Legislature(2011 - 2012)BUTROVICH 205

03/14/2011 03:30 PM Senate RESOURCES

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03:34:17 PM Start
03:34:59 PM SB49
04:59:38 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Presentation: Oil and Gas Production Tax Status
Report to the Legislature
Bryan Butcher, Commissioner, Dept. of Revenue
Bills Previously Heard/Scheduled
              SB  49-PRODUCTION TAX ON OIL AND GAS                                                                          
3:34:59 PM                                                                                                                    
CO-CHAIR PASKVAN announced SB 49 to be up for consideration. He                                                                 
welcomed Commissioner Butcher to continue his presentation on SB
49 [started on March 11].                                                                                                       
3:37:27 PM                                                                                                                    
BRIAN  BUTCHER,  Commissioner-designee,   Department  of  Revenue                                                               
(DOR), continued his  presentation on SB 49 starting  on slide 7,                                                               
a  graph  of North  Slope  exploration  drilling. It  listed  the                                                               
number of  exploration drills (in  blue) according to  the Alaska                                                               
Oil and  Gas Conservation Commission  (AOGCC) and an  overlay (in                                                               
green) of the price of oil  during that time. He pointed out that                                                               
Alaska's Clear  and Equitable Share  (ACES) passed in  the latter                                                               
half of 2007 when 18 wells  were drilled. Decisions had been made                                                               
to drill  16 exploratory wells  for 2008 previous to  the passage                                                               
of ACES; in the next two years, 9  wells in 2009 and 4 in 2010 (2                                                               
in Pt. Thomson) were drilled and  DNR estimates 1 will be drilled                                                               
in 2011.                                                                                                                        
SENATOR WIELECHOWSKI  asked if the  DOR had done any  analysis of                                                               
why the decrease in exploration wells happened.                                                                                 
COMMISSIONER  BUTCHER  replied  that the  Department  of  Natural                                                               
Resources (DNR)  could better  answer that.  "It's our  belief in                                                               
looking at  it that  as the  price of oil  has increased  and the                                                               
exploration has increased  in other states that it's  as a result                                                               
of our tax system that passed at the end of 2007."                                                                              
SENATOR WIELECHOWSKI asked if that  would be directly contrary to                                                               
what  his  department said  just  last  year  that there  was  an                                                               
increase  in investment  on the  North Slope  and it  was due  to                                                               
COMMISSIONER  BUTCHER  responded  that  the  department  has  new                                                               
information now.                                                                                                                
SENATOR WIELECHOWSKI  asked when he  came to this  conclusion and                                                               
when the decision was made.                                                                                                     
COMMISSIONER BUTCHER replied in  discussions with the governor in                                                               
the latter part of December and after taking the job in January.                                                                
SENATOR WIELECHOWSKI  asked if he  agreed with or  disagreed with                                                               
the following  statement: "The good news  is we are seeing  a lot                                                               
of increase in oil exploration."                                                                                                
COMMISSIONER  BUTCHER replied  he didn't  flat agree  or disagree                                                               
with that, but  he thought they were seeing more  activity by the                                                               
independents.  Ultimately,  though,  he didn't  think  they  were                                                               
seeing more production or exploration wells drilled.                                                                            
3:40:25 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked if  Karen Rehfeld  knew what  she was                                                               
talking  about when  she  mentioned  "increased oil  exploration"                                                               
before the House Finance Committee on January 19.                                                                               
COMMISSIONER BUTCHER  answered that she was  probably answering a                                                               
question in  reference to the  dollar amount of tax  credits that                                                               
were in the FY12 budget request.                                                                                                
3:41:14 PM                                                                                                                    
SENATOR FRENCH said  the state went from 16  exploration wells in                                                               
2001  to 11  in  2002 and  down  to 1  in 2003,  and  in 2004  if                                                               
lawmakers  had   decided  to  reduce   oil  taxes   to  stimulate                                                               
exploration on the North Slope,  that would have been an enormous                                                               
mistake because the  state would have missed out  on billions and                                                               
billions  of   dollars  of  revenue   in  2007/08/09.   While  he                                                               
appreciated the point of needing  more exploration wells, Senator                                                               
French said he  thought maybe they should just set  up a $150-200                                                               
million fund  and subsidize  the first three  and see  who drills                                                               
them first.  He cautioned  that they must  be careful  to connect                                                               
the dots correctly.                                                                                                             
CO-CHAIR PASKVAN  asked if  the DOR had  looked at  a correlation                                                               
between the collapse in the  U.S. economic markets in 2001/02 and                                                               
the decline of exploration drilling in 2003.                                                                                    
COMMISSIONER BUTCHER replied  yes; some states didn't  have a dip                                                               
and in others did.  But as the price of oil  began to climb again                                                               
in  2010/11  drilling  began to  increase  again  also.  However,                                                               
drilling did  not increase in  Alaska and, in fact,  continued to                                                               
decrease.  It's not  a correlation  one can  see in  some of  the                                                               
other states.                                                                                                                   
3:43:42 PM                                                                                                                    
SENATOR MCGUIRE joined the meeting.                                                                                             
CO-CHAIR  PASKVAN asked  if he  could break  out gas  exploration                                                               
wells as compared to oil, because  of the "shale explosion in the                                                               
Lower 48."                                                                                                                      
COMMISSIONER BUTCHER  replied that  would be difficult,  but they                                                               
would do their best.                                                                                                            
3:44:54 PM                                                                                                                    
SENATOR WIELECHOWSKI asked if the  2008/09 wells were all drilled                                                               
by a single company.                                                                                                            
COMMISSIONER BUTCHER  replied that  companies work  together when                                                               
drilling wells, but he didn't  have specifics on those particular                                                               
SENATOR WIELECHOWSKI  asked if he knew  companies have agreements                                                               
with each  other such that  one decides not  to drill a  well and                                                               
the other companies don't drill either.                                                                                         
