Legislature(2005 - 2006)

03/18/2005 08:34 AM W&M


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HB  63-OIL SEVERANCE TAX                                                                                                      
                                                                                                                                
8:44:13 AM                                                                                                                    
                                                                                                                                
CHAIR WEYHRAUCH announced that the  final order of business would                                                               
be  HOUSE  BILL NO.  63  "An  Act relating  to  the  oil and  gas                                                               
properties  production  (severance) tax  as  it  applies to  oil;                                                               
establishing a  minimum rate  of tax for  certain fields  of five                                                               
percent;  providing  for  an  adjustment   to  increase  the  tax                                                               
collected when  oil prices  exceed $20 per  barrel and  to reduce                                                               
the tax collected when oil prices  fall below $16 per barrel; and                                                               
providing for  relief from the tax  when the price per  barrel is                                                               
low or  when the  taxpayer demonstrates that  a reduction  in the                                                               
tax is necessary  to establish or reestablish  production from an                                                               
oil  field  or pool  that  would  not otherwise  be  economically                                                               
feasible."                                                                                                                      
                                                                                                                                
8:44:53 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE LES  GARA, Alaska  State Legislature,  speaking as                                                               
the  sponsor,  relayed   his  belief  that  oil   tax  reform  is                                                               
important.    He  highlighted the  Alaska  Constitution,  Article                                                               
VIII, Section 2,  which states that the legislature's  duty is to                                                               
provide for  the maximum benefit of  its people.  In  response to                                                               
Chair  Weyhrauch,  Representative  Gara clarified  that  oil  tax                                                               
exemptions concern  the means in  which Alaska receives  its fair                                                               
share.  The largest tax portion  received from oil is the royalty                                                               
tax  proceeded  by  the  production  tax.    He  added  that  the                                                               
corporate  and  property  taxes   that  are  distributed  through                                                               
municipalities  have  not been  very  high.   He  explained  that                                                               
although the  production tax is  a 15 percent tax,  also referred                                                               
to as  a severance tax, that  applies to every field,  HB 63 only                                                               
addresses North Slope  fields.  The production  tax is determined                                                               
by the economic limit factor (ELF).   The ELF is a number between                                                               
zero and one  [and to calculate the production  tax] multiply the                                                               
field's ELF by the 15 percent production tax.                                                                                   
                                                                                                                                
8:47:14 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARA said the field's  ELF rate is determined by a                                                               
formula that relies  partly on the size and  well productivity of                                                               
the field.   Therefore, the higher those factors,  the higher the                                                               
ELF.   The largest  fields, 0.8 fields,  located in  Prudhoe Bay,                                                               
North  Star, and  Alpine pay  a 13  percent production  tax.   In                                                               
fiscal year (FY) 06, most fields in  the state will pay 0 or less                                                               
than  1  percent for  [ELF],  he  said.   He  turned  to a  graph                                                               
entitled, "ELF  Now Exempts Blockbuster Fields",  and pointed out                                                               
that the right column details  the production taxes Alaska fields                                                               
pay.   He  offered  that  many believe  the  ELF was  [initially]                                                               
intended  to  give  incentives  and   reduce  the  taxes  of  the                                                               
producers of marginal,  declining, and small fields.   He offered                                                               
evidence to  the contrary highlighting  the FY 06  production tax                                                               
for Kuparuk,  the second  largest field in  the U.S.,  which will                                                               
pay  less than  1 percent.   Some  of the  largest fields  in the                                                               
U.S., including  Milne Point, Endicott,  West Sak,  Tarn, Niakuk,                                                               
and Meltwater will  pay 0 percent in production taxes.   He added                                                               
that  HB 63  does  not apply  to  heavy oil,  such  as West  Sak,                                                               
because it's  more expensive to  produce.  He related  his belief                                                               
that the production  tax "shrinks" every year.   According to the                                                               
Department  of   Revenue's  projections,  in  1993   the  average                                                               
production tax  on North Slope oil  was 13.5 percent, in  2004 it                                                               
fell to  7.5 percent, and in  2013 it will probably  fall below 4                                                               
percent.  Although the ELF  will continue to fall, the Governor's                                                               
Aggregation Order will  cause it to spike this year.   He pointed                                                               
out that about 10 percent of  North Slope oil was brought from 0-                                                               
1  percent production  tax rates  to the  Prudhoe Bay  rate.   He                                                               
reiterated that the  ELF and the production  taxes are declining.                                                               
Even assuming stable  oil prices or stable  production, the state                                                               
will continue to receive less revenue from its oil.                                                                             
                                                                                                                                
8:50:03 AM                                                                                                                    
                                                                                                                                
CHAIR WEYHRAUCH said:                                                                                                           
                                                                                                                                
     In the context  of [Representative Gara's] presentation                                                                    
     is ...  as the ELF  gets smaller  every year is  it ...                                                                    
     providing an incentive to developing  these fields.  If                                                                    
     there's an incentive issue here,  is it fulfilling that                                                                    
     strategic objective  to bring  more fields or  more oil                                                                    
     and gas online.  And at  the same time, while there's a                                                                    
     production  tax that  ELF applies  to, are  there other                                                                    
     taxes that are being limited  in a similar manner.  And                                                                    
     is it minimizing the oil  companies' general tax burden                                                                    
     at all or not.                                                                                                             
                                                                                                                                
REPRESENTATIVE GARA  opined that the  ELF is far too  generous to                                                               
the oil  industry, [considering that]  the largest fields  in the                                                               
U.S. are paying a 0 percent  production tax.  However, he further                                                               
opined that  the philosophy  "shelf the  ELF", which  means every                                                               
field  should  pay  the  full  15 percent,  goes  too  far.    He                                                               
explained that  a field  paying 0  percent production  taxes pays                                                               
the  same rate  when  profit  margins are  thin  and when  prices                                                               
increase.  "Despite the name,  the ELF ignores the biggest single                                                               
economic determinant, and that's price,"  he said.                                                                              
                                                                                                                                
REPRESENTATIVE  GARA opined  the  ELF  "somewhat disregards"  the                                                               
production from  the satellite fields,  which are  smaller fields                                                               
located around large pools of  oil, because the rationale is it's                                                               
too expensive  for processing  facilities to  be on  every field.                                                               
However, since 1989  most of Alaska's oil comes  from fields that                                                               
don't have  processing facilities  on them.   For  instance Tarn,                                                               
the nation's  67th largest oil  field, is a satellite  field that                                                               
requires  two  drill  sites  and   three  ten-mile  pipelines  to                                                               
Kuparuk's processing  facilities so there  is a 0  production tax                                                               
at Tarn.                                                                                                                        
                                                                                                                                
REPRESENTATIVE GARA  relayed that  currently 25 percent  of North                                                               
Slope  oil is  either  completely exempted  or almost  completely                                                               
exempted  from the  state's  production tax.    In 2006,  250,000                                                               
barrels a  day will  pay less  than a  1 percent  production tax.                                                               
The governor's order  effects about 100,000 barrels  a day, which                                                               
is about  10 percent  of daily production,  and does  not include                                                               
the margin  effect on Prudhoe  Bay.   He added that  according to                                                               
the U.S. Energy Information Administration  the price of oil will                                                               
be $30 per barrel for the long-term.                                                                                            
                                                                                                                                
8:53:31 AM                                                                                                                    
                                                                                                                                
CHAIR WEYHRAUCH  asked whether the aforementioned  order affected                                                               
10 percent [of the daily production].                                                                                           
                                                                                                                                
