Legislature(2013 - 2014)BARNES 124

02/22/2013 01:00 PM RESOURCES

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01:05:20 PM Start
01:05:42 PM HB72
03:03:07 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
- Follow Up with Consultants
- Presentations by Econ One & PFC Energy
+ Bills Previously Heard/Scheduled TELECONFERENCED
                HB 72-OIL AND GAS PRODUCTION TAX                                                                            
1:05:42 PM                                                                                                                    
CO-CHAIR  FEIGE announced  that  the only  order  of business  is                                                               
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."                                                                                               
1:06:29 PM                                                                                                                    
BARRY PULLIAM, Economist & Managing  Director, Econ One Research,                                                               
Inc., stated he had reviewed  the presentations by the producers'                                                               
representatives and would comment on that material.                                                                             
1:07:47 PM                                                                                                                    
MR. PULLIAM addressed  slide 14 of the  Pioneer Natural Resources                                                               
presentation  to  the  House   Resources  Standing  Committee  on                                                               
February 18  which used Econ  One data  for the economics  of [HB
72]  versus ACES  for  a new  development.   He  opined that  his                                                               
conclusion for  this data differed  from the  Pioneer conclusion.                                                               
He directed  attention to the  $115 million  on the right  of the                                                               
slide, explaining  that this referred  to the  difference between                                                               
the net  present values under HB  72 and ACES for  a new producer                                                               
developing a  50 million barrel  field with capital costs  of $16                                                               
per barrel.   He offered his belief that slide  16, developed for                                                               
Pioneer Natural Resources  by Palantir, used the  same 50 million                                                               
barrel field, and was modeled for  the Nuna Project.  He declared                                                               
this to have capital spending  of almost $900 million, similar to                                                               
the Econ  One analysis,  although the  production profile  was "a                                                               
little different than what we had  used."  He noted that, instead                                                               
of a  $115 million  benefit, Pioneer analyzed  this to  reflect a                                                               
$92  million detriment.   He  pointed to  the assumptions  at the                                                               
bottom  of  the  slide,  which  he stated  were  similar  to  his                                                               
analysis.   He  pondered why  there was  an "opposite  conclusion                                                               
essentially."   He declared that  the assumption for  price, $100                                                               
per barrel ANS West Coast, was  the same, but that he had assumed                                                               
the  price would  increase over  time at  the rate  of inflation,                                                               
about 2.5 percent per year.   He offered his belief that Palantir                                                               
did  not make  this same  assumption for  inflation, which  would                                                               
result in a  2012 price of $78 per barrel,  and would account for                                                               
the different conclusion.                                                                                                       
1:13:34 PM                                                                                                                    
CO-CHAIR  SADDLER, referring  to the  aforementioned slide  16 of                                                               
the  Pioneer   Natural  Resources   presentation,  asked   for  a                                                               
comparable Econ One slide to show its results.                                                                                  
MR.  PULLIAM,  in  response,  referenced   the  top  box  of  the                                                               
aforementioned slide 14,  which listed the net  present value for                                                               
ACES  as $192  million  compared  to the  net  present value  for                                                               
proposed HB  72 of $309  million.  He reported  that differential                                                               
to be about $115 million.                                                                                                       
REPRESENTATIVE  HAWKER,  clarifying  that   the  Econ  One  model                                                               
included annual  inflation to  the $100  per barrel  price, asked                                                               
what that inflation rate was.                                                                                                   
MR. PULLIAM replied it was 2.5 percent.                                                                                         
REPRESENTATIVE  HAWKER   asked  if   this  annual   increase  was                                                               
compounded or linear.                                                                                                           
MR. PULLIAM responded  it was compounded, and  reflected that the                                                               
compounded price would be about $170  per barrel in 30 years, but                                                               
that the linear mean price would be about $129 per barrel.                                                                      
1:16:36 PM                                                                                                                    
REPRESENTATIVE SEATON opined that it  was not possible to compare                                                               
outcomes if an  annually inflated price was  now being introduced                                                               
in only one of the evaluations.                                                                                                 
MR. PULLIAM  explained that  all of  his presented  analyses were                                                               
for real terms, so a specific  price over an extended time period                                                               
would include inflation adjustment.   He offered to clearly label                                                               
his projections  as a 2012 dollar  value.  He surmised  that this                                                               
was the common way to present assumptions.                                                                                      
CO-CHAIR  FEIGE affirmed  that any  calculation  for net  present                                                               
value  (NPV)   in  the  future  should   reflect  that  inflation                                                               
MR. PULLIAM expressed his agreement,  and indicated that a NPV of                                                               
12 percent was consistent with  an inflationary assumption of 2.5                                                               
1:19:30 PM                                                                                                                    
REPRESENTATIVE  SEATON asked  if,  at $100  per  barrel, the  NPV                                                               
would be 9.5 percent.                                                                                                           
MR. PULLIAM confirmed this to be correct on a real basis.                                                                       
MR. PULLIAM said that it  was important to understand whether the                                                               
analysis was done in real or  nominal terms, as each could create                                                               
a very different outcome.  He  opined that a fixed price scenario                                                               
for real  terms would  be adjusted for  inflation over  time, and                                                               
would  then  use  a  discount rate  with  the  same  inflationary                                                               
1:21:04 PM                                                                                                                    
JANAK  MAYER, Manager,  Upstream and  Gas, PFC  Energy, concurred                                                               
with  the analysis  by  Mr.  Pulliam, stating  that  all the  PFC                                                               
presentations  to the  Alaska State  Legislature had  factored in                                                               