COMMISSIONER BUTCHER replied that he didn't know.                                                                               
SENATOR WIELECHOWSKI asked him to  look into that, because he has                                                               
heard if ConocoPhillips and BP want  to drill a well and then BP,                                                               
because of some  financial disaster doesn't do it,  then the well                                                               
doesn't get drilled. Is there any sort of interplay?                                                                            
COMMISSIONER BUTCHER replied he would be happy to do that.                                                                      
CO-CHAIR PASKVAN  said he was trying  to ascertain if there  is a                                                               
natural pattern  of decline  in the  number of  exploration wells                                                               
simply   because  there   are   fewer  undiscovered   potentially                                                               
recoverable barrels of oil in a "mature elephant field."                                                                        
COMMISSIONER BUTCHER  replied that  he would get  back to  him on                                                               
that, adding  that they  had been digging  into what  the natural                                                               
evolution in the decline of a field is.                                                                                         
CO-CHAIR PASKVAN  said 10 or  12 years  ago it's likely  that the                                                               
central  North  Slope  had  7  billion  barrels  of  undiscovered                                                               
potentially recoverable oil and now  according to the USGS it has                                                               
4 billion barrels and  asked if going from 7 barrels  to 4 over a                                                               
10 or 12 year period is a natural decline.                                                                                      
SENATOR  WIELECHOWSKI   asked  if  the  explorer   companies  are                                                               
required to tell them of their future drilling plans.                                                                           
COMMISSIONER BUTCHER  replied that information is  shared between                                                               
the companies and the DOR,  but Ms. Nienhuis could enlighten them                                                               
3:48:21 PM                                                                                                                    
CHERI  NIENHUIS,  Petroleum   Economist,  Department  of  Revenue                                                               
(DOR), explained that the companies  do file plans of development                                                               
with the DNR and their  production forecaster has access to those                                                               
SENATOR  WIELECHOWSKI asked  how  much in  advance companies  are                                                               
required to give that notification.                                                                                             
MS. NIENHUIS replied that she wasn't sure.                                                                                      
3:49:57 PM                                                                                                                    
SENATOR  WIELECHOWSKI  asked  if  she was  aware  of  the  future                                                               
drilling plans for 2011/12/13.                                                                                                  
MS.  NIENHUIS answered  that  their  production forecaster  would                                                               
probably  have access  to  that information  prior  to doing  the                                                               
SENATOR   WIELECHOWSKI  asked   the  commissioner   for  a   more                                                               
definitive answer.                                                                                                              
COMMISSIONER  BUTCHER answered  that  he didn't  know, but  Frank                                                               
Molly, their production forecaster, could give them more detail.                                                                
SENATOR   WIELECHOWSKI  said   he   would  like   to  have   that                                                               
information. He asked  if an increase in the  projected number of                                                               
drilled wells would change his opinion on changing ACES.                                                                        
COMMISSIONER BUTCHER  responded that  would be  a good  sign, but                                                               
more exploration  wouldn't necessarily  lead to  more production,                                                               
because they don't know the success of the exploration wells.                                                                   
CO-CHAIR PASKVAN  asked how far  into the future  the exploration                                                               
plans the state receives go.                                                                                                    
MS.  NIENHUIS   replied  it   varies.  Some   developers  provide                                                               
comprehensive  information;  a  shorter  term  project  might  be                                                               
SENATOR FRENCH said they are  talking about reducing oil taxes on                                                               
the  producers hoping  the  explorers "will  run  out there"  and                                                               
explore  more. But  Exxon, ConocoPhillips  and BP  don't explore;                                                               
they're  producers, and  he was  concerned  that there  may be  a                                                               
mismatch between  what they are  trying to incentivize,  which is                                                               
exploration, and  the people who  are going to benefit  from this                                                               
bill who are largely producers.                                                                                                 
3:52:10 PM                                                                                                                    
SENATOR WIELECHOWSKI said  the issue of drilling  future wells is                                                               
important and  he hoped someone  would be  able to testify  as to                                                               
the  specifics on  the slides  that  are being  presented to  the                                                               
COMMISSIONER BUTCHER  replied that  the slides were  put together                                                               
with  the expectation  that someone  would be  here from  DNR. He                                                               
said slide 8 highlighted potential  production on the North Slope                                                               
showing 16 billion barrels of  cumulative production through 2010                                                               
with a little over 5 billion barrels remaining.                                                                                 
CO-CHAIR PASKVAN  asked what needs to  occur for a volume  of oil                                                               
to be classified as "reserves."                                                                                                 
COMMISSIONER BUTCHER replied for  oil to be classified "reserves"                                                               
enough work  would have had  to be done  to tell the  company and                                                               
the state  that "the  barrels are  there." At  some point  in the                                                               
future,  industry will  provide some  estimates on  what it  will                                                               
cost  to produce  that oil,  particularly  in some  of the  newer                                                               
areas that have no or  very little infrastructure. He pointed out                                                               
that  while  remaining  North Slope  reserves  exceed  5  billion                                                               
barrels,  that  does not  include  the  approximately 20  billion                                                               
barrels (heavy oil) in the  Ugnu deposit or offshore volumes from                                                               
the  Chukchi  or  Beaufort  Seas that  are  in  the  department's                                                               
CO-CHAIR PASKVAN  asked what  royalty interest  the state  has in                                                               
the Chukchi or the Beaufort locations.                                                                                          
COMMISSIONER  BUTCHER  replied  none;  they  would  be  jobs  for                                                               
Alaskans  and  there   is  no  place  to  put  the   oil  if  the                                                               
construction  of  a  link to  the  TransAlaska  Pipeline  doesn't                                                               
coincide with production occurring out in federal waters.                                                                       
CO-CHAIR PASKVAN  asked what royalty  or production  tax interest                                                               
Alaska has in the Arctic  National Wildlife Refuge (ANWR) or NPR-                                                               
A areas.                                                                                                                        
COMMISSIONER  BUTCHER  replied  the state  would  get  production                                                               