REPRESENTATIVE GARA  replied "roughly."   In further  response to                                                               
Chair  Weyhrauch, Representative  Gara  said  the information  is                                                               
cited from the Department of Revenue.                                                                                           
                                                                                                                                
8:53:41 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARA informed the  committee that according to the                                                               
Energy Information Administration, "we're in  a world" of $30 per                                                               
barrel  oil  over  the  long  term.    He  related  that  British                                                               
Petroleum (BP)  says at $20 per  barrel "they're in the  world of                                                               
windfall profits."  According to  a BP press release, issued over                                                               
half  a  year   ago,  profits  above  $20  per   barrel  will  be                                                               
distributed to  its shareholders  and executives; he  opined that                                                               
this indicates oil at $20 per barrel is quite profitable.                                                                       
                                                                                                                                
REPRESENTATIVE GARA  turned to the  chart entitled,  "Thin Profit                                                               
Margins?"  which shows  in FY  04 the  oil companies  North Slope                                                               
profits totaled  $3.55 billion and  the state's profit  share was                                                               
$2.5 billion,  and thus  the oil  companies exceeded  the state's                                                               
revenue by $1 billion.                                                                                                          
                                                                                                                                
8:55:35 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA turned  to the  page entitled,  "This Year's                                                               
Profits?".   That document details  2005 North Slope  oil prices,                                                               
which  average $42  per barrel.   Therefore,  an estimated  gross                                                               
revenue of $12  billion was produced, of which  the oil company's                                                               
profits are an estimated $5  billion and exceed the state's share                                                               
by $1.8 billion.   The aforementioned state's  share is estimated                                                               
to  be $3  billion  for the  total  production taxes,  royalties,                                                               
property taxes,  and corporate taxes,  he added.   Representative                                                               
Gara  pointed  to  the  Department  of  Revenue  chart  entitled,                                                               
"Impact  of  ELF   Changes  on  Oil  Severance   Tax  with  Price                                                               
Sensitivity", which  details the potential outcomes  of severance                                                               
taxes  with and  without  HB 63  and  the Governor's  Aggregation                                                               
Order.                                                                                                                          
                                                                                                                                
8:56:21 AM                                                                                                                    
                                                                                                                                
CHAIR  WEYHRAUCH  clarified  that  none of  the  slides  [in  the                                                               
presentation] show the total tax  burden to producers but only to                                                               
the state's take on taxes.                                                                                                      
                                                                                                                                
REPRESENTATIVE  GARA replied  that thus  far none  of the  slides                                                               
show the  tax burden to the  producers, and therefore he  said he                                                               
will present an  excerpt from the Wood  Mackenzie study detailing                                                               
Alaska's tax  burden is  lower than  the rest of  the world.   In                                                               
further   response  to   Chair  Weyhrauch,   Representative  Gara                                                               
clarified that  the aforementioned government take  refers to the                                                               
cumulative tax burden.                                                                                                          
                                                                                                                                
8:56:39 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG asked if  the producers' gross profits in                                                               
the  aforementioned example  meant  the same  reference as  gross                                                               
revenue prior to any other deductions.                                                                                          
                                                                                                                                
REPRESENTATIVE GARA replied: "[Yes],  it's not gross profit, it's                                                               
total  sales price,  it's total  revenue, and  more than  half of                                                               
that's  not  profit."   In  further  response  to  Representative                                                               
Rokeberg,  Representative Gara  said the  net profit  figures are                                                               
from  the  Department  of  Revenue,   which  should  explain  its                                                               
methodologies  for  estimating  the   corporate  tax  cost.    He                                                               
reiterated that  the aforementioned chart  shows that at  $42 per                                                               
barrel,  even  with the  Governor's  Aggregation  Order, the  oil                                                               
companies are taking $5 billion in profits from the North Slope.                                                                
                                                                                                                                
8:57:32 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA  turned  to  the  slide  entitled,  "Healthy                                                               
Profits" which details four Wall  Street firms net profit margins                                                               
in  relation  to  their  total revenue,  which  range  from  7-18                                                               
percent with  an average net profit  of 10 percent.   In 2005, at                                                               
$42 per barrel the North  Slope producers will have approximately                                                               
40 percent profit margins.   In 2005, if oil were  to drop to $22                                                               
per  barrel,  the  producers  would still  take  a  "healthy"  25                                                               
percent profit  margin.  If  oil were to  "tank" down to  $15 per                                                               
barrel, there would  be a "modest" 6.7 percent  profit margin, he                                                               
highlighted.                                                                                                                    
                                                                                                                                
8:58:32 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   ROKEBERG    related   his   belief    that   the                                                               
profitability of  any investment  needs to  be analyzed  over the                                                               
length of  that investment, particularly for  capital resourcing.                                                               
He  stated  that comparing  the  quarterly  or annualized  profit                                                               
margins  of  non-related  industries  is not  a  fair  comparison                                                               
because it offers  limited values in terms of  analyzing the true                                                               
return.                                                                                                                         
                                                                                                                                
REPRESENTATIVE  GARA relayed  that he  is trying  to offer  every                                                               
possible  measure for  the  committee to  assess  whether or  not                                                               
Alaska receives its fair share for oil.  He said:                                                                               
                                                                                                                                
     [Alaska] is giving out a  whole lot more money than the                                                                    
     state gets, in terms of  share.  [Alaska] is giving out                                                                    
     a very fair  profit margin:  25 percent if  oil were to                                                                    
     tank to  $22 per  barrel, [and]  40 percent  this year.                                                                    
     [Alaska] is exempting  a quarter of [its]  oil from the                                                                    
     state's  production tax.    Those  are three  measures.                                                                    
     There  will be  more, and  whether or  not you  want to                                                                    
     compare the profitability of  Alaska's oil companies to                                                                    
     other   companies   in   the  world,   that's   totally                                                                    
     [subjective].   Last quarter  Exxon earned  the largest                                                                    
     quarterly profit  of any corporation in  United States'                                                                    
     history because the  price of oil has been  so high: BP                                                                    
     last   quarter  [earned]   $4.4  billion   in  profits,                                                                    
     ConocoPhillips [earned]  $2.5 billion in  profits; just                                                                    
     their  last  quarter's   profits  totaled  about  $15.2                                                                    
     billion and  that's about $7  million an hour ....   On                                                                    
     the low end  Alaska overtaxes ... and  according to the                                                                    
     Alaska Oil and Gas Association  (AOGA), they say a high                                                                    
     end  estimate of  what  it takes  to  be profitable  in                                                                    
     Alaska  is  $12.82  oil  ....   At  low  prices  Alaska                                                                    
     becomes very unprofitable.                                                                                                 
                                                                                                                                
9:00:54 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA, in  response  to Representative  Gruenberg,                                                               
replied that there  is an additional profit  North Slope pipeline                                                               
owners receive for running the pipeline.  He said:                                                                              
                                                                                                                                
     I'm  not the  expert  in whether  or  not the  pipeline                                                                    
     tariff is fair ...; I  don't believe it is, and frankly                                                                    
     the higher  the pipeline  tariff, the more  profit goes                                                                    
     to the companies  and the less comes back  to the state                                                                    
     in terms  of production taxes  and royalties.   It gets                                                                    
     deducted  from the  money that  [Alaska] get[s],  so if                                                                    
       there is an overcharge in the pipeline, [Alaska's]                                                                       
     losing revenue for it.                                                                                                     
                                                                                                                                