the  impact  of  inflation,  usually  a 2.5  percent  rate.    He                                                               
declared  that  the real  or  nominal  analysis models  for  many                                                               
fiscal  regimes  did  not  necessarily  make  a  huge  amount  of                                                               
difference when  the fundamentals  of the  fiscal system  did not                                                               
change with  nominal prices.   He declared that these  models did                                                               
not work in  Alaska, however, as ACES and  progressivity were not                                                               
indexed  to  inflation, but  were  set  in nominal  terms,  which                                                               
allowed for  "bracket creep."   He stated that as  nominal prices                                                               
rise,  the production  tax value  point  for progressivity  would                                                               
move  lower  in real  terms.    He  confirmed  that there  was  a                                                               
fundamental  difference for  a one  year  review for  ACES and  a                                                               
review  for an  extended time  frame.   He pointed  out that  the                                                               
government take became  higher and the economics  for ACES looked                                                               
worse when  an extended time  frame was analyzed with  the impact                                                               
of  inflation  factored in  because  of  the effect  of  "bracket                                                               
1:23:07 PM                                                                                                                    
REPRESENTATIVE  SEATON questioned  if inflation  was factored  on                                                               
expenses,  which were  all deducted  prior  to the  progressivity                                                               
point,  then that  point would  not "bracket  creep" because  the                                                               
inflation was below the tax point.   He stated that the inflation                                                               
was assumed in the costs.                                                                                                       
MR. MAYER  pointed out  that the  inflation was  also in  the oil                                                               
REPRESENTATIVE  SEATON  questioned  whether  the  consumer  price                                                               
index in Anchorage was related to the actual oil prices.                                                                        
CO-CHAIR FEIGE  surmised that there  was a theoretical  nature to                                                               
predicting future prices.                                                                                                       
REPRESENTATIVE SEATON expressed  his difficulty for understanding                                                               
the different models  if the calculations were not the  same.  He                                                               
asked if  the models  for NPV  10 and  NPV 12  would only  be 0.5                                                               
percent different.                                                                                                              
MR. PULLIAM, in  response to Representative Seaton,  said that it                                                               
would be better  if the cash flow and the  discount rate were not                                                               
inflated, however, the challenge would  be that an assumption for                                                               
constant oil prices  in real terms, a  common forecasting method,                                                               
would  differ from  nominal terms  as these  would be  rising and                                                               
would affect the ACES tax.  He  declared that it was not as valid                                                               
to ignore  the effects of inflation  in an analysis, as  it would                                                               
understate the  taxes due  under ACES because  the rate  rises as                                                               
the price rises.                                                                                                                
REPRESENTATIVE   SEATON   asked  if   the   basis   of  all   the                                                               
considerations had  been the DOR  Revenue Sources Book,  and were                                                               
these projections  all inflated  by 2.5  percent to  the consumer                                                               
price index.                                                                                                                    
1:26:58 PM                                                                                                                    
MR. PULLIAM offered his belief  that the figures presented in the                                                               
DOR Revenue  Sources Book  were nominal, or  dollars of  the day,                                                               
but  when   the  costs  and   prices  were  forecast   there  was                                                               
consideration for  the effects of  inflation.  He pointed  to the                                                               
gradual increase of  prices in the forecast,  which reflected the                                                               
inflationary effect.                                                                                                            
CO-CHAIR FEIGE surmised that, if  history was any guide, that the                                                               
price had steadily increased.                                                                                                   
MR. PULLIAM suggested that, although  there was some disagreement                                                               
for the  direction of  oil prices,  even a  conservative forecast                                                               
would reflect no growth, or a constant, in real terms.                                                                          
MR. MAYER  opined that  no economist would  say that  time series                                                               
data could be looked at  in nominal terms and generate meaningful                                                               
conclusions, as  inflation was a  fact of  life.  He  pointed out                                                               
that the  price of  oil in  the 1960s,  when reviewed  in nominal                                                               
terms, offered  no information for  a meaningful conclusion.   It                                                               
would  be necessary  to  inflate  that 1960s  oil  price to  2012                                                               
dollars to gain a sense of the purchasing power.                                                                                
MR. MAYER  affirmed that for  any of these current  analyses, the                                                               
point was  not to forecast  the exact  oil price, but  to compare                                                               
using  certain assumptions.   He  declared that  the crux  of the                                                               
matter was to determine the nominal price for its impact.                                                                       
1:30:35 PM                                                                                                                    
CO-CHAIR SADDLER  asked if it had  been an omission with  ACES in                                                               
not accounting for inflation.                                                                                                   
MR. MAYER  opined that, as  Palantir was a software  company, the                                                               
Pioneer  Natural   Resources  analysis  was  not   necessarily  a                                                               
commissioned report from  Palantir.  He pointed to  a white paper                                                               
produced by  Palantir, which included  an analysis  using nominal                                                               
terms.  In response to Co-Chair  Saddler, he surmised that it was                                                               
not   an  uncommon   oversight,  as   few  people   realized  the                                                               
significance that  "bracket creep effect  of ACES is  over time."                                                               
He  stated that  he  had not  specifically  reviewed the  Pioneer                                                               
Natural Resources analysis for real or nominal basis.                                                                           
CO-CHAIR SADDLER asked how significant was the bracket creep.                                                                   
MR. MAYER replied  that it had a noticeable  effect on government                                                               
take and  on the  price level at  which progressivity  would kick                                                               
MR. MAYER, in  response to Co-Chair Saddler, said  that the price                                                               