taxes but no royalty.                                                                                                           
CO-CHAIR WAGONER  asked if the  state receives 50 percent  of the                                                               
royalty in ANWR.                                                                                                                
COMMISSIONER BUTCHER replied yes.                                                                                               
CO-CHAIR WAGONER  said that still  has to  be decided in  some of                                                               
the other areas.                                                                                                                
COMMISSIONER BUTCHER  said that  was correct. That  was something                                                               
that  was   being  negotiated  between  the   federal  and  state                                                               
government in previous discussions about opening ANW-R.                                                                         
3:57:14 PM                                                                                                                    
He  said that  slide 9  shows underdeveloped  areas of  the North                                                               
Slope  where  they  want to  encourage  exploration.  The  darker                                                               
shaded areas near the coast have  the legacy fields where most of                                                               
the  production occurs  now. To  the left  and right  are federal                                                               
lands and  just south of  the developed  North Slope area  is the                                                               
region the governor has identified as  state land that the new 15                                                               
percent  base tax  rate  in  the bill  would  most likely  apply.                                                               
Armstrong/Repsol and Great Bear leases are in that area.                                                                        
COMMISSIONER BUTCHER said they put  together a sample of investor                                                               
decision criteria,  with industry  input, on  how to  reverse the                                                               
trend;  prospectivity (if  and how  much  oil is  out there)  and                                                               
geopolitical stability were two of those.                                                                                       
CO-CHAIR PASKVAN asked if  "prospectivity" refers to conventional                                                               
COMMISSIONER  BUTCHER   replied  that   it  is  a   reference  to                                                               
conventional  oil,  but  it  could  include  other  things.  When                                                               
industry  testifies  they will  comment  on  what they  think  is                                                               
available and possible.                                                                                                         
SENATOR  WIELECHOWSKI   asked  how  Alaska  rates   in  terms  of                                                               
prospectivity and geopolitical stability.                                                                                       
COMMISSIONER  BUTCHER  answered  that   it  rates  very  well  in                                                               
prospectivity  when compared  to other  states, but  not as  well                                                               
when  compared to  other Middle  Eastern countries.  Geopolitical                                                               
stability is an area where the United States is very strong.                                                                    
SENATOR STEVENS asked  if the health of  the TransAlaska Pipeline                                                               
System (TAPS) enters into investor decisions at all.                                                                            
COMMISSIONER  BUTCHER replied  he has  heard anecdotally  that it                                                               
does, because there  is a concern about when it  would shut down.                                                               
It's a potential  negative when companies look  at investing long                                                               
SENATOR STEVENS  said they keep  hearing it's all on  the state's                                                               
shoulders to help  fill the pipeline, but it  certainly isn't. If                                                               
it were  to close tomorrow  it would be  an enormous loss  to the                                                               
oil companies.                                                                                                                  
COMMISSIONER BUTCHER agreed; it's in  their best interest to keep                                                               
it flowing, as well.                                                                                                            
He moved  back to the  list of investor decision  criteria saying                                                               
regulations   (access  to   resources,  development   permitting,                                                               
environmental constraints)  is an area  in which Alaska  has been                                                               
as accommodating as possible. However,  there are federal hurdles                                                               
here that  are not seen  in other  countries, which make  it more                                                               
difficult. This  is nothing the  state has any control  over, but                                                               
something  that  is  factored  in  when  a  company  is  weighing                                                               
development here or someplace else.                                                                                             
He  said that  operations  (existing infrastructure,  experienced                                                               
workforce  availability,  costs,  market  proximity)  is  another                                                               
important  criterion.  This  is  an area  that  is  difficult  to                                                               
compare  Alaska with  other states  like Texas  and North  Dakota                                                               
that produce  oil, as well as  the Middle Eastern areas  that sit                                                               
close  to tidewater  in  that our  existing  infrastructure is  a                                                               
benefit to the  legacy fields, but exploring areas  outside of it                                                               
will be costly  to connect to the  existing infrastructure. Also,                                                               
the workforce is not  as easy to come by as it  is in states like                                                               
Texas.  Alaska's distance  from  the market  also  makes it  more                                                               
difficult  to "make  a development  pencil."  Dealing with  these                                                               
issues means the oil in Alaska has to be more profitable.                                                                       
COMMISSIONER BUTCHER said the tax  regime in SB 49 does something                                                               
to improve the  investment climate in Alaska when  looking at all                                                               
of the other issues SB 49.                                                                                                      
CO-CHAIR  PASKVAN  asked  if  he   is  using  the  Fraser  Report                                                               
definition of the term "tax regime."                                                                                            
COMMISSIONER  BUTCHER replied  no;  they use  it  in the  broader                                                               
application,  because  it  means different  things  to  different                                                               
areas. As an  example, in Alberta it means royalty,  in Alaska it                                                               
means production tax;  they are different but an  oil company has                                                               
to weigh them all.                                                                                                              
4:04:31 PM                                                                                                                    
CO-CHAIR PASKVAN asked if he agreed  the term "tax regime" in the                                                               
Fraser Report didn't include production taxes.                                                                                  
COMMISSIONER  BUTCHER responded  that  he  agreed, but  explained                                                               
that  it  was  included  because  it  resonated  after  surveying                                                               
industry on the pros and cons of different jurisdictions.                                                                       
CO-CHAIR  PASKVAN  said they  were  here  focusing on  production                                                               
taxes  and the  Fraser  Report has  that  category under  "fiscal                                                               
terms" and asked if he agreed with that.                                                                                        
COMMISSIONER BUTCHER replied yes.                                                                                               
SENATOR  WIELECHOWSKI  asked  if  there is  a  reason  he  didn't                                                               
include the  "fiscal term" section  in his Fraser Report  when he                                                               
