belief  that  Alaska's  tax  environment  did  not                                                               
encourage  investment.   He  reported  that  ACES took  away  the                                                               
upside, even  with the tax credits  to offset some of  the costs.                                                               
He  declared  that  long  term  cash flow  was  a  criterion  for                                                               
investment, and that ACES did not incentivize investment.                                                                       
                                                                                                                                
MR.   JEPSEN  summarized   the   last   category,  Legacy   Field                                                               
Opportunities, which  he declared to  be a very big  positive for                                                               
Alaska,  as   there  was  tremendous  resource   potential.    He                                                               
announced that investments  for near term production  to stop the                                                               
decline  would focus  on  these  fields.   He  affirmed that  the                                                               
legislature could  "do something about  taxes if it  so chooses,"                                                               
which  would help  to equalize  the investment  playing field  by                                                               
making  taxes comparable  to other  places  that were  attracting                                                               
large  amounts of  capital.   He  encouraged  the legislature  to                                                               
consider  providing investment  incentives,  and  to spread  them                                                               
across the  board, which would  include investment in  the legacy                                                               
fields.                                                                                                                         
                                                                                                                                
2:27:00 PM                                                                                                                    
                                                                                                                                
MR.  JEPSEN  indicated  slide  5,  "Alaska  Legacy  Fields  Still                                                               
Provide Significant  Opportunity."   He reported that  this graph                                                               
was taken from  the 2009 DOR production forecast data  for 2010 -                                                               
2050.  He  pointed out that the majority of  the resource lies in                                                               
the  legacy fields:   Kuparuk,  Prudhoe, and  Alpine areas,  with                                                               
more than 4 billion barrels  of expected future production, which                                                               
offered the "greatest bang for the buck for investment."                                                                        
                                                                                                                                
MR. JEPSEN considered  slide 6, "Alaska's Days of  'Easy Oil' Are                                                               
Gone:  High  Costs and High Government  Take Present Challenges,"                                                               
which  had  been  prepared  by PFC  Energy,  and  compared  costs                                                               
between Alaska  and the  Lower 48.   He pointed  out, as  it cost                                                               
half as  much to drill  in the Lower  48 than Alaska,  with lower                                                               
taxes, that it was a simple equation for where to invest.                                                                       
                                                                                                                                
2:28:55 PM                                                                                                                    
                                                                                                                                
MR. JEPSEN explained  slide 7, "Easy Oil In the  Legacy Fields Is                                                               
Gone," and stated  that the first wells  were relatively straight                                                               
forward.  He  affirmed that this had changed,  and although there                                                               
was still a  lot of oil, it was trapped  in isolated fault blocks                                                               
and  other places,  which required  complicated high  cost wells.                                                               
He agreed  that the  complicated new wells  in the  legacy fields                                                               
were  still cheaper  than  drilling  new grass  root  wells.   He                                                               
stated  that the  reserve  targets were  smaller,  and they  were                                                               
pursuing  the  satellite  fields,  which   had  added  a  lot  of                                                               
production  to  the  North  Slope.     He  noted,  however,  that                                                               
development   of  the   satellite  fields   often  required   new                                                               
infrastructure, new  pipelines, and  long cycle times,  which was                                                               
all  more expensive  than drilling  in existing  facilities.   He                                                               
reported that viscous  oil was also being  developed, with almost                                                               
15,000 barrels  each day online  in Kuparek.   He said  that this                                                               
will be  a long term  continuous evolvement of  technology before                                                               
this  viscous   oil  resource  can   be  fully  developed.     He                                                               
acknowledged that wells  were also producing water,  as water was                                                               
often  injected  to push  oil  out  of  the reservoir,  and  this                                                               
increased the  cost for oil  production.  He summarized  that the                                                               
days of  low cost,  straight forward well  bores for  100 percent                                                               
oil  were gone,  and the  focus was  now on  oil production  that                                                               
required   good  prices,   good  technology,   and  a   good  tax                                                               
environment.                                                                                                                    
                                                                                                                                
