Legislature(2017 - 2018)SENATE FINANCE 532

04/15/2017 09:00 AM RESOURCES

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09:00:47 AM Start
10:47:35 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ -- Joint with the Senate Finance Committee -- TELECONFERENCED
-- Please Note Time and Location --
Heard & Held
Uniform Rule 23 Waived
Overview with Legislative Consultants
CS FOR HOUSE BILL NO. 111(FIN) (efd fld)                                                                                      
     "An Act  relating to  the oil  and gas  production tax,                                                                    
     tax  payments,   and  credits;  relating   to  interest                                                                    
     applicable to  delinquent oil  and gas  production tax;                                                                    
     relating  to carried-forward  lease expenditures  based                                                                    
     on losses  and limiting those lease  expenditures to an                                                                    
     amount  equal  to  the  gross value  at  the  point  of                                                                    
     production of  oil and gas  produced from the  lease or                                                                    
     property  where  the  lease expenditure  was  incurred;                                                                    
     relating to  information concerning tax  credits, lease                                                                    
     expenditures, and  oil and gas  taxes; relating  to the                                                                    
     disclosure of that information  to the public; relating                                                                    
     to an  adjustment in  the gross value  at the  point of                                                                    
     production;  and  relating  to  a  legislative  working                                                                    
9:00:47 AM                                                                                                                    
^PRESENTATION: MR.  ROGER  MARKS,   CONSULTANT,  LEGISLATIVE                                                                  
BUDGET AND AUDIT COMMITTEE                                                                                                    
9:01:50 AM                                                                                                                    
Chair Giessel  relayed that HB  111 was heard for  the first                                                                    
time  in the  Senate Resources  Committee the  previous day.                                                                    
She  informed  that  the  joint  committee  would  have  two                                                                    
meetings to hear testimony from legislative consultants.                                                                        
ROGER MARKS, LEGISLATIVE  CONSULTANT, LEGISLATIVE BUDGET AND                                                                    
AUDIT COMMITTEE,  introduced himself  and noted that  he was                                                                    
on   contract  with   the  Legislative   Budget  and   Audit                                                                    
Committee. He discussed the  presentation, "Evaluation of HB
111," (copy on file).                                                                                                           
Mr. Marks showed slide 2, "Roger Marks -Background":                                                                            
     •Since 2008:  Private consulting practice  in Anchorage                                                                    
     specializing in petroleum economics and taxation                                                                           
     -Clients include: State  of Alaska Legislature, federal                                                                    
     government,   local   municipalities,   University   of                                                                    
     Alaska,  oil   and  gas   explorer/producers,  pipeline                                                                    
     companies, commercial/investment  banks, private equity                                                                    
     •1983-2008:  Senior petroleum  economist with  State of                                                                    
     Alaska Department of Revenue Tax Division                                                                                  
     -Statutory and regulatory design                                                                                           
     -Economic  and  commercial  valuation  of  exploration,                                                                    
     development,   production,  transportation,   refining,                                                                    
     marketing, taxation                                                                                                        
     -Analysis of international competitiveness                                                                                 
     -North Slope gas commercialization                                                                                         
Mr. Marks  discussed his work  pertaining to  oil production                                                                    
tax policy and associated legislation.                                                                                          
9:04:38 AM                                                                                                                    
Mr. Marks displayed slide 3,  "North Slope Oil Price ($/bbl)                                                                    
-  The  Alignment of  Misery,"  which  showed a  line  graph                                                                    
depicting a drop in oil prices  starting at the end of 2014.                                                                    
He  wanted to  discuss  that the  state's  budget woes  from                                                                    
lower oil  taxes were matched  by the taxpayers  having less                                                                    
money to  pay the taxes.  He additionally wanted  to explore                                                                    
the issue of how the misery  of low oil prices was allocated                                                                    
between the  state and taxpayers  under current  statute and                                                                    
the proposed HB 111.                                                                                                            
Mr. Marks turned to slide 4, "Two Themes":                                                                                      
     1. The alignment of misery:                                                                                                
          -The state's budget woes from lower oil taxes are                                                                     
          matched by the taxpayers' having less income to                                                                       
          pay them                                                                                                              
     2. How  is the misery  of low prices  allocated between                                                                    
     State and taxpayers under SB 21 and HB 111?                                                                                
Mr. Marks  remarked that  for his evaluation  of HB  111, he                                                                    
would generally  present the approach he  took in practicing                                                                    
economics  and  in  practicing tax  administration  when  he                                                                    
worked for the department. He  thought the method would help                                                                    
enlighten  multiple  perspectives  and the  impacts  to  all                                                                    
Mr.  Marks  showed  slide 5,  "  Fair  Share:  Understanding                                                                    
Impacts to All Parties":                                                                                                        
          -Development of resources for maximum benefit of                                                                      
          its people                                                                                                            
          -Investor demands                                                                                                     