did his presentation in House Resources.                                                                                        
COMMISSIONER BUTCHER replied  it was a fairly minor  piece in the                                                               
House Resources presentation  - a snapshot - just  as they showed                                                               
Alaska  as 129th  out  of 141  in  a snapshot  of  the "Wood  Mac                                                               
study." He didn't include that  here because it just confused the                                                               
issue from  all perspectives and  was more  of a problem  than it                                                               
was worth.                                                                                                                      
SENATOR  WIELECHOWSKI asked  if he  agreed that  the fiscal  term                                                               
section of the Fraser Report  deals with "government requirements                                                               
pertaining to  royalty payments, production shares  and licensing                                                               
fees" and that when they  are considering how industry executives                                                               
view  Alaska's fiscal  terms that's  really the  more appropriate                                                               
slide to include.                                                                                                               
COMMISSIONER  BUTCHER replied  that  he didn't  agree with  that.                                                               
They believe  that including "tax regime"  would have represented                                                               
one more  state that does  not have  any personal income  tax, in                                                               
particular, when almost 50 percent of them had a negative view.                                                                 
SENATOR WIELECHOWSKI said he spoke  with the author of the study,                                                               
Gerry  Angevine, who  said  that  in looking  at  the Alaska  oil                                                               
production taxes and royalty payments  that it's more appropriate                                                               
under the  "fiscal terms" section. Since  the commissioner thinks                                                               
the taxation regime  which is the tax burden "other  than for oil                                                               
production  including  personal  corporate  payroll  and  capital                                                               
taxes and  complexity of tax  compliance," he asked what  part of                                                               
SB  49 alleviates  the personal,  corporate,  payroll or  capital                                                               
COMMISSIONER BUTCHER  replied that no  sections of the  bill deal                                                               
with those.                                                                                                                     
SENATOR WIELECHOWSKI  asked, "You  thought even though  your bill                                                               
has absolutely nothing  to do with alleviating  those things, you                                                               
felt it  was appropriate  to include  a slide  to make  your case                                                               
about why we need to reduce production and taxes?"                                                                              
COMMISSIONER BUTCHER  responded that they  felt it told  a story,                                                               
which  is  that  44  percent  of  respondents  when  asked  about                                                               
Alaska's tax  regime found it a  mild to a serious  deterrent. He                                                               
appreciated Senator  Wielechowski saying he spoke  to the author,                                                               
but given the other things Alaska  has a relatively low score on,                                                               
it  doesn't make  sense to  not look  at it  from a  larger view.                                                               
However, it was  set aside along with the Wood  Mac study because                                                               
it was too confusing.                                                                                                           
SENATOR WIELECHOWSKI asked if  he reviewed the question/responses                                                               
to fiscal terms  which deal with royalty  payments and production                                                               
shares  to see  what sort  of  responses were  given by  industry                                                               
COMMISSIONER BUTCHER replied no.                                                                                                
SENATOR WIELECHOWSKI asked the commissioner  if it would surprise                                                               
him  to  know  that  40   percent  of  the  executives  who  were                                                               
questioned said  that Alaska's fiscal terms  encourage investment                                                               
and 34 percent said Alaska's fiscal  terms are not a deterrent to                                                               
COMMISSIONER  BUTCHER countered  that  wouldn't  surprise him  at                                                               
all. A number of independents  and new companies are very excited                                                               
about  the Alaska  credits. There  is a  real split  between that                                                               
excitement from  independents who are  up here looking to  buy up                                                               
leases and the "larger deeper  moneyed companies - the producers"                                                               
that they then have difficulty finding  to partner with. FEX is a                                                               
good example of a company that  got leases, drilled and found oil                                                               
but couldn't  find any producers  who were  looking at it  in the                                                               
same way.  The governor has  said this isn't setting  ACES aside,                                                               
but it  is trying  to keep  the positive  in ACES  while tweaking                                                               
some of the other issues.                                                                                                       
4:10:34 PM                                                                                                                    
SENATOR  WIELECHOWSKI  asked  if  the fact  that  74  percent  of                                                               
industry  executives  think  that Alaska's  fiscal  terms  either                                                               
encourage  investment or  are not  a deterrent  to investment  is                                                               
immaterial to him.                                                                                                              
COMMISSIONER BUTCHER  answered that  it could  be said  the other                                                               
way, too; it doesn't change the  fact that people don't appear to                                                               
be exploring in Alaska and production is declining.                                                                             
CO-CHAIR  PASKVAN   said  a  possible  way   to  address  Senator                                                               
Wielechowski's  issue is  that  the  commissioner presented  five                                                               
criteria and  was asked which  ones are most  strongly correlated                                                               
to  decisions  to   invest  in  Alaska  at   this  time.  Senator                                                               
Wielechowski is  saying almost three-quarters of  the respondents                                                               
say  our  fiscal terms  are  either  not  a  deterrent to  or  do                                                               
encourage investment.                                                                                                           
COMMISSIONER BUTCHER responded that  he couldn't say specifically                                                               
which one was the largest  deterrent; that would be something the                                                               
companies could  discuss. Of the  five, this bill deals  with the                                                               
one something  can be  done about  and that's  taxes. The  DNR is                                                               
working  on regulations  from the  state side  of things  and the                                                               
Department of  Law is doing  what it can  on the federal  side of                                                               
things. In  terms of the  operations, geopolitical  stability and                                                               
prospectivity,  they would  probably  hear  different views  from                                                               
different  companies because  they each  have a  different focus;                                                               
some have national and some have global.                                                                                        
CO-CHAIR PASKVAN  said the legislature  could do  something about                                                               
workforce availability under "operations,"  but he wanted to know                                                               
which one  is most strongly  correlated with decisions  to invest                                                               