9:01:50 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA   turned  to   the  slide   entitled,  "Wood                                                               
Mackenzie" which details Alaska's  profitability according to the                                                               
Wood Mackenzie study.  The study  details that at $35 per barrel,                                                               
from  53   oil-producing  regions,   Alaska  is  the   14th  most                                                               
profitable  place  and at  $16  per  barrel  it's the  15th  most                                                               
profitable  of   49  regions.     According  to  the   study  the                                                               
government's take  on Alaska's oil  taxes is the 19th  lowest out                                                               
of 55 regions.   For instance, the Alaska average  tax on $35 per                                                               
barrel is  about 58  percent, while  the global  tax is  about 73                                                               
percent.  He reiterated that as  the price of oil rises, Alaska's                                                               
relative share  decreases because  Alaska taxes "poorly"  at high                                                               
prices and over taxes at low prices.                                                                                            
                                                                                                                                
9:03:12 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROKEBERG   asked  why  the   presentation  didn't                                                               
include the  Wood Mackenzie  study page  that details  Alaska has                                                               
some of the highest production costs in the world.                                                                              
                                                                                                                                
REPRESENTATIVE GARA clarified that  the aforementioned study says                                                               
Alaska's "raw  costs" are higher  than most places in  the world.                                                               
However,  the  total  costs  including  production,  development,                                                               
exploration, and  taxes for  a company to  do business  in Alaska                                                               
are  among the  least expensive  and the  most profitable  in the                                                               
world, because  Alaska's tax  is so  low at  high oil  prices, he                                                               
said.   He reiterated  that Alaska's [raw]  costs are  very high,                                                               
but its low taxes are very competitive.                                                                                         
                                                                                                                                
REPRESENTATIVE  ROKEBERG related  that he  "does not  agree" with                                                               
Representative Gara's understanding of the Wood Mackenzie study.                                                                
                                                                                                                                
REPRESENTATIVE  GARA  replied,  "That's  fine, and  I  hope  that                                                               
members of  the legislature would maybe  work on a study  that we                                                               
could discuss  in public.   I don't think it  helps us at  all to                                                               
have a study that we can't talk about."                                                                                         
                                                                                                                                
9:04:51 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA moved  on to  the slide  entitled, "How  the                                                               
bill works  - 5% "Minimum  Tax", which details the  two principal                                                               
reforms of HB  63.  The first  reform "leaves the ELF  as is" and                                                               
it establishes  a minimum 5  percent production tax.   The second                                                               
reform imposes that oil above $20  per barrel is in the "windfall                                                               
profits   range"  and   the   production   tax  should   increase                                                               
accordingly  and below  $16  per barrel,  when  oil becomes  less                                                               
profitable,  the production  tax shall  be reduced  including the                                                               
fields  with a  5  percent  production tax.    The second  reform                                                               
incorporates a price factor into  the ELF and production taxes to                                                               
reflect the  reality that oil  is very profitable at  high prices                                                               
and  not  at  low prices,  he  added.    He  noted that  if  this                                                               
legislation were to take effect at  $22 per barrel it could raise                                                               
$90 million;  at last  year's price it  would raise  another $400                                                               
million, and this  year's price would raise another  billion.  He                                                               
highlighted  that  the  oil  companies  upside  reward  would  be                                                               
protected if  prices were to fall  to $10 per barrel  because the                                                               
state would give back roughly $50 million to the oil companies.                                                                 
                                                                                                                                
9:06:39 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GRUENBERG asked if Alaska  were to give money back                                                               
to the oil  companies wouldn't it be during a  period when Alaska                                                               
needed that money the most.                                                                                                     
                                                                                                                                
REPRESENTATIVE  GARA  clarified  that  at  $10  per  barrel  this                                                               
legislation would  produce $50 million  less in  production taxes                                                               
than not  doing anything.   He said,  "If [the state]  want[s] to                                                               
have a system  that slightly overtaxes at low  prices and largely                                                               
under taxes  at high prices, we  can leave things the  same.  But                                                               
...  by  over pricing at low prices,  you're deterring production                                                               
... [and] development.   You're telling companies  that they have                                                               
to take  the risk that if  oil prices tank they're  going to lose                                                               
money ....   And I think we  have to share some of  the burden at                                                               
low prices."                                                                                                                    
                                                                                                                                
9:07:48 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA pointed  out  that the  state and  corporate                                                               
shares equalized in  range, for $10-$50 per barrel,  prior to the                                                               
Governor's Aggregation  Order.   Since the  aforementioned order,                                                               
shares  were altered  such  that the  state  receives a  slightly                                                               
larger  share  than the  corporate  share.   Representative  Gara                                                               
paraphrased Jay Hammond as follows,  "That the intent of Alaska's                                                               
oil tax  system should  have been  to give  the state  roughly an                                                               
equal share to industry" but Alaska isn't doing that now.                                                                       
                                                                                                                                
REPRESENTATIVE  GARA reiterated  that  this legislation  includes                                                               
tax relief  if oil  drops below  $10 per  barrel and  a provision                                                               
exempting heavy oil because it is  more expensive to produce.  In                                                               
addition,  the legislation  includes a  provision expanding  upon                                                               
the Royalty Relief law [House  Bill 28 of the Twenty-Third Alaska                                                               
State Legislature] that if a  company can prove the state's taxes                                                               
are  making a  field  "uneconomic," the  state  will reduce  that                                                               
field's taxes.   In response  to Chair  Weyhrauch, Representative                                                               
Gara  said the  provision would  be an  administrative mechanism.                                                               
He  reiterated  that House  Bill  28  and this  legislation  both                                                               
address  whether taxes  are making  fields economically  feasible                                                               
and if not, additional relief shall be granted.                                                                                 
                                                                                                                                
9:10:28 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARA  opined that  the oil  industry tends  not to                                                               
respond to the  legislation [favorably] and neglects  to focus on                                                               
issues such as the tax  relief provision providing incentives for                                                               
production  and the  fact  that Alaska  is  more profitable  than                                                               
other places  in the  world.   The oil  industry responds  to tax                                                               
reforms by  declaring "[the legislature]  can't change  taxes [on                                                               
us]  because  a  deal  is  a deal."    He  highlighted  that  the                                                               
legislature passes about 400 bills per  session and "A law is not                                                               
a deal, a  law is [the legislature's] policy judgment  as to what                                                               
is right  and what is fair  to Alaskans."  He  alluded that under                                                               
"the deal  is a  deal argument"  all fields  would be  paying the                                                               
original 15  percent production tax  and the ELF  wouldn't exist,                                                               
hence the "deal is a deal argument ... is a red herring."                                                                       
                                                                                                                                
9:11:18 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARA, in response to Chair Weyhrauch, said:                                                                      
                                                                                                                                
     [The aforementioned argument is  a red herring because]                                                                    
     it  assumes that  industry is  allowed to  come to  the                                                                    
     government get  the best deal  it can  ....  If  it can                                                                    
     get a bill  that under taxes its oil, then  you come up                                                                    
     with  a deal  is a  deal argument  and you  cement that                                                                    
     into  law forever  ...  government  should work  better                                                                    
     than  that.   Government shouldn't  have the  worst law                                                                    
     possible that  is negotiated  on the  books ...  by ...                                                                    
     powerful industry  lobbyists.  If industry  succeeds in                                                                    
     getting  ... [an]  anti-public  interest, pro  industry                                                                    
     bill and  then says you  can never change it,  ... then                                                                    
     there is really no reason for  us to be here.  In 1989,                                                                    
     the  same arguments  you'll hear  today were  made then                                                                    
     ...   in  various contents  by various  companies since                                                                    
     the first  time anybody  ever suggested an  income tax.                                                                    
     But in 1989, they said  ..., according to the Senior VP                                                                    
     of  ARCO, the  changes would  put a  burden on  the oil                                                                    
     industry that will make them  remove to other states or                                                                    
     countries, the  money that would otherwise  be spent on                                                                    
     investments in Alaska.                                                                                                     
                                                                                                                                