level for  progressivity became significantly lower  over a 20-30                                                               
year time frame.                                                                                                                
1:33:45 PM                                                                                                                    
REPRESENTATIVE  SEATON asked  about  the inflation  rate for  in-                                                               
field project  costs, and  whether it had  been entered  into the                                                               
analysis.  He opined that  these project costs had increased more                                                               
than the consumer price index.                                                                                                  
MR. PULLIAM offered  his belief that, on average,  there had been                                                               
a  greater increase  for project  costs.   He  reported that  the                                                               
inflationary pressure on  oil project costs was  greater than the                                                               
consumer price index,  and that these had been  factored into the                                                               
Econ One  analyses.  If  one simply  assumed that oil  prices and                                                               
costs were going  to rise at the level of  inflation, or somewhat                                                               
higher, the tax rate  for ACES would go up because  of it, as the                                                               
taxable base  for the price  of oil  was larger than  the taxable                                                               
base for costs.                                                                                                                 
1:35:51 PM                                                                                                                    
REPRESENTATIVE   HAWKER  reflected   on  the   initial  dialogues                                                               
regarding the  production profits  tax (PPT),  which had  a lower                                                               
progressivity level  than ACES.   He stated  that there  had been                                                               
discussion for  bracket creep, with recognition  that there would                                                               
be opposing  consequences for cost  and revenue  inflation, which                                                               
would tend to  be offsetting for the tax  calculations over time.                                                               
He indicated  that, as progressivity  rates under ACES  had never                                                               
been  modeled   or  evaluated  significantly  for   the  possible                                                               
consequences, there  now existed  a potentially  profound bracket                                                               
CO-CHAIR  FEIGE reviewed  that, although  inflation affected  the                                                               
revenues and the  expenses evenly, there were  other factors that                                                               
affected expenses.                                                                                                              
REPRESENTATIVE HAWKER  replied that  these were  relatively equal                                                               
and offsetting under  the original PPT.  However,  under ACES the                                                               
differential  became  quite  profound,   which  resulted  in  the                                                               
current bracket creep.                                                                                                          
1:37:56 PM                                                                                                                    
REPRESENTATIVE  SEATON  confirmed  that bracket  creep  had  been                                                               
discussed for  ACES.  He  opined that bracket creep  entered when                                                               
there were higher  prices, as there was then more  revenue in the                                                               
progressivity range.                                                                                                            
MR.  PULLIAM  declared   that  this  was  the   margin  over  the                                                               
progressivity trigger,  and inflation would increase  that margin                                                               
resulting  in an  increasing  tax rate  with  progressivity.   He                                                               
noted that  the "upside gain"  on slide  16 was the  amount saved                                                               
when not  paying any  progressivity, and  he opined  that similar                                                               
results would be reflected if he  assumed a real price of $80 per                                                               
1:40:23 PM                                                                                                                    
REPRESENTATIVE  TARR recalled  that Mr.  Pulliam had  stated that                                                               
the  tax  credits  were  not an  important  aspect  for  decision                                                               
making;  however, she  pointed out  that all  of the  independent                                                               
producers  testified to  the importance  of the  tax credits  for                                                               
commitment to investment in Alaska.                                                                                             
MR.  PULLIAM  replied  that  he did  not  recall  offering  those                                                               
opinions  as  he  had  intended  to  indicate  that  the  overall                                                               
economics of  the project, including the  credits, were important                                                               
to review.                                                                                                                      
REPRESENTATIVE TARR asked  how to attract the  small producers to                                                               
invest  in  Alaska,  as  the proposed  bill  would  remove  those                                                               
MR.  PULLIAM  suggested making  it  attractive  for the  enhanced                                                               
present value of the projects.   Even without credits, there were                                                               
enough other benefits to enhance the project's present value.                                                                   
REPRESENTATIVE TARR asked,  if the proposed bill  passed, at what                                                               
point and  for how many  barrels of oil  it would take  to recoup                                                               
the $1.5 billion revenue loss.                                                                                                  
1:43:30 PM                                                                                                                    
MR.  PULLIAM replied  that  he  was not  familiar  with the  $1.5                                                               
billion revenue  loss, although DOR  had analyzed the  impact for                                                               
new production.   He explained  that it depended on  the response                                                               
from the producers, although no  one could predict the time line.                                                               
He  stated  that  it  was   possible  to  make  the  system  more                                                               
attractive to encourage greater participation.                                                                                  
REPRESENTATIVE TARR  asked whether he  had an estimation  for the                                                               
number of barrels  of new oil production necessary  to recoup the                                                               
losses from the change in tax structure.                                                                                        
MR. PULLIAM  replied that the  calculation and analysis  could be                                                               
done  and  he opined  that  some  of  this information  had  been                                                               
1:45:14 PM                                                                                                                    
MR. MAYER shared  his conclusion that, should there  be no change                                                               
in  current production  until 2017  when new  production came  on                                                               
line,  it was  necessary  for  an additional  20,000-barrel-a-day                                                               
project to  come on-line each year  after that.  By  2019 - 2020,                                                               
there would  be greater  revenue than  currently under  ACES, and                                                               
real revenue to the state would level off.                                                                                      
1:46:06 PM                                                                                                                    