given that 74 percent hold the opinion of Alaska that they do.                                                                  
COMMISSIONER BUTCHER  responded that  he didn't think  they could                                                               
be separated out;  they are all very important.  Industry will be                                                               
in  front of  them soon  and they  could ask  them that  question                                                               
first hand.                                                                                                                     
SENATOR WIELECHOWSKI asked if this is his bill or industry's.                                                                   
COMMISSIONER  BUTCHER replied  that it  is the  state's bill  and                                                               
that he can lay out what they  believe are some of the issues and                                                               
the solutions  to them,  but ultimately they  would have  to hear                                                               
from the companies on what it means to them.                                                                                    
SENATOR WIELECHOWSKI  said it's the  state's bill and  the burden                                                               
is  on  the state  to  make  its  case;  they shouldn't  rely  on                                                               
industry to  do that. The oil  companies can say what  they want.                                                               
He   asserted  that   the  state   would  benefit   greatly  from                                                               
independent expert analysis - trust but verify.                                                                                 
4:16:20 PM                                                                                                                    
COMMISSIONER BUTCHER said  he didn't disagree, and  they will lay                                                               
out a case they  believe says there is a problem  and that it can                                                               
be solved  with an improved  investment climate.  But ultimately,                                                               
as state government,  they can't say they are going  to force the                                                               
private sector to do A, B and C  if this passes. That needs to be                                                               
heard from industry. The state doesn't have a crystal ball.                                                                     
CO-CHAIR  PASKVAN asked  what the  administration  believes is  a                                                               
fair distribution of net profits.                                                                                               
COMMISSIONER BUTCHER  replied that they  will get to  slides that                                                               
compare the  status quo to  where they  think tax rates  are fair                                                               
for Alaska as well as reducing them  to a point where it would be                                                               
an  encouragement for  industry  to invest  here. Initially  they                                                               
started with Governor Hammond's concept of one-third/state, one-                                                                
third/federal  and  one-third/industry   when  development  first                                                               
started on  the North Slope.  The state is  far in excess  of its                                                               
one-third now and would still be  in excess under this bill. They                                                               
hoped SB  49 would  be something material  for the  industry that                                                               
did say it  was, in fact, a material change  and would cause them                                                               
to reevaluate the  decisions they were going to make  in terms of                                                               
Alaska. That is where they are today.                                                                                           
CO-CHAIR  PASKVAN  said they  are  here  under a  production  tax                                                               
system that looks at net  profits and asked if the administration                                                               
has a fair goal in mind.                                                                                                        
COMMISSIONER  BUTCHER  replied no.  One  of  the aspects  of  the                                                               
current law  and this  bill is  progressivity and  at $114/barrel                                                               
the state  gets to a  point where it's  taxing at a  higher level                                                               
than it is in other areas.                                                                                                      
SENATOR WIELECHOWSKI said he read  the governor's statement where                                                               
he  said Alaska  is  an "outlier"  and asked  what  states he  is                                                               
comparing  us  to at  those  prices,  because  when he  looks  at                                                               
government take figures  at those numbers, he  doesn't see Alaska                                                               
as  being an  outlier. What  analysis  has been  done that  shows                                                               
Alaska is an outlier at those prices?                                                                                           
COMMISSIONER   BUTCHER  replied   that  Alaska   is  an   outlier                                                               
nationally and  it becomes very  difficult to make  an apples-to-                                                               
apples  comparison  to other  countries.  For  example, a  Middle                                                               
Eastern country that is sitting on  many times the oil Alaska has                                                               
and is very close  to where it can be exported  is in a different                                                               
situation and with very low labor costs.                                                                                        
4:20:40 PM                                                                                                                    
SENATOR MCGUIRE said  she wanted to make two  comments to Senator                                                               
Wielechowski  that she  does think  it's common  when introducing                                                               
bills to do  them by request when industry asks  them for certain                                                               
bill, and  other times, like  in this  case, it's an  issue where                                                               
lawmakers  and the  administration recognize  people are  talking                                                               
loudly about the  fact that we are not seeing  the exploration on                                                               
the North Slope that  we used to see and we  are seeing a decline                                                               
in the  throughput of the  TAPS. Those facts  bear consideration.                                                               
She said  she didn't see  anything in testimony or  anything from                                                               
the governor  that says he has  put this out at  the direction of                                                               
the  industry.  Rather  she  sees  it as  an  attempt  to  elicit                                                               
conversation, to say "this is our stab at it."                                                                                  
As lawmakers, they  also have a broader obligation to  see how to                                                               
diversify  the  state's  economy,  she said.  "We're  90  percent                                                               
dependent  on one  main  artery." The  state  owns the  resources                                                               
through  subsurface  rights  and   is  looking  to  partner  with                                                               
industry  to develop  them unlike  Texas and  other places  where                                                               
subsurface  rights are  privately  held for  the  most part.  She                                                               
hoped those  conversations would  not be adversarial,  but rather                                                               
about  what can  be  done  to make  the  climate  in Alaska  more                                                               
investment friendly  for those who are  unhappy. "Wildcatters are                                                               
very happy,"  but she wanted  to find out which  companies aren't                                                               
4:25:10 PM                                                                                                                    
SENATOR WIELECHOWSKI referenced  slide 10 and asked  how the five                                                               
investor criteria are  ranked by industry when  making a decision                                                               
where to invest.                                                                                                                
COMMISSIONER  BUTCHER responded  that these  are just  sample big                                                               
picture  topics  that  the  department  put  together  and  those                                                               
questions  would have  to be  asked of  individual companies.  He                                                               
thought that  geopolitical stability would  mean a lot more  to a                                                               