REPRESENTATIVE  GARA   suggested  that  companies   often  oppose                                                               
reforms  by  claiming  reforms  will drive  the  company  out  of                                                               
business or force them to do  business elsewhere.  He related his                                                               
belief  that  corporations have  a  legal  duty to  maximize  the                                                               
profits  of its  shareholders, and  the legislature  has a  legal                                                               
duty to maximize  the tax revenue corporations pay  to the state.                                                               
He highlighted  a newspaper  article in which  BP claimed  it has                                                               
too much money  to invest, and therefore it  returns excess money                                                               
to  shareholders and/or  uses it  to  provide corporate  bonuses.                                                               
However,  returning  revenue  to shareholders  [contradicts]  the                                                               
idea  that   tax  reduction  provides  incentives   for  returned                                                               
investment in the state, he noted.                                                                                              
                                                                                                                                
9:13:45 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA  concluded  his  presentation  by  reviewing                                                               
measures necessary for oil tax reform.  He said:                                                                                
                                                                                                                                
     [The  state is]  treating very  huge fields  ... as  if                                                                    
     they were  marginal fields  ... [and]  exempting fields                                                                    
     from production tax even when  oil is $50 a barrel ....                                                                    
     At  average  and high  oil  prices,  according to  Wood                                                                    
     Mackenzie, Alaska is one of  the more profitable places                                                                    
     in  the  world  to  invest ....    [According  to]  the                                                                    
     Department  of  Revenue's   own  projections,  [Alaska]                                                                    
     produces  a very  healthy  profit  margin of  somewhere                                                                    
     upwards of 25 percent, 30  percent, 40 percent at $22 a                                                                    
     barrel and above.  So,  [Alaska] is producing a healthy                                                                    
     profit margin  for companies even  after they  back out                                                                    
     their exploration  costs.   [Alaska] rank[s]  very well                                                                    
     in the world  [and it's] exempting oil  from very large                                                                    
     fields  from the  production tax.   And  ... the  other                                                                    
     option is  to just do  nothing.  [The] other  option is                                                                    
     to  sort of  grapple  over the  crumbs  and say  [there                                                                    
     isn't] enough money for our  schools and we have to cut                                                                    
     back on senior  services, and the like;  and I disagree                                                                    
     with  that.    I  think  that  we're  making  ourselves                                                                    
     poorer.     Every   single  year   we   sit  by,   [the                                                                    
     legislature] is running the risk  that [it's] sending a                                                                    
     huge  amount  of money  out  of  the state  that  could                                                                    
     either  be put  into needed  services or  put into  our                                                                    
     savings  account.   [If nothing  is changed  this year]                                                                    
     according to  the Department of Revenue,  let's say the                                                                    
     standard  is [to]  equalize the  share  that the  state                                                                    
     receives and  companies receive in terms  of profit ...                                                                    
     [then  Alaska is]  sending out  $1  billion.   [Alaska]                                                                    
     didn't do  anything last  year [and]  we sent  out $500                                                                    
     million in  excess tax exemptions ....   It's incumbent                                                                    
     upon  the  legislature  to   do  something  about  this                                                                    
     problem now,  every year  that [the  legislature] waits                                                                    
     [it's]  sending out  a huge  amount of  money from  the                                                                    
     state.    And   my  biggest  fear  ...   is  that  [the                                                                    
     legislature] will  finally act  on oil tax  reform when                                                                    
     oil prices go  down to some low level,  so [Alaska has]                                                                    
     these   couple  years   where   oil  is   fantastically                                                                    
     expensive and we're missing out.   We're missing out on                                                                    
     money we could put into  our savings account, ... money                                                                    
     we can put  into our schools.  I have  the biggest fear                                                                    
     that we're  not going to  get our act together  on this                                                                    
     issue until oil is back at  $30 a barrel or maybe until                                                                    
     it tanks.                                                                                                                  
                                                                                                                                
REPRESENTATIVE GARA  then turned  attention to old  Alaska budget                                                               
reports  from  the  Alaska  oil   industry,  which  charged  that                                                               
Alaska's   tax   system   isn't    progressive   enough.      The                                                               
aforementioned can  be attributed to  the fact that  Alaska's tax                                                               
system over  taxes at low  prices and  vastly over taxes  at high                                                               
prices.   Therefore, the oil  industry and the state  should come                                                               
up with a  system that doesn't deter or scare  away investment at                                                               
low prices.   He  offered that  companies considering  whether or                                                               
not to invest in Alaska factor  into their analysis the effect of                                                               
oil  at  low  prices.    He  highlighted  that  this  legislation                                                               
protects oil companies  on the upside because  the production tax                                                               
will  be  capped  above  25  percent.   He  reiterated  that  the                                                               
legislation will  protect business  on the downside,  protect the                                                               
profit margin on the upside, and gives Alaska its fair share.                                                                   
                                                                                                                                
9:18:04 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA,  in  response to  Representative  Rokeberg,                                                               
relayed that the  heavy oil provision "can  certainly be tweaked"                                                               
and the  heavy oil  standard adopted in  this legislation  is the                                                               
federal definition of heavy oil.                                                                                                
                                                                                                                                
9:19:39 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG related his  belief that production below                                                               
250 barrels per day zeros out  a well, and therefore the proposed                                                               
5 percent minimum  floor would be incentive to shut  down a well.                                                               
He added  that the administrative  action for royalty  relief can                                                               
be  a  long   process,  which,  in  the  mean   time,  can  cause                                                               
complications for the corporations.                                                                                             
                                                                                                                                
REPRESENTATIVE GARA  replied that the  5 percent tax is  a modest                                                               
tax  and  in  a  situation  in which  taxes  are  too  high  this                                                               
legislation provides  a system allowing companies  entitlement to                                                               
tax relief if they can prove it's needed.                                                                                       
                                                                                                                                
9:22:59 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WILSON  inquired as  to the evidence  necessary to                                                               
prove taxes are making a company economically unfeasible.                                                                       
                                                                                                                                
REPRESENTATIVE GARA  replied that the legislation  specifies that                                                               
oil companies  are not  entitled to tax  relief unless  they show                                                               
clear  and  convincing  evidence  it's needed  to  make  a  field                                                               
economically feasible.  The aforementioned,  he opined, is a fair                                                               
method.                                                                                                                         
                                                                                                                                
9:24:47 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROKEBERG opined that there  has never been one act                                                               
of royalty relief under the current statute.                                                                                    
                                                                                                                                
REPRESENTATIVE GARA  related his  belief that  the aforementioned                                                               
is the case because Alaska is  a profitable place to do business.                                                               
He highlighted  the Wood Mackenzie  study and the  profit figures                                                               
from  the Department  of  Revenue which  detail  that the  fields                                                               
online  are  profitable  under the  current  tax  structure,  and                                                               
therefore not entitled to royalty relief.                                                                                       
                                                                                                                                
9:25:59 AM                                                                                                                    
                                                                                                                                
CHAIR WEYHRAUCH  commented that the  dialogue on this  issue will                                                               
be continued at another time, in  order for other people to offer                                                               
testimony.                                                                                                                      
                                                                                                                                
9:26:44 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARA  summarized   the  Department  of  Revenue's                                                               
analysis details, at each price  level, the corporate profits and                                                               
the state's revenue.                                                                                                            
                                                                                                                                