2:32:03 PM                                                                                                                    
                                                                                                                                
MR.  JEPSEN reported  that the  initial  Alpine development  cost                                                               
about  $1.4 billion  in 2000,  with 92  wells, 2  satellite drill                                                               
sites,  connecting  roads,  pads,  an  airstrip,  pipelines,  and                                                               
facilities  and had  initial production  of about  80,000 barrels                                                               
each day.   He compared this  to a similar CD-5  type development                                                               
which would  have 16-22  wells, with  small test  facilities, and                                                               
pipelines, and  would produce 15  - 18,000 barrels at  peak rate,                                                               
and  noted the  increase in  the cost  of doing  business on  the                                                               
North Slope.                                                                                                                    
                                                                                                                                
MR.  JEPSEN  concluded  that  progressivity  was  "really  a  big                                                               
disincentive  for investment  here in  the state."   He  reported                                                               
that proposed HB 72 did address  this, but the elimination of tax                                                               
credits would  still disadvantage  Alaska, as  the cost  of doing                                                               
business was  so much higher.   He suggested that  incentives for                                                               
investment,  specifically  in  the  legacy  fields,  would  be  a                                                               
necessary key component in a tax policy.                                                                                        
                                                                                                                                
2:34:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON  asked about the cost for  the CD-5 type                                                               
development.                                                                                                                    
                                                                                                                                
MR. JEPSEN replied  that the new development would  cost about $1                                                               
billion.                                                                                                                        
                                                                                                                                
2:34:43 PM                                                                                                                    
                                                                                                                                
BOB  HEINRICH,  Vice  President Finance,  ConocoPhillips  Alaska,                                                               
Inc., began  with a review  of the positive elements  of Alaska's                                                               
Clear and  Equitable Share (ACES), slide  8, "ACES Observations."                                                               
He stated  that the tax credits  were an important aspect  of the                                                               
structure of  ACES, as they offset  a small part of  the high tax                                                               
rates which resulted  from the calculations.  He  declared that a                                                               
large  amount  of  the  credits   had  gone  toward  exploration,                                                               
although the  producers also  used them to  offset the  high cost                                                               
environment.   He pointed out  that the tax credits  also applied                                                               
to both the new fields and  the legacy fields.  He explained that                                                               
these tax credits were not enough  to offset the high average and                                                               
high marginal  tax rates which  resulted from progressivity.   He                                                               
noted that the gross minimum tax  also demanded a tax, often when                                                               
the revenue  did not cover  the cost.   He directed  attention to                                                               
the  graph of  marginal shares  on  slide 8,  which depicted  the                                                               
industry,  federal, and  state shares  per barrel  of oil  from a                                                               
range of prices under ACES.   He reported that, under the current                                                               
price environment of  $110 per barrel, the marginal  tax rate was                                                               
about 80  percent.  He  referred to the  lower chart on  slide 8,                                                               
representing  the  ConocoPhillips   earnings  per  barrel,  which                                                               
ranged from  $22 - $25 per  barrel, even as the  price had ranged                                                               
from $60 - $110  per barrel.  He stated that  the majority of the                                                               
upside had been paid to the State of Alaska.                                                                                    
                                                                                                                                
2:37:17 PM                                                                                                                    
                                                                                                                                
MR.   HEINRICH  presented   slide   9,  "ConocoPhillips   Capital                                                               
Allocation," which  graphed investments  in Alaska and  the Lower                                                               
48.     He  declared  that,   although  there  were   "great  new                                                               
opportunities"  in  the  Lower 48,  the  reason  for  significant                                                               
investment there was for the cash  return, more than a 50 percent                                                               
greater  return than  in Alaska.   He  stated that  the trend  of                                                               
investment for  the greatest  profit opportunity  would continue.                                                               
He  reported  that  ConocoPhillips  had invested  more  than  $20                                                               
billion  since 2000  in Alaska  activities,  however the  current                                                               
investments were  "into liquids  rich oil plays,  which generates                                                               
substantially  better margins."   Alaska  was still  an important                                                               
part of the portfolio, but  ACES was preventing a greater capital                                                               
investment.                                                                                                                     
                                                                                                                                