CO-CHAIR SADDLER requested Mr. Mayer to repeat his response.                                                                    
MR. MAYER  explained that, if one  assumed no change in  the rate                                                               
of decline  between now and  2017, it  would be necessary  for an                                                               
additional 20,000  barrels of  oil a  day each  year in  order to                                                               
hold state revenues steady.  By  2020, the state would then be in                                                               
a  net positive  position  compared to  the  current system  with                                                               
ACES, if the additional barrels were a result of the tax change.                                                                
1:47:40 PM                                                                                                                    
REPRESENTATIVE  SEATON  directed  attention  to  page  3  of  the                                                               
attached  fiscal note  [Included in  members' packets]  and asked                                                               
about the $1.5 billion loss in  2015 and the additional loss each                                                               
year  after.   He  declared  that  there  would be  some  balance                                                               
against this loss if the credits  were also removed.  He surmised                                                               
that the  total negative fiscal  impact would be over  $1 billion                                                               
in  2017 -  2019 according  to the  fiscal note.   He  questioned                                                               
whether the buy-down provision of  progressivity was an incentive                                                               
to invest in Alaska, when  the capital credits were also removed.                                                               
He asked  how removal of  these incentives to reinvest  in Alaska                                                               
offered  an overall  fiscal system  incentive that  would counter                                                               
balance these.                                                                                                                  
1:50:17 PM                                                                                                                    
MR. PULLIAM  expressed his disagreement  with the  conclusions of                                                               
the Palantir white  paper with respect to the legacy  fields.  He                                                               
declared that the  combination of the two changes  in proposed HB
72 made the system more attractive.   He allowed that there was a                                                               
question  whether  the buy  down  would  act  as strongly  as  an                                                               
incentive for  a lower  tax rate.   He pointed  out that  the buy                                                               
down  required continued  investment  in Alaska  rather than  the                                                               
freedom to invest elsewhere.                                                                                                    
REPRESENTATIVE SEATON reflected on the  "quality of the cash" for                                                               
the incentives,  which was  dependent on the  ability to  take it                                                               
wherever  desired.   He asked  for any  financial mechanism  that                                                               
would hold  funds until the  investments or  production commenced                                                               
under  the proposed  tax  system.   This  would  allow Alaska  to                                                               
retain the revenue until the incentives offered had been met.                                                                   
1:53:53 PM                                                                                                                    
MR.  PULLIAM  suggested  an escrow-type  account,  which  allowed                                                               
access to the funds given the adherence to certain conditions.                                                                  
REPRESENTATIVE  SEATON offered  his belief  that this  would give                                                               
comfort to many Alaskans regarding the proposed bill.                                                                           
MR.  PULLIAM opined  that the  value would  be determined  by the                                                               
hurdles  to  access  the  escrow funds,  and  whether  there  was                                                               
interest accrued for those funds.                                                                                               
1:57:03 PM                                                                                                                    
REPRESENTATIVE  HAWKER reflected  on an  earlier dialogue  during                                                               
the  debate  on  ACES  that  the  high  marginal  rates  were  an                                                               
incentive  to  the  industry  to  buy-down  their  taxes  through                                                               
additional  investment  in   Alaska.    At  that   time,  he  had                                                               
questioned the validity  of the premise, and he  noted that these                                                               
buy-downs had not happened.                                                                                                     
CO-CHAIR  SADDLER asked  if  Representative  Seaton intended  the                                                               
escrow  money to  only  be available  as script  to  use at  "the                                                               
company store of Alaska."                                                                                                       
REPRESENTATIVE  SEATON  explained  that   there  was  a  need  to                                                               
guarantee  that the  proposed  bill  would encourage  investment,                                                               
hence the  money in  the escrow account  would be  returned given                                                               
investment and  increased production in  Alaska.  He  offered his                                                               
belief that  the other  exclusions in  the proposed  bill created                                                               
winners and  losers, and  he was  in search of  a solution.   The                                                               
escrow money  would be available  for redemption  upon attainment                                                               
of  the  benchmarks.   He  offered  his  belief that  this  would                                                               
assuage any concerns for the loss of revenue with no guarantees.                                                                
2:01:18 PM                                                                                                                    
CO-CHAIR FEIGE  relayed that  all of  these companies  had stated                                                               
that they  would miss the  capital credits.   He opined  that the                                                               
capital credits  had led to spending,  but not to an  increase in                                                               
production  necessary  to level  out  or  reverse the  production                                                               
decline.    He asked  whether  a  credit to  encourage  increased                                                               
drilling and  new oil  production would  accomplish the  goals as                                                               
stated by Representative Seaton.                                                                                                
MR. PULLIAM declared that the goal  was to get more oil, and that                                                               
the current credits  had been valuable, in so far  as the current                                                               
tax  structure   without  these  credits  was   abominable.    He                                                               
clarified that the  credit did not offset or make  up for the tax                                                               
structure.  He  expressed preference for a credit  tied to actual                                                               
barrels,  rather than  spending, and  he suggested  a per  barrel                                                               
allowance that would  exempt new barrels from some or  all of the                                                               
tax.  He pointed out that  this would allow the producers and the                                                               
engineers to  determine the best means  to access the oil.   This                                                               
would  tie  the   incentive  to  the  end   result,  which  would                                                               
effectively offer a  lower tax rate.  He offered  an example that                                                               
a  credit   tied  to  drilling   could  be  a   disincentive  for                                                               