9:27:39 AM                                                                                                                    
                                                                                                                                
CHAIR  WEYHRAUCH surmised  that the  context of  this legislation                                                               
addresses that the state overtaxes  at low prices and under taxes                                                               
at  high   prices.     He  asked  for   an  explanation   on  the                                                               
administrative order as it relates to the ELF.                                                                                  
                                                                                                                                
9:28:31 AM                                                                                                                    
                                                                                                                                
JUDY BRADY,  Executive Director,  Alaska Oil and  Gas Association                                                               
(AOGA), relayed  that AOGA is  a non-profit with 19  members that                                                               
are  involved  in  exploration, production,  transportation,  and                                                               
refining of oil and gas products in the state.                                                                                  
                                                                                                                                
9:30:58 AM                                                                                                                    
                                                                                                                                
TOM  WILLIAMS,  Chair, Alaska  Oil  and  Gas Association  (AOGA),                                                               
presented the  slide entitled,  "Oil and  Gas: Vital  to Alaska",                                                               
which shows a pie chart  detailing the FY 05 unrestricted revenue                                                               
of  which  88  percent  is  petroleum  and  12  percent  is  non-                                                               
petroleum.  He said, "Oil  is going to account for three-quarters                                                               
of  the pie  ...  through  2014 ...,"  and  what determines  that                                                               
percentage is the price of the oil  and how much is produced.  He                                                               
highlighted that the amount of  oil produced requires significant                                                               
new   investments  and   Alaska   will  have   to  compete   with                                                               
opportunities elsewhere.   Currently, Alaska receives  four major                                                               
sources  of  revenue  from  the   oil  industry:    the  royalty,                                                               
production, property,  and corporate  income tax.   In FY  04 the                                                               
royalty based on ownership of  the land generated $1 billion that                                                               
was placed in  the general fund (GF) and $500  million was placed                                                               
in the  permanent fund.   In FY  04 the production  tax generated                                                               
$652  million.   The property  tax is  determined by  the state's                                                               
assessed    value   of    the   production,    exploration,   and                                                               
transportation  costs;  he noted  that  oil  companies receive  a                                                               
credit for local  taxes paid against the state taxes  on the same                                                               
property, of which most goes  to the municipalities.  However, in                                                               
FY 04 $50  million went to the state.   In FY 04 the  oil and gas                                                               
corporate income tax generated $300  million and accounted for 88                                                               
percent of  the total corporate  income tax.   In FY 04,  the oil                                                               
companies paid  $2.75 billion  in taxes  however, the  state only                                                               
counts a  $2 billion figure  in the budget because  the permanent                                                               
fund  and the  municipalities' portions  are not  spendable.   He                                                               
suggested the amount  of taxes paid accounts for  a difference in                                                               
perspective between  the two  entities.  He  added that  only the                                                               
$652 million  portion of  the production tax  is effected  by the                                                               
ELF.  He said that even if  the ELF makes the production tax zero                                                               
for  a field,  the field  still  pays full  royalty and  property                                                               
taxes, contributes  fully to the owners'  income taxes, increases                                                               
the netback value  by lowering tariffs, and  creates more Alaskan                                                               
jobs.                                                                                                                           
                                                                                                                                
MR.  WILLIAMS turned  to the  slide  entitled, "Production  Tax",                                                               
which details  the formula  for the  production tax:   production                                                               
tax equals  the ELF multiplied  by the  base rate, which  is then                                                               
applied to  the gross resource  value.  The gross  resource value                                                               
equals  the  netback  multiplied  by  the  taxable  volume.    He                                                               
explained that the netback in FY  04 had the "same spot price" of                                                               
$25.00  for all  the West  Coast destinations,  save the  netback                                                               
value at pump station one totals $20.34.                                                                                        
                                                                                                                                
MR. WILLIAMS  said Alaska's leverage  regarding the price  of oil                                                               
flows  back to  the wellhead  value.   The base  rate during  the                                                               
first  five years  of production  is at  10 percent  for gas  and                                                               
12.25 percent  for oil;  after those  five years  the rate  is 15                                                               
percent.   The  oil ELF  is calculated  depending on  the field's                                                               
size  and  well  productivity;  hence, larger  fields  with  more                                                               
productive wells  have larger ELFs  and higher tax rates,   while                                                               
smaller fields and lower well  productivity have smaller ELFs and                                                               
lower tax rates.                                                                                                                
                                                                                                                                
MR. WILLIAMS  turned to  the slide entitled,  "Why Have  an ELF",                                                               
which details  that the  original purpose  of the  ELF was  for a                                                               
high rate  production tax early  in a typical field's  life while                                                               
avoiding the  adverse consequences  as the  field depletes.   The                                                               
severance tax  is based on the  gross resource value of  where it                                                               
is produced  and none of  the operating costs for  extraction are                                                               
deductible, he added.   He said, "As operating  costs rise during                                                               
the life  of the field,  the profit margin shrinks  [because] the                                                               
resource is  non renewable  ....   Production tax  contributes to                                                               
the total  costs and tends  to hasten  the time when  this break-                                                               
even point [called the ELF] is reached ...."                                                                                    
                                                                                                                                
MR.  WILLIAMS   turned  to  the  slide   entitled,  "The  Adverse                                                               
Consequences of  a High Rate",  which shows  columns representing                                                               
four stages  of the producer's  gradual profit  margin reductions                                                               
as the  consequence of  high operational  costs.   The producers'                                                               
responses to  the higher  operational costs  are the  "Do nothing                                                               
stage" where the cost is  relatively small so the producers don't                                                               
respond.   The second stage  is the "Drive for  efficiency stage"                                                               
during which the  costs are getting to be  a significant fraction                                                               
so  the producer  starts cutting  costs wherever  possible.   The                                                               
efficiency stage  makes new investments harder  to be competitive                                                               
because the  field is not  as robust as  its earlier years.   The                                                               
third  stage   is  the  "Harvest  stage"   during  which  capital                                                               
opportunities are  no longer possible  and no  competition exists                                                               
to help the  field maintain production.  The fourth  stage is the                                                               
"Running in  the red stage", which  can occur because of  low oil                                                               
prices  or  the  huge  costs   terminating  the  field,  such  as                                                               
dismantling and  removing the facilities.   He noted that  it can                                                               
be less expensive to run  an operation than dismantling it, which                                                               
is how running in the red happens.                                                                                              
                                                                                                                                
MR. WILLIAMS,  in response to  Chair Weyhrauch, explained  on the                                                               
aforementioned graph  that the color green  represents one-eighth                                                               
royalty share, red is the 15  percent severance tax, black is the                                                               
operation costs,  white is  the producer's  margin, and  the hash                                                               
marks  represent  the  severance  tax  being  "eaten-up"  by  the                                                               
encroaching  production  costs.    He  explained  that  companies                                                               
[bank] on receiving large profit  margins early in a field's life                                                               
or else they incur [phenomenal] costs with no return.                                                                           
                                                                                                                                
9:42:50 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked  if stage one shows any  of the costs                                                               
associated with production, infrastructure, and drilling.                                                                       
                                                                                                                                
MR. WILLIAMS replied no.                                                                                                        
                                                                                                                                
REPRESENTATIVE SEATON asked  if the production costs  are a large                                                               
portion.                                                                                                                        
                                                                                                                                
MR.  WILLIAMS  replied  that the  columns  represent  production,                                                               
infrastructure, and drilling as a "sum cost".                                                                                   
                                                                                                                                
9:43:40 AM                                                                                                                    
                                                                                                                                
MR.  WILLIAMS, in  response  to  Representative Seaton,  recalled                                                               
that in  the past taxpayers  could show  that there was  a higher                                                               
level of  cost than what  was originally  assumed.  In  1977, the                                                               
Department  of Revenue  proposed  that producers  need a  certain                                                               
amount of oil production to breakeven  and the passage of the ELF                                                               
legislation increased  the assumption  to 300  barrels a  day per                                                               
well based on the Prudhoe Bay costs.                                                                                            
                                                                                                                                