2:38:35 PM                                                                                                                    
                                                                                                                                
MR.  HEINRICH offered  slide 10,  "Producer Share  under HB  72,"                                                               
which  analyzed  the difference  between  ACES  and  HB 72  on  a                                                               
producer share basis,  defined as "the available  cash after cost                                                               
and taxes that are retained by  the producers."  He declared this                                                               
to  be  the  inverse  of  the state  or  government  share.    He                                                               
explained that the producer share  was affected by assumptions on                                                               
capital  spending  and operating  costs,  which  could vary  from                                                               
field to field  and from producer to producer.   He reported that                                                               
this graph used 2012 revenue  sources data, which represented all                                                               
the  producers with  a  tax liability  on the  North  Slope.   He                                                               
clarified that  the graph  was projected for  the single  year FY                                                               
2014, and was  not a field life  or a five year  calculation.  He                                                               
opined that the  first year of a forecast was  the most reliable.                                                               
He pointed out that the crossover  point for the two tax systems,                                                               
HB 72  and ACES,  was about  $93 per barrel  and that  above that                                                               
price,  HB  72  produced  a  higher  percentage  share  from  the                                                               
producer  perspective.     Below  this  price   line  essentially                                                               
resulted in  a tax increase for  the producers.  This  had forced                                                               
the producers to analyze the  effects of the proposed bill, which                                                               
would  trade off  the benefits  of  a better  tax environment  at                                                               
higher prices  with a  worse tax  environment at  prices slightly                                                               
lower than  the current price  per barrel.   He declared  that it                                                               
was important for project analysis  to review a probable range of                                                               
prices.   He noted  that the  shape of the  curve was  similar to                                                               
that  in many  of the  Lower 48  states, but  that Alaska's  high                                                               
operating  cost  environment did  not  tilt  the equation  toward                                                               
Alaska investments.  He suggested  that a flattening of the curve                                                               
would lower the tax increase  at lower prices, and that expansion                                                               
of  the incentives  for  legacy fields  would  also "improve  the                                                               
likelihood of the state achieving its goals."                                                                                   
                                                                                                                                
2:41:46 PM                                                                                                                    
                                                                                                                                
MR.  HEINRICH  summarized his  observations  of  proposed HB  72,                                                               
slide  11, "Recap  of ConocoPhillips  Perspective."   He reported                                                               
that, under ACES,  progressivity took away the  price upside, and                                                               
discouraged  investment; although  the tax  credit structure  did                                                               
reduce  the overall  effective tax  rate,  it was  not enough  to                                                               
offset the  negative effects of  progressivity at  higher prices.                                                               
He declared  that proposed HB  72 was  a positive step  toward an                                                               
improved investment climate, as  the elimination of progressivity                                                               
resolved  the  problem of  the  high  marginal tax  at  increased                                                               
prices and made  Alaska more competitive at  those higher prices,                                                               
which he  defined as more  than $100 barrel.   He noted  that the                                                               
proposed bill  made Alaska  less competitive  than ACES  at lower                                                               
prices, and it  represented a tax increase to the  producers.  He                                                               
declared that  the gross revenue  exclusion was not  broad enough                                                               
to incentivize new  production, as it did not  include the legacy                                                               
fields,  where  the  vast  majority   of  future  production  was                                                               
expected.                                                                                                                       
                                                                                                                                
2:43:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON asked  how many years  after investment                                                               
would it take for an increase in production.                                                                                    
                                                                                                                                
MR. JEPSEN recognized the necessity  for the producers to respond                                                               
to a positive  tax structure.  He shared that  it was possible to                                                               
more quickly bring on  a new drill rig than to  build a new drill                                                               
site, although  there were plans  and ideas for projects  after a                                                               
change in  the tax environment.   He offered his belief  that the                                                               
closest differential time frame would be  1 - 2 years, with other                                                               
projects coming  on line  at later  dates.   He pointed  out that                                                               
there was  already a  high demand  for drilling  equipment, given                                                               
the  high price  of oil,  but  that an  incentive for  investment                                                               
would be actively pursued.                                                                                                      
                                                                                                                                
2:45:00 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  directed attention  to the  investment criteria                                                               
on slide 4, and asked  which was the most important consideration                                                               
for investment.                                                                                                                 
                                                                                                                                
MR.  JEPSEN  replied  that  these   criteria  were  in  order  of                                                               
occurrence, as each determined the next stage.                                                                                  
                                                                                                                                
CO-CHAIR SADDLER asked which was the most important to consider.                                                                
                                                                                                                                
MR. JEPSEN,  in response, stated  that there was not  an absolute                                                               
answer as it was a function of the fit for all the variables.                                                                   
                                                                                                                                