2:05:47 PM                                                                                                                    
MR.  MAYER  expressed  concern   for  the  impact  from  complete                                                               
elimination of the capital credits.   He noted that the crossover                                                               
price point  whereby there was a  tax decrease for high  price of                                                               
oil and a tax increase at  low price levels, was "potentially, at                                                               
the  moment, uncomfortably  high, particularly  when it  comes to                                                               
more  expensive  new production."    He  offered that  the  gross                                                               
revenue  exclusion  addressed completely  new  areas.   When  the                                                               
current  system  for  profit  based   production  tax  was  first                                                               
proposed by  Pedro van Meurs, it  was for a flat  25 percent base                                                               
tax, without a progressive component,  but had included a capital                                                               
credit to  mitigate the  project economics  at low  price levels.                                                               
He opined  that the capital  credit played a significant  role in                                                               
the improvement  of project economics.   However, a  credit based                                                               
solely  on production  would not  necessarily offset,  as it  was                                                               
applied later  in the cash flow  cycle to reduce the  overall tax                                                               
burden, but did  not help with the initial economics  for rate of                                                               
return.   He asked how concerned  the state was for  the downside                                                               
liability from  the tax credits and  if there were other  ways of                                                               
providing the incentive  that the credits offered.   He suggested                                                               
more  limited credits  for spending,  credits  that are  tradable                                                               
with other companies, or credits  that allowed more discretion by                                                               
the state.                                                                                                                      
2:09:24 PM                                                                                                                    
CO-CHAIR FEIGE  outlined the process  for finding  and developing                                                               
new oil fields,  and asked if there were  different credits which                                                               
were  more helpful  at  different  points of  the  timeline.   He                                                               
suggested a  credit system  be structured  to allow  companies to                                                               
elect which credit they preferred to use.                                                                                       
MR. MAYER said he would like to think about that.                                                                               
2:11:02 PM                                                                                                                    
REPRESENTATIVE TARR pointed  out that removal of  the tax credits                                                               
in  the proposed  bill would  create difficulties  for the  small                                                               
producers  and  for  exploration,  and  that  the  gross  revenue                                                               
exclusion  (GRE)   would  create   difficulties  for   the  large                                                               
producers as  it did  not apply  to the  legacy fields  where the                                                               
majority of  new oil  was projected  to be  produced.   She noted                                                               
that 20,000  new barrels of oil  per day was necessary  to offset                                                               
the loss  of tax  revenue, and yet,  the only  accomplishment for                                                               
the  proposed bill  was "giving  the oil  companies more  money."                                                               
She  stated that  it did  not  attract small  producers with  new                                                               
investment,  or  incentivize  legacy   field  development.    She                                                               
questioned why Alaska would move  forward with the proposed bill.                                                               
She suggested a change of  the gross revenue exclusion to include                                                               
the legacy fields, and she asked for comments.                                                                                  
2:12:16 PM                                                                                                                    
MR.  PULLIAM  expressed  his  understanding  for  the  producers'                                                               
desire to  have the  tax credits extended  to include  the legacy                                                               
field.    He   shared  his  confidence  that   the  economics  of                                                               
production and  additional investment in the  legacy fields would                                                               
be better under the proposed  bill than currently under ACES, and                                                               
therefore, the proposed  bill should be an  incentive to continue                                                               
production in the legacy fields.   He offered his belief that the                                                               
GRE and similar  incentives could be applied  to new developments                                                               
within  existing fields  which were  "getting  at new  oil."   He                                                               
acknowledged  that it  could  be more  difficult  to measure  new                                                               
production in  an existing  field.  He  reported that  the United                                                               
Kingdom had  a similar approach with  their brownfield allowance,                                                               
which was designed for mature  fields with pockets that were less                                                               
economic to produce.   In this system, the operator  would make a                                                               
proposal to  the government  and upon  approval an  exclusion was                                                               
2:15:04 PM                                                                                                                    
MR. PULLIAM  addressed earlier  points by  Representatives Hawker                                                               
and Seaton  that ACES was  designed to allow  a buy down  for the                                                               
tax  rate,  which should  encourage  investment.   He  referenced                                                               
earlier  analysis  that had  been  focused  on internal  rate  of                                                               
return  (IRR), which  reflected  that  additional investments  in                                                               
legacy fields were  huge.  He directed attention to  a slide [not                                                               
distributed  to members]  which depicted  the IRR  on incremental                                                               
investments in a  legacy field under ACES and  other systems with                                                               
different rates for progressivity.   He noted the flat 25 percent                                                               
tax rate, which  offered an IRR that increased  linearly over the                                                               
price range.  He shared that  as progressivity was added, the tax                                                               
rate went up and the IRR was  increased.  He declared that it was                                                               
an odd  result, as it appeared  that an increase to  the tax rate                                                               
would  make the  investment more  attractive.   He mused  why the                                                               
companies did  not also see this.   He opined that  the resulting                                                               
IRRs were  attractive and should  be stimulating investment.   He                                                               
asked which system would be preferred as a taxpayer.                                                                            
2:19:06 PM                                                                                                                    
REPRESENTATIVE TARR opined that, as  this was a much higher price                                                               