9:45:15 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  asked, for  comparison purposes,  if there                                                               
were  [projections]  available  on the  differences  between  the                                                               
Department of Revenue's and ELF's assumptions.                                                                                  
                                                                                                                                
MR. WILLIAMS replied no.                                                                                                        
                                                                                                                                
9:45:48 AM                                                                                                                    
                                                                                                                                
MR. WILLIAMS  presented the Department of  Revenue's formula that                                                               
was  not  enacted, which  is  one  minus  the production  at  the                                                               
economic limit  divided by the  total production during  that tax                                                               
period.  The  aforementioned is the total percentage  of costs to                                                               
cover  the   production  out  of   the  ground.     Subtract  the                                                               
aforementioned  formula  from  100   percent,  which  equals  the                                                               
percentage  that's   the  operating  margin  available   for  the                                                               
producer.   The wider  the operating margin,  the higher  the tax                                                               
rate because the  field is healthier.  When  the operating margin                                                               
gets "squeezed" it  lowers the tax rate because there  is less to                                                               
bare  the costs.    He turned  to the  slide  entitled, "How  ELF                                                               
Avoided the Adverse Consequences"  with four color-coded columns.                                                               
The  chart  shows   the  difference  between  the   ELF  and  the                                                               
Department of  Revenue's aforementioned  formula.   He reiterated                                                               
that in  1977 the Department  of Revenue used  the aforementioned                                                               
formula for  simplifying assumptions to  ease the cost  burden to                                                               
the administration.                                                                                                             
                                                                                                                                
9:48:16 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GRUENBERG  highlighted  that the  bottom  of  the                                                               
columns present  the data as though  all the costs are  the same.                                                               
However, he related his belief that  there are at least two types                                                               
of costs:   those the producer  can control and those  over which                                                               
they have relatively little control.                                                                                            
                                                                                                                                
9:48:47 AM                                                                                                                    
                                                                                                                                
MR.  WILLIAMS said  he wouldn't  make a  distinction between  the                                                               
costs.    He related  that  some  costs  are controlled  such  as                                                               
operating a field with fewer  employees.  However, eventually the                                                               
fields, like  those in Cook  Inlet that have been  producing over                                                               
40 years,  have the  minimum required  for safety  and operations                                                               
and thus  there is no  control because  one can't safely  run the                                                               
platforms  below   that.    He   added  that  the   slide  simply                                                               
illustrates an evolution over time,  the easy oil comes first and                                                               
as  the field  depletes, it  gets  harder and  more expensive  to                                                               
recover the resources.                                                                                                          
                                                                                                                                
REPRESENTATIVE GRUENBERG  specified he was pointing  out it's not                                                               
as simple as presented.                                                                                                         
                                                                                                                                
MR. WILLIAMS replied "Fair enough."                                                                                             
                                                                                                                                
9:49:46 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON commented  that the  slide shows  that the                                                               
ELF  reduces  revenue to  the  state,  and  yet there  are  still                                                               
healthy  profits.   He  inquired as  to why,  under  the stage  2                                                               
proposed scenario, would taxes need to be reduced.                                                                              
                                                                                                                                
MR. WILLIAMS  replied that in 1977  the tax rate for  Prudhoe Bay                                                               
wells  at  10,000  barrels  per  day, before  the  ELF,  was  7.8                                                               
percent.   The aforementioned represents  a 10 percent  rate, and                                                               
therefore under stage  2 it was still viewed as  an increase over                                                               
the  prior system.    The ELF  was in  conjunction  with the  tax                                                               
increase  and  the  base  rate increased  to  the  12.25  percent                                                               
applicable to the  first five years of production.   He explained                                                               
that "we  were going" to raise  the tax rate for  Prudhoe Bay and                                                               
the  base rate  for all  fields,  and use  the ELF  to adjust  it                                                               
appropriately.   The  stage 2  scenario, in  the case  of Prudhoe                                                               
Bay, would have been a higher tax that that prior to the ELF.                                                                   
                                                                                                                                
9:51:17 AM                                                                                                                    
                                                                                                                                
MR. WILLIAMS  pointed out that  the oil industry opposed  the ELF                                                               
because Prudhoe Bay's tax rate  was increased from 7.8 percent to                                                               
11.7 percent.   The  owners of  Prudhoe Bay  opposed the  hike in                                                               
taxes while in contrast the Cook  Inlet owners saw a reduction in                                                               
their tax  rates, and  thus were less  likely to  complain except                                                               
for the  fact they had interests  in Prudhoe Bay.   He reiterated                                                               
that industry opposed the ELF.                                                                                                  
                                                                                                                                
9:52:10 AM                                                                                                                    
                                                                                                                                
MR. WILLIAMS relayed that the  original ELF formula was driven by                                                               
well productivity,  which was  changed in 1989  to add  the field                                                               
size, total daily production, to the  formula.  The field size is                                                               
compared to a reference level of  a 150,000 barrel per day field,                                                               
any field larger than the  aforementioned causes the ELF exponent                                                               
to move  toward one  and smaller fields  would move  toward zero.                                                               
Thus,  larger fields  have larger  ELFs and  smaller fields  have                                                               
smaller  ELFs.   The field  size is  the dominant  factor in  the                                                               
formula,  he noted.    He  recalled the  example  he offered  the                                                               
legislature in  which the tax rate  was based on 500  barrels per                                                               
day:   Prudhoe  Bay's 375,000  barrels  daily tax  rate was  11.9                                                               
percent  and Lizburn's  40,500 barrels  daily tax  rate was  less                                                               
than  0.2 percent,  which illustrates  the  formula is  extremely                                                               
sensitive to field size.                                                                                                        
                                                                                                                                
9:53:46 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  asked  if  the previous  [change  to  the                                                               
formula]  was  based  on  the  production  facilities  having  to                                                               
fulfill certain volumes in order to be profitable.                                                                              
                                                                                                                                
9:53:53 AM                                                                                                                    
                                                                                                                                
MR. WILLIAMS  said the justification  for adding field size  as a                                                               
parameter  was   primarily  because  large  fields   can  realize                                                               
economies of scale that small fields  can't.  He noted that other                                                               
reasons  for  the changes  to  the  ELF included  obtaining  more                                                               
revenue for  the state, providing incentives  for smaller fields,                                                               
and  providing pro-development  incentives for  West Sak  viscous                                                               
oil.  Furthermore,  Prudhoe Bay and Kuparuk could afford  it.  He                                                               
recalled one reason for the change  was after the 1986 crash when                                                               
oil was  priced at $10  per barrel,  Prudhoe Bay was  costing the                                                               
state over $140 million per  year and the administration told the                                                               
legislature  "we  shouldn't  be  giving that  money  away."    He                                                               
reiterated that the ELF would  reduce rates for all fields except                                                               
Prudhoe  Bay and  Kuparuk.    He opined  that  the definition  of                                                               
"marginal field", as described in  the 1989 ELF legislation, "was                                                               
a  rhetorical  term  ...  and wasn't  used  with  its  dictionary                                                               
definition ... if  100,000 barrel a day field that  came in early                                                               
and under  budget ... was  a marginal  field."  He  recalled that                                                               
the legislature  was told  the following:   the  ELF could  go to                                                               
zero under the  new formula, smaller fields would  pay less [tax]                                                               
even with  the same well  productivity as larger fields,  and the                                                               
state would  gain $2.7 billion.   Therefore, the 1989  ELF change                                                               
worked exactly as it intended, he opined.                                                                                       
                                                                                                                                