multinational company  than to  a small  company that  just deals                                                               
with North America.                                                                                                             
SENATOR WIELECHOWSKI asked  if he thought tax regime  is the most                                                               
important thing companies look at.                                                                                              
COMMISSIONER BUTCHER  responded that he couldn't  say; obviously,                                                               
prospectivity  would  be  tremendous.  If  you  didn't  have  oil                                                               
available for development you wouldn't  even be worried about the                                                               
tax structure.                                                                                                                  
SENATOR WIELECHOWSKI asked him if  it would be beneficial for him                                                               
to know  how important tax  regime is  to industry when  making a                                                               
decision to drastically alter it.                                                                                               
4:27:05 PM                                                                                                                    
COMMISSIONER BUTCHER  responded that tax structure  has been very                                                               
important, but there are many  important factors. But that is one                                                               
of the top ones.                                                                                                                
SENATOR WIELECHOWSKI  said the commissioner  cited the  fact that                                                               
Alaska has the  highest taxes in the United States  and asked why                                                               
any company would invest in Alaska because of that.                                                                             
COMMISSIONER BUTCHER  replied it's because Alaska  would be rated                                                               
so high  in prospectivity.  Prudhoe Bay is  the largest  field in                                                               
North America  and Alaska continues  to have more oil  than other                                                               
states.  As a  result,  there is  going to  be  more interest  in                                                               
exploring in  Alaska than in states  with the very low  tax rates                                                               
like Illinois, for instance.                                                                                                    
He  explained  that slide  12  illustrated  production tax  value                                                               
(PTV) that  is the market  price of oil minus  the transportation                                                               
costs  and allowable  lease expenditures  (operating and  capital                                                               
expenditures). The base tax rate on the PTV is 25 percent.                                                                      
4:29:30 PM                                                                                                                    
SENATOR FRENCH  said it  would be helpful  to see  the governor's                                                               
bill projected against the dollar breakdown on page 13.                                                                         
COMMISSIONER BUTCHER replied he could certainly do that for him.                                                                
CO-CHAIR PASKVAN  asked for backup on  how this section of  SB 49                                                               
applies to FY10/11/12.                                                                                                          
COMMISSIONER BUTCHER said he would do that for him.                                                                             
CO-CHAIR PASKVAN asked  if the $2,754,000,000 is  28.5 percent of                                                               
PTV in FY12.                                                                                                                    
COMMISSIONER BUTCHER answered it works  out to 33.1 percent, then                                                               
minus the credit.  He didn't know what the percentage  is off the                                                               
top of his head.                                                                                                                
CO-CHAIR  PASKVAN asked,  assuming  the math  is  right, if  28.5                                                               
percent is the tax actually paid of the PTV.                                                                                    
COMMISSIONER  BUTCHER replied  yes, if  the math  is correct.  He                                                               
also remarked that the department  would come out with the spring                                                               
revenue forecast in the next  couple of weeks; these numbers were                                                               
based on their fall revenue forecast.                                                                                           
CO-CHAIR PASKVAN moved the presentation along to slide 18.                                                                      
COMMISSIONER BUTCHER  said this shows the  nominal production tax                                                               
rate with  the blue line being  the nominal rate for  ACES with a                                                               
25 percent  base and moving up  the slope.  Red  represents SB 49                                                               
unitized fields  of the same  25 percent base rate  with brackets                                                               
instead of the way progressivity  is currently factored. The bill                                                               
mimics  the  ACES  slope.  The green  line  represents  the  non-                                                               
unitized fields in  SB 49; the nominal rates would  be 15 percent                                                               
based rate (as opposed to 25  percent). It has the same slope and                                                               
caps at 40 percent instead of 50 percent.                                                                                       
4:33:13 PM                                                                                                                    
CO-CHAIR  PASKVAN   asked  for  clarification:  no   credits  are                                                               
factored into this graphing?                                                                                                    
COMMISSIONER BUTCHER answered that was correct.                                                                                 
CO-CHAIR PASKVAN asked  for example, at a $30  PTV the production                                                               
tax  is approximately  10  percent  - in  other  words, about  15                                                               
percent below the base tax rate.                                                                                                
4:34:08 PM                                                                                                                    
BRUCE  TANGEMAN,  Deputy   Commissioner,  Department  of  Revenue                                                               
(DOR), answered that would depend  on an individual company's tax                                                               
credits  and  its liability.  Different  levels  of credit  would                                                               
determine that starting point.                                                                                                  
SENATOR WIELECHOWSKI asked how much  in reduced revenue the state                                                               
would have  taken in had SB  49 been in effect  since the passage                                                               
of ACES.                                                                                                                        
COMMISSIONER BUTCHER replied he would get back to him on that.                                                                  
SENATOR  WIELECHOWSKI asked  him  to include  information on  the                                                               
reduction to the treasury projected  at $100, $110, $120/oil when                                                               
they discuss the fiscal note.                                                                                                   
COMMISSIONER BUTCHER indicated he would do that.                                                                                
COMMISSIONER  BUTCHER  said  slide 19  illustrates  the  marginal                                                               
government  take that  continues to  grow, but  at a  slower rate                                                               
than under the  current ACES progressivity. It  eliminates the 93                                                               
percent marginal tax rate effect  that one hears frequently about                                                               
from the  industry that continues to  take more in for  the state                                                               
as the price of oil goes higher  up into the 50 percent cap. It's                                                               
just not as steep as the current progressivity.                                                                                 
COMMISSIONER BUTCHER  said page  20 is  a breakdown  at different                                                               
ANS  West Coast  prices  in current  law. The  blue  line is  the                                                               
producers' percentage of profit.                                                                                                