2:46:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON identified  slide  10, and  asked why  the                                                               
projected oil price of $93  per barrel differed from the Palantir                                                               
projection of $120  per barrel as the crossover point.   He asked                                                               
if this price was production tax value.                                                                                         
                                                                                                                                
MR.   HEINRICH  responded   that  the   price  depended   on  the                                                               
assumptions made  for cost  of capital.   He declared  that these                                                               
prices represented  the undiscounted cash  flow for FY 2014.   He                                                               
stated that he was not aware  of the presentation, noting that it                                                               
was  important  to  make  sure   both  were  for  the  same  time                                                               
durations.                                                                                                                      
                                                                                                                                
2:48:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked  to clarify that it was  for the full                                                               
life cycle of a capital intensive project by a producer.                                                                        
                                                                                                                                
MR.  HEINRICH   replied  that  it   was  based  on   a  portfolio                                                               
perspective from DOR sources.                                                                                                   
                                                                                                                                
2:51:02 PM                                                                                                                    
                                                                                                                                
DAN  SECKERS,  Tax   Counsel,  ExxonMobil  Corporation,  directed                                                               
attention  to  his  submitted  written  testimony,  [Included  in                                                               
members'  packets]   and  he  invited   any  questions   to  that                                                               
testimony.   He offered to  summarize the  ExxonMobil perspective                                                               
for  proposed  HB  72,  and  declared  support  for  the  earlier                                                               
testimonies from BP and ConocoPhillips.   He endorsed the efforts                                                               
of  the governor  and the  legislature for  examining the  Alaska                                                               
investment  climate,  specifically  ACES.    He  emphasized  that                                                               
Alaska was no longer competitive  hence it was not attracting the                                                               
necessary investments.  For ExxonMobil,  it was necessary for any                                                               
effective  tax policy  to address  two main  components of  ACES,                                                               
progressivity and  the overall  high government  take.   He noted                                                               
that the  producers agreed that  these were a  major disincentive                                                               
to move any  investment opportunities forward.   He affirmed that                                                               
proposed  HB 72  offered significant  progress toward  making the                                                               
Alaska  investment  climate more  competitive.    He stated  that                                                               
progressivity created  complexities, and  it took  away a  lot of                                                               
the  upside potential  that other  tax jurisdictions  allowed the                                                               
producers  to retain.   He  assessed that  this was  important in                                                               
Alaska, as  the costs were  high, and the investments  long term,                                                               
high risk, and capital intensive;  therefore, mitigation for this                                                               
was the  upside potential.   He stressed that the  elimination of                                                               
progressivity  was a  significant  improvement,  and would  allow                                                               
Alaska  to  be more  competitive  and  increase investment.    He                                                               
reported that the  gross revenue exclusions did not  apply to the                                                               
legacy fields, and that it  was important to incentivize both new                                                               
production  and existing  fields.   He pointed  out that  a small                                                               
increase in the  recoverable reserves at Prudhoe  Bay would dwarf                                                               
any new  field on the North  Slope.  He confirmed  that, although                                                               
proposed  HB 72  offered significant  progress, there  were still                                                               
some concerns.   He noted that the base rate  was still too high.                                                               
Benchmarking   government   take   against  other   regimes   was                                                               
important, but it did not tell  the entire picture, as Alaska had                                                               
some of  the highest costs.   He  offered his belief  that Alaska                                                               
should strive to make companies want  to invest in Alaska, as the                                                               
other factors were all deterrents.                                                                                              
                                                                                                                                
2:57:09 PM                                                                                                                    
                                                                                                                                
MR. SECKERS addressed the issue  for tax credits, recognizing the                                                               
necessity to balance  long term state needs with  wide band price                                                               
scenarios.   He stated  that tax  credits offered  investors that                                                               
opportunity, as it  downsized risks, and mitigated  the costs for                                                               
capital  investments.     He  suggested  consideration   for  the                                                               
maintenance  of  the tax  credits.    He  stated that  the  gross                                                               
revenue exclusions  should be expanded  to cover all  the fields,                                                               
not  just new  fields,  and  that the  base  tax  rate should  be                                                               
reviewed  and  compared with  other  states.   He  conveyed  that                                                               
Alaska  was  important to  the  ExxonMobil  long term  investment                                                               
portfolio,  and they  looked forward  to staying  in Alaska.   He                                                               
cited that it  was critical that Alaska continue to  exam its oil                                                               
tax  policies.     He  asked  if  the   Alaska  legislators  were                                                               
comfortable  with   "the  path   Alaska's  currently  on."     He                                                               
summarized  that  any  encouragement  for  investment  in  Alaska                                                               
should  be examined  to improve  the investment  climate, and  he                                                               
declared  that  proposed   HB  72  was  "a  good   step  in  that                                                               
direction."                                                                                                                     
                                                                                                                                