environment  than possibly  envisioned,  there  were much  higher                                                               
effective production  tax rates.   She pointed out that  this tax                                                               
rate  was only  10 percent  when  the price  of oil  was $60  per                                                               
barrel.   She suggested  that it  was now  necessary to  offer an                                                               
approach that more appropriately  responded to the higher prices.                                                               
She asked if he had  made calculations for progressivity at these                                                               
higher prices.                                                                                                                  
MR. PULLIAM replied  that he had reviewed a  variety of potential                                                               
progressivity scenarios, and  that he used a  model which allowed                                                               
changes to predict various outcomes.                                                                                            
REPRESENTATIVE TARR asked if these were available for review.                                                                   
MR.  PULLIAM   stated  that  he   would  request   approval  from                                                               
Department of Revenue (DOR).                                                                                                    
2:21:56 PM                                                                                                                    
REPRESENTATIVE  SEATON  questioned  whether  to  tie  credits  to                                                               
production, as it increased the  risk to exploration and drilling                                                               
because a dry hole  would not allow for any credit.   He asked if                                                               
this  revision  of  the  credit  would  discourage  drilling  and                                                               
exploration  to  both the  new  producers  and the  legacy  field                                                               
producers.  He  offered his belief that it was  the reverse of an                                                               
MR.  PULLIAM replied  that  part  of a  lease  agreement was  for                                                               
exploration  and  development, which  was  a  risk to  which  the                                                               
company agreed in the hope of  having a big reward.  He suggested                                                               
that any  mitigation of that risk  was favorable to them  as long                                                               
as they did not have to give up  part of the reward.  He declared                                                               
that  the advent  of  technology today  had  greatly reduced  the                                                               
probability of a dry hole, as  extensive work was done in advance                                                               
of drilling.   He opined that the risk was  not overwhelming when                                                               
it was  commensurate with  the potential reward.   He  noted that                                                               
there  was  a  program  which   offered  credit  for  exploration                                                               
drilling, although there were some  limitations, and he suggested                                                               
a review of this program with some modifications.                                                                               
2:26:41 PM                                                                                                                    
REPRESENTATIVE  SEATON  asked to  clarify  that  Mr. Pulliam  was                                                               
saying that  a company would  bid on  a lease if  the opportunity                                                               
for reward  was good  and the  tax rate  was down,  therefore the                                                               
credits were not necessary.                                                                                                     
MR. PULLIAM, in response, offered  his belief that overall, while                                                               
trying to  help, "we  tend to  try and  micromanage a  little bit                                                               
what it is  that the companies do."  He  established that, as the                                                               
companies take  on risk  and explore, the  state would  be better                                                               
off  letting them  do  that  without trying  to  provide so  much                                                               
assistance.    He  nominated   that  streamlined  permitting  and                                                               
reasonable  tax rates  would accomplish  the goal,  more so  than                                                               
trying to offer incentives.                                                                                                     
2:28:55 PM                                                                                                                    
CO-CHAIR  SADDLER  asked  about  the  link  of  tax  relief  with                                                               
production,  pointing  to  an allowance  for  production  of  new                                                               
barrels of oil, credits to  drilling, and credits for facilities.                                                               
He summarized that Mr. Pulliam  had suggested the state leave the                                                               
decision to  producers for the  most efficient allocation  to the                                                               
credit.    He inquired  whether  the  current credit  system  was                                                               
working toward that  end, or were there other ways  to modify the                                                               
tax  credit system  which would  address production  and abnormal                                                               
cost structures, while limiting exposure by the State of Alaska.                                                                
MR. PULLIAM, in response, offered  his belief that, if there were                                                               
going to  be credits, the  current credit was better  than having                                                               
more specific  credits directed to  activities, which  could lead                                                               
to unexpected consequences.   He opined that a  credit would best                                                               
be tied  to barrels instead  of spending, because that  would get                                                               
to what was  desired.  He suggested that it  may be worthwhile to                                                               
investigate a definition for new  barrels of oil, suggesting that                                                               
these may  be barrels  which exceeded  the natural  decline rate.                                                               
He  proposed an  engineering review  of specific  developments to                                                               
guarantee new production,  and then to offer those  new barrels a                                                               
greater per barrel credit.                                                                                                      
2:32:21 PM                                                                                                                    
MR.  MAYER mused  that there  was a  fundamental question  to the                                                               
philosophical approach  for the  achievement of a  fiscal system.                                                               
He opined  that the  approach in Alaska  had been  to micromanage                                                               
the  systems.     He  assessed   that  the   exploration  credit,                                                               
especially  when  combined,  was  overly  generous  and  was  not                                                               
affected  by the  proposed bill.   He  reported that  exploration                                                               
risk  was the  one form  of risk  that most  taxing jurisdictions                                                               
were unwilling  to risk, as  it was  similar to the  economics of                                                               
venture  capital.   He surmised  that a  substantial part  of the                                                               
problem  with   Alaska's  fiscal  system  was   the  concern  for                                                               
minimizing  risk  to take  as  much  as  possible return  on  the                                                               
upside.  He  suggested a rebalancing to take less  on the upside,                                                               
while taking even less risk.                                                                                                    
MR. MAYER reflected on the overall  approach to this goal, and he                                                               
considered  the  balance  for  a  high level  of  take  with  the                                                               