9:57:20 AM                                                                                                                    
                                                                                                                                
CHAIR WEYHRAUCH asked  if the methodologies were  really fair and                                                               
whether it's time to review [the ELF].                                                                                          
                                                                                                                                
MR.  WILLIAMS replied,  "It's not  a deal  is a  deal, that  is a                                                               
mischaracterization  because   ...  ELF  was  enacted   over  the                                                               
industry's  objections,  but ...  the  legislature  sets the  tax                                                               
policy ...  [which was] changed in  1989.  Industry has  acted in                                                               
reliance  on the  new policy.   [The  legislature] can  change it                                                               
again but [the industry] has invested lots of money."                                                                           
                                                                                                                                
MR. WILLIAMS  turned to the  graph entitled,  "Historical Effects                                                               
on  ANS Production  from Different  Kinds  of Investment",  which                                                               
shows the  production gain resulting  from new  investments since                                                               
1989.  The  graph's black portion represents  the natural decline                                                               
of the fields would have  been, the yellow portion represents the                                                               
actual production from the North  Slope fields, which become less                                                               
important  over   time  due  to  the   contributions  of  wildcat                                                               
exploration,   heavy  oil,   and  satellite   production.     The                                                               
projections  for  the  future detailed  on  the  graph  entitled,                                                               
"Contributions of  Different Kinds  of Investments  in Additional                                                               
Oil  Production"  shows  a  color-coded  graph,  detailing  black                                                               
representing  the   natural  decline,  yellow   representing  the                                                               
investments for existing  fields, and the remainder  of the chart                                                               
details new  investments in  wildcat exploration,  satellites and                                                               
heavy  oil  production,  and  developing  new  fields  that  have                                                               
already been discovered.                                                                                                        
                                                                                                                                
CHAIR  WEYHRAUCH surmised  that  Representative  Gara's point  is                                                               
that the oil companies are  making the investments, but the state                                                               
is not getting any return.                                                                                                      
                                                                                                                                
MR.  WILLIAMS  recalled  1981 when  President  Carter  created  a                                                               
windfall  profit tax  in which  70  percent of  oil profits  were                                                               
divided and appropriated such that  the state received one-third,                                                               
the federal  government received  one-half, and the  oil industry                                                               
received one-sixth.   He recalled  when the ELF passed  the state                                                               
was concerned  about protecting its one-third  and basically told                                                               
the  oil  industry to  work  out  its "disproportionate  sharing"                                                               
between the federal  government.  He said,  "It's interesting how                                                               
if  you don't  know  your  lessons in  history  ...  how you  can                                                               
misdescribe what they are."                                                                                                     
                                                                                                                                
MR.  WILLIAMS then  turned to  a slide  entitled, "Point  No. 5",                                                               
which highlights that  both historically and for  the future more                                                               
investment is crucial  and a given tax change  promises to impact                                                               
different  classes of  oil investments  differently.   Therefore,                                                               
any change  made must be  examined for  "unintended consequences"                                                               
because more production could be  lost than gained by raising the                                                               
tax.   He said,  "Sometimes its  better to grow  the pie  than to                                                               
take a wider slice out of it."                                                                                                  
                                                                                                                                
10:00:11 AM                                                                                                                   
                                                                                                                                
MR.  WILLIAMS related  that the  governor's  ELF decision  lumped                                                               
together six smaller  fields, which made them all  larger for ELF                                                               
purposes.   Because of the  field size component in  the formula,                                                               
aggregating  the fields  increased  the ELF  and  raised the  tax                                                               
rates for all the fields to the  same rate.  He added that two of                                                               
the aggregated  fields are West Sak  viscous oil.  He  noted that                                                               
American   Petroleum  Institute   (API)   gravity   is  not   the                                                               
appropriate measure  to judge viscous  oil but  rather centipoise                                                               
is.   Centipoise is the  measure determining how viscous  the oil                                                               
is, meaning  how slowly  it transports from  the ground  into the                                                               
wells.   He informed the committee  that high viscosity oil  is a                                                               
function of  its temperature  and its  characteristics.   He said                                                               
viscous oil also  produces lots of silt and  currently over 1,300                                                               
cubic  yards  of silt  have  to  be  dug  out of  the  separators                                                               
producing West Sak  oil and be disposed of  somewhere else, which                                                               
is a very expensive process.                                                                                                    
                                                                                                                                
10:01:23 AM                                                                                                                   
                                                                                                                                
MR. WILLIAMS  related that AOGA opposes  this legislation because                                                               
it's a  structural increase.   The Department of  Revenue's long-                                                               
term forecast is  $25.50, which is a 27.5  percent structural tax                                                               
increase.  This  legislation raises the cap  rate two-thirds from                                                               
15 percent  to 25 percent.   The proposed 5 percent  minimum is a                                                               
heavy burden  on satellite development.   This  legislation fails                                                               
to protect  the West Sak  viscous oil  because it uses  the wrong                                                               
measurement,  he opined.   He  said the  legislation is  not very                                                               
balanced because at the assumed  high price of oil the industry's                                                               
tax  increases to  $500 million  or $1  billion, while  the state                                                               
offers  a tax  relief of  $50 million  when prices  are low.   He                                                               
related his belief that if oil  prices drop, it's not likely that                                                               
the state will give back $50  million to the industry.  He opined                                                               
that if  oil dropped $12-$15  per barrel, then two-thirds  of the                                                               
revenue  accounting  for  80  percent   of  the  GF  budget  will                                                               
disappear.    He  relayed  that a  structural  increase  of  27.5                                                               
percent makes Alaska's investments  less competitive.  Alaska has                                                               
$20-$30 billion  worth of  investments to  develop over  the next                                                               
decade;  therefore, it's  crucial for  the state  to remain  at a                                                               
basically flat  production level  of 850,000-900,000  barrels per                                                               
day,  which is  going to  take a  huge amount  of investment  and                                                               
those   investments  have   to   compete  against   opportunities                                                               
elsewhere, he  noted.  He alluded  to the fact that  when the oil                                                               
industry profits, so does the state government.                                                                                 
                                                                                                                                
10:04:15 AM                                                                                                                   
                                                                                                                                
MS. BRADY  added the  oil industries  fought the  introduction of                                                               
the  ELF  because in  1989  it  would  raise an  additional  $2.5                                                               
billion over  the next  ten years from  Kuparuk and  Prudhoe Bay.                                                               
She relayed that a production plan  was intended so that when 2.1                                                               
million barrels per  day fell to less than 1  million, like it is                                                               
today,  there wouldn't  be fiscal  issue.   Therefore, the  state                                                               
anticipated  the drop  in oil  production and  it taxed  the huge                                                               
fields then,  and now those  fields produce half of  that amount.                                                               
The satellite fields and heavy  oil started production five years                                                               
ago under  the ELF proposals  and already the state  is proposing                                                               
changing  the  rules  again.    She  reiterated  that  the  state                                                               
received the revenue it intended to  get from Prudhoe Bay and the                                                               
development of the new satellite fields.  She said, "We have in-                                                                
built price  benefit to the state,  that's why we don't  have the                                                               
prices right now  from high prices ... ELF is  working as well as                                                               
you can  expect a  state tax  system to work  and many  places in                                                               
Canada look at Alaska as the  model for taxation.  We're going to                                                               
make more  money this  year in  oil revenues  then we  have since                                                               
1981,  and at  that time  we were  producing almost  half million                                                               
barrels a day more than what we are producing now."                                                                             
                                                                                                                                