CO-CHAIR PASKVAN asked if the term "profit" includes royalty.                                                                   
COMMISSIONER BUTCHER answered yes.                                                                                              
CO-CHAIR PASKVAN asked if this  graph depicts the relationship of                                                               
the  state's production  tax relative  to  the producers  looking                                                               
purely at a production tax with or without credits applied.                                                                     
COMMISSIONER  BUTHCER answered  that this  graph is  inclusive of                                                               
credits. Using an example of  $115/barrel (about $1 above what it                                                               
is today) the  state take would be 57 percent,  the producer take                                                               
would be  28 percent and the  federal take would be  15 percent -                                                               
quite a ways from one-third, one-third, one-third.                                                                              
SENATOR FRENCH  asked him to  use $90/barrel as an  example. Does                                                               
he mean the 50 percent share  of profit includes the state's one-                                                               
eighth royalty share?                                                                                                           
COMMISSIONER BUTCHER answered yes.                                                                                              
SENATOR FRENCH  said if that's  true, he  wanted to him  to rerun                                                               
that graph, because he was trying  to work off of what ACES does,                                                               
not what the  royalty does (because that is set).  He said he was                                                               
working  off of  slide 14,  the  production tax  called ACES.  It                                                               
shows him  that at $82/barrel  out of  a production tax  value of                                                               
$9.6 billion,  the state gets  $2.7 billion. That strikes  him as                                                               
being  less  than one-third.  That  leaves  about two-thirds  for                                                               
industry and the  federal government.  He needs to  know how ACES                                                               
treats  oil company  profits, not  how we  deal with  the royalty                                                               
share, which is set in stone.                                                                                                   
CO-CHAIR PASKVAN added that it's  important to understand that in                                                               
using the  FY12 projected  figures, the costs  are $639  and $26.                                                               
The commissioner  used upstream costs  at $20; so it's  short $6,                                                               
which downgrades  the deductions and potentially  the credits and                                                               
"gooses up" the progressivity by factoring costs out.                                                                           
4:40:32 PM                                                                                                                    
COMMISSIONER BUTCHER said he could make that adjustment.                                                                        
CO-CHAIR  PASKVAN  said  in analyzing  the  percentage  of  split                                                               
between FY10/11/12, the  state in FY10 got 29.5  percent, in FY11                                                               
it  gets 28  percent and  in FY12  gets 28.5  percent of  the PTV                                                               
(using DOR  production tax  projections), and  said, "We  need to                                                               
get to a specific base line on what the costs are."                                                                             
SENATOR MCGUIRE  said she  thought slide  20 was  helpful because                                                               
when businesses  look at  profit, it's not  relevant to  them who                                                               
they have  to pay  taxes to  or in what  category. It  just means                                                               
less profit. It  would be helpful, however, to in  the green part                                                               
divide out  the green bars  and show  what part between  the four                                                               
taxes is allocated.  She said this should remind  everyone of how                                                               
complex Alaska's system is.                                                                                                     
COMMISSIONER BUTCHER said they can absolutely do that.                                                                          
CO-CHAIR PASKVAN  asked if  he had estimated  a percent  of taxes                                                               
that are paid to the U.S. government in the federal portion.                                                                    
COMMISSIONER BUTCHER replied yes.                                                                                               
CO-CHAIR PASKVAN  asked if the  federal portion  includes federal                                                               
royalty.  The reason  he  asked is  because  the FY12  projection                                                               
includes federal barrels.                                                                                                       
COMMISSIONER  BUTCHER replied  it's just  the federal  income tax                                                               
CO-CHAIR WAGONER  said he had been  looking at that all  the time                                                               
and he didn't think the federal take was accurate.                                                                              
COMMISSIONER  BUTCHER  responded that  he  just  didn't know  and                                                               
invited Ms. Nienhuis to comment.                                                                                                
4:43:54 PM                                                                                                                    
MS. NIENHUIS said  the federal portion is  just federal corporate                                                               
income  tax. The  state's proceeds  from that  come from  federal                                                               
waters to which federal royalties  are assessed and is relatively                                                               
minor. They  tried to show the  bigger scheme on the  North Slope                                                               
where most  of the  barrels are  state barrels.  If they  were to                                                               
divide up everything  they would also have to  talk about private                                                               
royalties and things like that;  those portions, at least at this                                                               
point, are pretty small.                                                                                                        
CO-CHAIR  PASKVAN said  his  question is  in  part, for  example,                                                               
federal/state  royalty   barrels  are  included  on   the  FY  12                                                               
projection.  He  was  getting very  confused  about  whether  the                                                               
state's  percentage  included  federal royalty  barrels,  because                                                               
that figure is  15.1 percent. And when one deducts  that from the                                                               
gross value  of the oil, the  state's value is 12.5  percent. The                                                               
federal barrels are  another 2.6 percent. If that  2.6 percent is                                                               
included in the state's share, that is distorting it completely.                                                                
MS. NIENHUIS  agreed and added  that she thought the  royalty was                                                               
probably  higher than  that.  It's not  12.5  percent across  the                                                               
entire North Slope; each lease  has a slightly different royalty.                                                               
So,  the royalty  percentage  is  closer to  13  percent for  the                                                               
state.  Senator  Paskvan  was correct  in  that  federal  barrels                                                               
(mostly from  North Star) are  included, but those could  be left                                                               
out on  future models. They were  trying to depict what  a barrel                                                               
produced on state land would receive.                                                                                           
SENATOR  FRENCH said  they are  talking about  ACES, so  he found                                                               
those words  misleading because they  are not talking  about ACES                                                               
but  total global  tax  take.  It's fair  to  do  that, but  it's                                                               
misleading.  That leads  to the  question  of if  the 50  percent                                                               
includes  royalties  barrels,  does  it  also  include  corporate                                                               