creation   of  a   competitive,  attractive   fiscal  regime   to                                                               
incentivize  behaviors.    He noted  that  substantially  reduced                                                               
government  take and  relatively few  specific interventions  was                                                               
one solution, although there was  a significant cost to the state                                                               
treasury  as companies  would receive  cash  back for  activities                                                               
that were currently  economic.  He pointed out that  a lot of the                                                               
spending on  the North  Slope was  currently economic.   However,                                                               
there was also the alternative  for a simpler, competitive regime                                                               
with reduced  exposure and reduced  revenue, which  would require                                                               
specific  interventions  with possible  unintended  consequences.                                                               
He considered that,  to the extent that one was  trying to create                                                               
specific incentives,  approaches that provided the  producer with                                                               
greater  discretion   were  preferable.    He   referred  to  the                                                               
aforementioned brownfield  solution in the United  Kingdom, which                                                               
applied to  incremental new developments  that produced  oil from                                                               
mature fields.   Approval  was given  after plans  were reviewed,                                                               
the  incremental   new  production   over  the  status   quo  was                                                               
determined,  economics  were  finalized,  and  agreement  to  the                                                               
allowance was negotiated.  He  opined that this solution was much                                                               
more sensible than simply giving a tax credit.                                                                                  
CO-CHAIR  SADDLER asked  to clarify  that this  was a  negotiated                                                               
level of credit.                                                                                                                
MR.  MAYER expressed  his agreement,  and noted  that there  were                                                               
CO-CHAIR  SADDLER asked  how there  was a  determination for  new                                                               
MR. MAYER replied that the  government had to make that judgment.                                                               
He commented that  the tax code was the worst  way to incentivize                                                               
incremental  production,  especially  if it  required  a  written                                                               
formula  for calculation.   He  stated that  DNR had  experts for                                                               
well  level   analysis  and   determinations,  although   it  was                                                               
necessary for trust among the branches of government.                                                                           
CO-CHAIR FEIGE reflected  on the quandary for  defining a decline                                                               
curve  that arose  during the  last year's  special session.   He                                                               
noted that it was necessary to  agree on the point of decline, in                                                               
order to define new oil.                                                                                                        
2:41:15 PM                                                                                                                    
REPRESENTATIVE  SEATON, noting  that  this would  be  a field  by                                                               
field  specific policy,  pointed  out that  the  three major  oil                                                               
companies had  significantly different company rates  of decline.                                                               
He asked how  to retain the elements of a  profit-based tax while                                                               
putting in the separate elements for field development.                                                                         
MR. MAYER  stated his support  to the legislature for  making the                                                               
overall  playing   field  more   competitive  in   Alaska,  while                                                               
recognizing  the costs  to  future revenues.    He declared  that                                                               
rigid incentives  through the  tax code were  often not  the best                                                               
approach, and  instead, specific  incentives could  be negotiated                                                               
for a specific field.                                                                                                           
2:44:10 PM                                                                                                                    
MR.  PULLIAM added  that  the  tax code  was  the least  flexible                                                               
option when  conditions warranted  a change.   He  announced that                                                               
royalty relief  offered additional incentives and  was an example                                                               
of  what  had  worked  along  those lines.    He  explained  that                                                               
Department   of  Natural   Resources  (DNR)   would  review   the                                                               
application and  the proposed development, and  then evaluate the                                                               
need for  royalty relief in  order to  be economic.   He declared                                                               
this to be "a scalpel as opposed to a chain saw approach."                                                                      
2:45:34 PM                                                                                                                    
REPRESENTATIVE HAWKER  expressed his appreciation to  Mr. Mayer's                                                               
and Mr.  Pulliam's commentaries, and  disclosed that "I  may have                                                               
just heard one  of the greatest understatements that  I have ever                                                               
heard  in the  oil and  gas tax  debates in  this legislature  in                                                               
eleven years, and that was  when Mr. Pulliam said the legislature                                                               
attempts  to  micromanage  the  companies  a  little  bit."    He                                                               
concurred with  the statement that  Alaska would be a  lot better                                                               
off if the legislature focused  on removing obstacles and let the                                                               
companies do what they do best.                                                                                                 
2:46:40 PM                                                                                                                    
REPRESENTATIVE TARR,  noting that testimony had  stated that ACES                                                               
had  not  yet been  in  place  for  many years,  exploration  was                                                               
anticipated to  lead to new  production, and that the  audits for                                                               
those ACES years  had not yet been completed, asked  how it could                                                               
be determined that the capital credits were working or not.                                                                     
MR.  MAYER  replied   that  the  state  did   not  lack  adequate                                                               
exploration, but lacked the ability  to turn known resources into                                                               
reserves and production.  He  explained that capital credits were                                                               
essential  in the  current system,  as  no development  activity,                                                               
given  the high  level  of  take under  ACES,  would be  economic                                                               
without this credit.  He suggested  that a small amount of credit                                                               
was necessary to  reduce the base tax.  He  characterized the tax                                                               
code  as  a  blunt  instrument  used  to  incentivize  particular                                                               
2:49:36 PM                                                                                                                    
CO-CHAIR SADDLER  asked for suggestions to  reduce the regressive                                                               
elements of the proposed bill  at lower prices, for consideration                                                               