10:06:21 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE ROKEBERG  asked what impacts would  an adoption of                                                               
this  legislation  have on  the  negotiations  regarding the  gas                                                               
pipeline.                                                                                                                       
                                                                                                                                
MR. WILLIAMS replied AOGA can't  comment on that because it's not                                                               
involved in the aforementioned negotiations.                                                                                    
                                                                                                                                
10:07:10 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  ROKEBERG asked  if the  legislation's proposed  5                                                               
percent  minimum  tax would  not  only  have  a heavy  burden  on                                                               
satellite development  but would  also effect any  well mirroring                                                               
the  ELF  in terms  of  lower  productivity.   He  further  asked                                                               
whether it  would tend to be  a disincentive for an  early "shut-                                                               
in"  of a  particular  well notwithstanding  the  impacts on  the                                                               
entire field.                                                                                                                   
                                                                                                                                
MR. WILLIAMS  specified that the  ELF works  on a field  basis as                                                               
the  average  well productivity  rather  than  on a  well-by-well                                                               
basis.                                                                                                                          
                                                                                                                                
10:07:57 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE ROKEBERG requested that  the Department of Revenue                                                               
execute  an analysis  on the  effects  of this  legislation.   He                                                               
related  his  belief  that the  legislation  would  change  state                                                               
policy  regarding the  government's  take  on the  low  end.   He                                                               
recalled testimony  stating that the state  could lose two-thirds                                                               
of  its current  revenue at  the lower  pricing scale.   He  then                                                               
asked about  the relative  costs of  production in  Alaska versus                                                               
other provinces.                                                                                                                
                                                                                                                                
MS. BRADY  relayed that the  state has procured Chuck  Logsdon to                                                               
analyze the Wood Mackenzie study.   The aforementioned study used                                                               
different fields  and timelines  than those in  previous studies.                                                               
She surmised that  the state will be interested  in the different                                                               
price scenarios used to determine  internal rates of return.  She                                                               
related her  belief that Representative  Gara misspoke  about the                                                               
aforementioned   study's  operation   costs   and  benefits   for                                                               
operating in  Alaska.  She said,  "the look out the  window test"                                                               
shows a  high level of reserves  and a low level  of investors in                                                               
Alaska.    In  2004,  AOGA  had  21  members  and  lost  2  large                                                               
companies, Total  and EnCana.   If Alaska  were as  profitable as                                                               
Representative  Gara related,  there  would be  20 companies  and                                                               
every  independent  company  in  the  world  looking  at  Alaska.                                                               
However, that isn't the reality, she added.                                                                                     
                                                                                                                                
10:11:28 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  ROKEBERG asked  if  public  information could  be                                                               
used to compare  Alaska with the Gulf of Mexico.   He opined that                                                               
both  places   are  North   American  provinces   with  different                                                               
government takes  and economic profiles.   He related  his belief                                                               
that although  the capital  costs may be  similar because  of the                                                               
high initial  investments, the  tax regimes may  put Alaska  at a                                                               
disadvantage.                                                                                                                   
                                                                                                                                
10:12:10 AM                                                                                                                   
                                                                                                                                
MS. BRADY replied, "[AOGA] can verify  that ... [when the Gulf of                                                               
Mexico] makes  finds [they  make] big  finds ...,  the government                                                               
take is low; its about half of  what Alaska's is and that makes a                                                               
huge  difference."    She  recalled the  graph  where  the  white                                                               
represents the producer's  profit margins, which have  to be made                                                               
up fast to  compensate for the previous investments.   She opined                                                               
that the  oil industry is  similar to the movie  industry because                                                               
both need to  make back the capital costs quickly.   This country                                                               
lets the  companies take all the  risk and then hopes  to get the                                                               
payback in a  short period of time,  she said.  In  1986 to 2003,                                                               
oil prices averaged  $17.70 and at that price  the state received                                                               
46  percent;  the  government, state  and  federal,  received  64                                                               
percent.  Therefore,  during that time the  companies didn't make                                                               
much and  there weren't many new  investments in the state.   The                                                               
state may  have made  an error  by changing the  ELF in  1989 and                                                               
taking that "big  of a chunk", she opined.   Currently, the state                                                               
is going to count on more  investment than has been present since                                                               
the  early 1980's.   The  Department  of Revenue  says the  state                                                               
needs   more  investment   than  it's   ever  had   because  such                                                               
investments would  keep the loss  of production to  under 800,000                                                               
barrels per  day, which  is the least  amount of  production ever                                                               
lost.  She said that the  state lost 1 million barrels daily from                                                               
1989  to 1999,  another 400,000  barrels daily  between 1999  and                                                               
now.   The  state  needs to  maintain a  minimum  loss less  than                                                               
200,000  barrels  daily   or  find  more  oil  in   order  to  be                                                               
profitable, she explained.                                                                                                      
                                                                                                                                
10:14:51 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  ROKEBERG asked  if Ms.  Brady is  testifying that                                                               
the  ELF  has  or  hasn't   worked  for  creating  an  investment                                                               
environment.                                                                                                                    
                                                                                                                                
MS. BRADY  replied that  the ELF  worked, but  the rate  may have                                                               
been  too high  in the  beginning after  which there  was a  long                                                               
period of low prices.                                                                                                           
                                                                                                                                
10:16:04 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE   ROKEBERG   commented   that   since   1999   the                                                               
investments in  the industry  have stabilized  production levels,                                                               
and  thus policies  are balanced  because it  has maintained  the                                                               
flow of production.                                                                                                             
                                                                                                                                
10:16:27 AM                                                                                                                   
                                                                                                                                
MR. WILLIAMS  answered that there were  continuous investments in                                                               
the  larger  fields like  Kuparuk  and  Prudhoe Bay  despite  the                                                               
change in  higher tax rates.   Since  1989, the oil  industry has                                                               
been able to  stabilize production and level off  with no decline                                                               
after 1999  because of investments  in large  fields, satellites,                                                               
heavy  oil,   and  wildcat   exploration.     The  aforementioned                                                               
investments will continue  to increase in the future  in order to                                                               
maintain a stabilized level.                                                                                                    
                                                                                                                                
10:17:55 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  ROKEBERG  asked  if  the  heavy  oil  projections                                                               
should  be updated  to FY  05 because  the current  production is                                                               
below the projections.                                                                                                          
                                                                                                                                
MR.  WILLIAMS  answered that  he  doesn't  know [if  the  current                                                               
production is  below the projections].   However, he  agreed that                                                               
the  heavy oil  projections need  to  be updated  because of  the                                                               
technology breakthrough last August  that allows drilling lateral                                                               
wells.                                                                                                                          
                                                                                                                                
10:18:35 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  ROKEBERG  asked  if  currently  Alaska  is  about                                                               
50,000-75,000 barrels per month below its former production.                                                                    
                                                                                                                                
MS. BRADY answered, "I believe that is right."                                                                                  
                                                                                                                                
REPRESENTATIVE ROKEBERG  asked if the aforementioned  decline was                                                               
due to production glitches last year.                                                                                           
                                                                                                                                
MS. BRADY relayed that generally  there was a loss in production.                                                               
She said she was unaware of the specific reasons.                                                                               
                                                                                                                                
REPRESENTATIVE  ROKEBERG questioned  whether  it  is a  long-term                                                               
trend.                                                                                                                          
                                                                                                                                
CHAIR  WEYHRAUCH announced  that, if  necessary, this  discussion                                                               
would continue during the summer.                                                                                               
                                                                                                                                
[HB 63 was held over.]                                                                                                          

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