income tax and property tax.                                                                                                    
COMMISSIONER BUTHCER replied yes.                                                                                               
SENATOR FRENCH remarked,  "Share of total profit,  not ACES, just                                                               
per barrel."                                                                                                                    
4:46:46 PM                                                                                                                    
SENATOR WIELECHOWSKI  pointed out when Governor  Hammond made his                                                               
one-third, one-third, one-third statement,  the state had a gross                                                               
tax and if  they were to look at the  gross one-third, one-third,                                                               
one-third,  Alaska's  tax  rate  is probably  not  too  far  off.                                                               
Another point  would look at  the costs the state  contributes to                                                               
unsuccessful  development projects,  which the  DOR says  runs 76                                                               
percent; the federal share was  8 percent and the company's share                                                               
was 15  percent. "So, in looking  at these numbers, if  the state                                                               
is  contributing  76  percent  to  the  unsuccessful  development                                                               
project costs of  an existing producer, I think it's  fair for us                                                               
to get a fair share back from that."                                                                                            
COMMISSIONER  BUTCHER said  they believe  this bill  provides the                                                               
state with a fair share.                                                                                                        
CO-CHAIR PASKVAN asked who prepared the numbers this slide used.                                                                
COMMISSIONER BUTCHER replied they were provided by a DOR model.                                                                 
CO-CHAIR  PASKVAN asked  if they  could  see the  numbers. He  is                                                               
trying to  figure out if they  are basing their predictions  on a                                                               
certain volume of oil.                                                                                                          
COMMISSIONER BUTCHER asked if he wanted  to know if the model has                                                               
numbers that can be manipulated.                                                                                                
CO-CHAIR PASKVAN replied that he wanted  to be able to "track the                                                               
thinking" so they could understand  the message that was intended                                                               
to be delivered by showing those percentages.                                                                                   
MR. TANGEMAN responded that they  have that model and can provide                                                               
it to  his staff. He  said it has  a certain number  of variables                                                               
and it flows through to different types of slides.                                                                              
4:50:42 PM                                                                                                                    
CO-CHAIR PASKVAN  said he really  wanted to see  it, particularly                                                               
the variables that affected this slide.                                                                                         
CO-CHAIR  WAGONER said  he's "sick  and tired"  of hearing  about                                                               
North  Dakota because  they don't  see royalty  figures or  other                                                               
taxes  people pay  like  county  taxes. He  wanted  to see  green                                                               
section  of  the graph  that  is  on  page  20 broken  down  into                                                               
corporate,  royalty  and  property  taxes, which  Alaska  has  no                                                               
control over. On the North Slope,  19 percent of the property tax                                                               
goes  to the  borough;  the state  doesn't get  any  of that.  He                                                               
repeated they  are talking  about ACES  and this  doesn't reflect                                                               
that at all.                                                                                                                    
COMMISSIONER BUTCHER  said okay.  They were looking  very broadly                                                               
only at  state land, but  he understood the importance  of having                                                               
the breakdown.                                                                                                                  
CO-CHAIR WAGONER  said he wanted  him to include state  lands; he                                                               
wasn't  interested in  what  the state  gets  from federal  lands                                                               
right now.                                                                                                                      
SENATOR  WIELECHOWSKI asked  the highest  average ANS  price they                                                               
forecast over the next decade.                                                                                                  
COMMISSIONER BUTCHER replied  in 2020 they have  projected an ANS                                                               
West Coast price of $111.84.                                                                                                    
SENATOR  FRENCH  asked   if  that  is  the   highest  price  they                                                               
projected, why  is more  than half the  graph directed  at prices                                                               
they do not anticipate they are not going to see.                                                                               
COMMISSIONER BUTCHER replied  they just wanted to lay  out all of                                                               
the prices; and they focused on  $115 because that is where it is                                                               
SENATOR FRENCH  said the  commissioner didn't  know that  when he                                                               
made  the  graph;   the  $115  is  a  way  point.   Did  you  get                                                               
extraordinarily lucky?                                                                                                          
MR. TANGEMAN replied  that they can manipulate the  model to show                                                               
whatever  ANS  price   they  want  and  they   thought  that  was                                                               
SENATOR FRENCH  replied that it's  more productive to  spend time                                                               
on the more likely range of  outcomes. He suggested aiming at the                                                               
center  of the  target and  educating lawmakers  about what  they                                                               
want the  tax structure to  look like at their  predicted prices.                                                               
Then they can go from there.                                                                                                    
4:55:45 PM                                                                                                                    
CO-CHAIR PASKVAN  said so  they understand  why he  is struggling                                                               
with this,  that if in FY11  they are using $78/barrel  for crude                                                               
(half-way between  $65 and $90) the  state's projected percentage                                                               
of  the gross  of 14.8  percent plus  13 percent  royalty, for  a                                                               
total of 27.8  percent, how do you get from  there to between 42-                                                               
50 percent as shown on the graph.                                                                                               
COMMISSIONER  BUTCHER  replied  he  would   be  happy  to  get  a                                                               
breakdown on that for him.                                                                                                      
SENATOR WIELECHOWSKI  asked in comparing  page 20 to 21,  what is                                                               
the  policy   reason  behind  lowering   the  state's   share  at                                                               
$40/barrel. It looks like it's even  lower than it would be under                                                               
the ELF [economic limit factor].                                                                                                
COMMISSIONER  BUTCHER  answered that  they  focused  more on  the                                                               
"sweet spot" of where they saw the price of oil going.                                                                          
4:59:38 PM                                                                                                                    
CO-CHAIR PASKVAN thanked everyone  for their comments and finding                                                               
no further questions, adjourned the meeting at 4:59 p.m.                                                                        

Document Name Date/Time Subjects