to  a GRE  at $80  per barrel  which increased  as the  price per                                                               
barrel  decreased, and  for  a progressive  gross  tax as  prices                                                               
moved above $100 per barrel in the legacy fields.                                                                               
2:50:18 PM                                                                                                                    
MR.  MAYER  expressed his  agreement  that  these were  the  most                                                               
obvious solutions.   He explained that the  cause of regressivity                                                               
in  this proposed  bill was  the fixed  royalty, which  he called                                                               
regressive by  nature.  As long  as this remained, there  was the                                                               
need  for  a  progressive  wedge.     If  the  wedge  was  solely                                                               
progressive, then the problems were  those which had already been                                                               
discussed, including decoupling and  the impact of gas production                                                               
on  progressivity,  or  the  incentives for  cost  control.    He                                                               
offered that  levying this on the  gross was a means  to overcome                                                               
some  of the  problems, however  the difficulty  would be  at the                                                               
intersection  of  the   25  percent  base  rate   and  the  gross                                                               
progressive element.   He opined  that the situation  could arise                                                               
for some  companies that low  prices would mean an  effective tax                                                               
increase.  In  that case, it would be necessary  to either reduce                                                               
the base rate  and have a progressive tax, or  keep the base rate                                                               
and have a progressive GRE.                                                                                                     
2:52:54 PM                                                                                                                    
CO-CHAIR  FEIGE pointed  out that  Mr. Mayer  was the  consultant                                                               
hired by the Alaska State  Legislature, while Mr. Pulliam was the                                                               
consultant hired by the governor and the administration.                                                                        
MR. MAYER, in  response to Co-Chair Feige, said  that the quality                                                               
of Mr.  Pulliam's work was  very high, and that  ongoing dialogue                                                               
between  he and  Mr. Pulliam  would improve  the quality  of both                                                               
their  models  and presentations.    He  declared his  faith  and                                                               
confidence  in   the  quality  of  the   models  and  assessments                                                               
presented  by  Mr. Pulliam.    He  opined  that Mr.  Pulliam  had                                                               
presented one possible solution of  many to the particular issues                                                               
of  HB 72,  and that  potential  solutions would  continue to  be                                                               
reviewed in more detail.                                                                                                        
2:55:04 PM                                                                                                                    
CO-CHAIR FEIGE lauded the discussions and presentations.                                                                        
2:55:36 PM                                                                                                                    
REPRESENTATIVE SEATON  referred to  net operating loss,  posing a                                                               
scenario in  which oil prices  went down and expenses  were high,                                                               
and  questioned whether  the state  had any  liability under  the                                                               
proposed bill, specifically from the Big 3 producers.                                                                           
MR. PULLIAM expressed his belief  that proposed HB 72 would allow                                                               
for  those  losses to  be  carried  forward  for a  certain  time                                                               
period.   He  mused  that prices  would  need to  be  low for  an                                                               
extended period  of time to create  losses, and he did  not put a                                                               
high probability  on significant state  exposure.  He  offered to                                                               
review the price levels that would create an exposure.                                                                          
MR. MAYER clarified  that the state's biggest  net operating loss                                                               
liability  would  come  from the  small  operators,  those  below                                                               
production  of  55,000  barrels  each  day, and  not  the  Big  3                                                               
producers.  These operators could  claim their net operating loss                                                               
directly from  the state treasury,  whereas the  larger operators                                                               
could only claim this loss against future production.                                                                           
REPRESENTATIVE SEATON  surmised that the  state was at  a greater                                                               
risk for  net operating loss  under ACES  than it would  be under                                                               
proposed HB 72.   He noted that  a tax on the  gross would always                                                               
generate income for the state, which  was not the case with a net                                                               
operating  loss.   He  questioned  whether  it was  necessary  to                                                               
address this possibility in proposed HB 72.                                                                                     
2:59:32 PM                                                                                                                    
CO-CHAIR SADDLER  recounted the  effective tax rates  of previous                                                               
tax regimes,  and asked if it  was a surprise that  the effective                                                               
tax  rate under  ACES  of  26 percent  was  so  much higher  than                                                               
previous tax systems.                                                                                                           
MR.  PULLIAM, in  response to  Co-Chair Saddler,  said that  this                                                               
rate was not  a surprise, and he clarified that  the earlier data                                                               
was the tax rate  on the gross value of the oil,  and not the net                                                               
value.   He  noted  that  the effective  tax  rate was  generally                                                               
declining under  ELF in the  five years prior to  ACES, although,                                                               
as the  data was from fiscal  years, it did include  a little bit                                                               
of PPT in the  time period.  He pointed out  that the changes for                                                               
ACES significantly  increased the tax  rates, and that  there was                                                               
also a rise in oil prices.                                                                                                      
3:01:56 PM                                                                                                                    
CO-CHAIR FEIGE urged members to  be thinking of amendments to the                                                               
proposed bill, and, in response, he  said that he would not limit                                                               
the number of  amendments.  He noted that he  planned to hold the                                                               
proposed bill  until the  Senate version was  passed over  to the                                                               
[HB 72 was held over.]                                                                                                          

Document Name Date/Time Subjects
HRES HB 72 Armstrong O&G Letter.pdf HRES 2/22/2013 1:00:00 PM
HB 72
HRES HB 72 PFC Energy Updated Slides 2.22.13.pdf HRES 2/22/2013 1:00:00 PM
HB 72
HRES HB 72 Butcher-Sullivan Response 2021013.pdf HRES 2/22/2013 1:00:00 PM
HB 72
HRES HB 72 Butcher-Sullivan Response Slides 2.21.13.pdf HRES 2/22/2013 1:00:00 PM
HB 72
HRES HB 72 Progressivity Slide Econ One 2.22.13.pdf HRES 2/22/2013 1:00:00 PM
HB 72