2:59:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked if a change  for the base tax rate to                                                               
an  equivalent of  17 percent  would be  less complex  than broad                                                               
application for the gross revenue exclusions.                                                                                   
                                                                                                                                
MR.  SECKERS  replied that  this  was  a  part of  the  necessary                                                               
analysis  for  the  legislature.   He  offered  his  belief  that                                                               
taxation was just math, and could be  made to work in a number of                                                               
different  ways.   He  shared  that the  question  should be  for                                                               
competitiveness,  with  a  goal  to make  Alaska  attractive  for                                                               
investors.                                                                                                                      
                                                                                                                                
3:00:49 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON, referring to  the call for the elimination                                                               
of  progressivity, asked  whether,  if the  upside potential  was                                                               
eliminated for the  state, the floor amount should  be changed so                                                               
that the oil industry had some downside risk as a balance.                                                                      
                                                                                                                                
MR. SECKERS  agreed it was  a difficult challenge to  balance the                                                               
tax structure  across all prices.   He opined that the  floor, as                                                               
it was  based on gross,  could be exceptionally harsh,  and could                                                               
lead to  a tax situation  even though  there was not  any profit.                                                               
He  stated that  progressivity was  the most  punitive aspect  of                                                               
ACES,  and  to  address  that  issue was  a  step  in  the  right                                                               
direction.                                                                                                                      
                                                                                                                                
3:02:24 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER asked  to  what  degree ExxonMobil  Corporation                                                               
would require durability for tax policy.                                                                                        
                                                                                                                                
MR. SECKERS  replied that stability  was very important  to Exxon                                                               
Mobil, although  it was only as  good as the cost  it came under.                                                               
He  said that  investment  decisions were  impacted by  continual                                                               
regulatory changes.   He commented  that any changes had  to make                                                               
Alaska more competitive.                                                                                                        
                                                                                                                                
3:03:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK  asked how  long ago  Texas and  North Dakota                                                               
had  changed their  tax policies  in  order to  have the  current                                                               
level of production.                                                                                                            
                                                                                                                                
MR.  SECKERS stated  that  he  did not  know  the historical  tax                                                               
treatments for  either of those  states, or how often  either had                                                               
changed its system.  He opined  that neither had made many recent                                                               
changes,  but their  systems were  "a  lot more  favorable."   He                                                               
added that  the dynamics  of new technology  and the  increase in                                                               
oil price had made both places more attractive.                                                                                 
                                                                                                                                
3:05:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK   asked  how  much  more   quickly  was  the                                                               
turnaround time for unconventional  oil development to production                                                               
in Texas and North Dakota.                                                                                                      
                                                                                                                                
MR. SECKERS offered his belief  that the turnaround time would be                                                               
quicker in the Lower 48.                                                                                                        
                                                                                                                                
3:06:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  detailed that some consultants  had stated                                                               
that  the  return on  capital  employed  was the  most  important                                                               
factor,  and  asked  what  the  most  important  factor  was  for                                                               
ExxonMobil.                                                                                                                     
                                                                                                                                
MR.  SECKERS  explained that  the  decision  making process,  for                                                               
ExxonMobil,  was  confidential,  although they  reviewed  a  wide                                                               
spectrum.  He expressed agreement  with ConocoPhillips that there                                                               
was no one lynchpin factor for decision making.                                                                                 
                                                                                                                                
[HB 72 was held over.]                                                                                                          

Document Name Date/Time Subjects
HRES HB 72 ExxonMobil 2.20.13.pdf HRES 2/20/2013 1:00:00 PM
HB 72
HRES HB72 BP 2.20.13.pdf HRES 2/20/2013 1:00:00 PM
HB 72
HRES HB 72 BP Written Testimony 2.20.13.pdf HRES 2/20/2013 1:00:00 PM
HB 72
HRES HB 72 ConocoPhps 2.13.20.pdf HRES 2/20/2013 1:00:00 PM
HB 72