          -Competitive opportunities                                                                                            
          -Cash flow constraints                                                                                                
Mr. Marks relayed that as  he considered the information, he                                                                    
believed that  maximizing the long-term benefit  of resource                                                                    
development in the state was  competitiveness. In his career                                                                    
he  had actively  participated in  efforts to  both increase                                                                    
and decrease  taxes when  it appeared  that what  Alaska was                                                                    
receiving  was out  of line  with international  competitive                                                                    
9:07:07 AM                                                                                                                    
Mr.  Marks discussed  slide 6,  "Current North  Slope Income                                                                    
Legacy Fields (Old Oil)":                                                                                                       
     •ANS Market Price ($/bbl) $55                                                                                              
     •Less Transportation ($10)                                                                                                 
     •GROSS Revenue $45                                                                                                         
     •Less Upstream costs ($23) *                                                                                               
     •DIVISIBLE Income $22                                                                                                      
     •Less State Taxes & Royalties ($11)                                                                                        
     •Less Federal Income Tax ($4)                                                                                              
     •PRODUCER after-tax net income $7                                                                                          
     * DOR average estimate based on reported and audited                                                                       
     costs. Including transportation, Alaska about $5-                                                                          
     $15/bbl higher than average Lower 48 costs. Newer oil                                                                      
     upwards of $10-$20/bbl more expensive.                                                                                     
Mr. Marks informed  he would be focusing on  the North Slope                                                                    
and   some   basic   numbers  for   his   presentation.   He                                                                    
characterized  the slide  as a  basic  income statement  for                                                                    
current North  Slope activity for legacy  fields. He pointed                                                                    
out that  he would be  discussing gross value  (market price                                                                    
plus  transportation  cost);   which  was  sometimes  called                                                                    
"wellhead  value"  and  was  the  basis  for  royalties  and                                                                    
Mr. Marks  continued to  discuss slide  6, noting  that when                                                                    
considering gross  revenue less upstream costs,  it resulted                                                                    
in divisible  income. Divisible income  was available  to be                                                                    
divided between  the government and investors  before taxes.                                                                    
Divisible income  could also be called  production tax value                                                                    
(PTV).   He   specified   that  a   break-even   price   was                                                                    
approximately $40 under the assumptions on the slide.                                                                           
Mr. Marks  spoke to  slide 7, "  Economic Barometer  on Fair                                                                    
Share: "Government Take"":                                                                                                      
     Defined: Percentage of divisible income that goes to                                                                       
     Look at tax on its own terms                                                                                               
     Systematic comparison to other similar jurisdictions                                                                       
     Compare proposal to status quo                                                                                             
     Looks at all taxes / royalties                                                                                             
Mr. Marks explained  that 'Government Take' was  a cash flow                                                                    
snapshot of who  received what funds. He stated  that for an                                                                    
investor or  taxpayer, the total amount  paid for production                                                                    
tax  and royalties  was most  important, as  opposed to  how                                                                    
much was paid  for each. He stated that  government take was                                                                    
not  a  perfect tool.  He  referred  to comments  by  fellow                                                                    
consultant  Rich  Ruggiero  that  suggested  that  sometimes                                                                    
timing of  revenue was more  important than the  quantity of                                                                    
revenue. He  thought that timing  issues had more of  a role                                                                    
in rate-of-return type  fiscal systems that were  in play in                                                                    
production sharing  contracts. Alaska  was a  cash-flow type                                                                    
tax  system, and  he wanted  to compare  the state  to other                                                                    
such systems. Government take provided  a tool for analyzing                                                                    
9:11:54 AM                                                                                                                    
Mr.  Marks  spoke to  slide  8,  which  showed a  bar  graph                                                                    
entitled  "Government  Take  at $55/bbl  Market  Price."  He                                                                    
explained that when government take  was used as an analysis                                                                    
tool,  there  were areas  of  judgement  that needed  to  be                                                                    
exercised. It was  important to consider the  peer group, or                                                                    
what states  Alaska would be  compared to. He had  looked at                                                                    
places that had investment  opportunities where the physical                                                                    
terms were established  in a similar context  as Alaska; and                                                                    
additionally, places where the  geological and cost contexts                                                                    
were  similar. On  the  slide,  the peer  group  of tax  and                                                                    
royalty   regimes   were    basic   Western   industrialized                                                                    
democracies.  In  the  group,  the taxes  were  governed  by                                                                    
statutes  and  regulations   established  by  democratically                                                                    
elected legislators.                                                                                                            
Mr. Marks  continued discussing  the bar  graph on  slide 8,                                                                    
explaining that  he had put  a threshold of  400,000 barrels                                                                    
per day. He  asserted that another area in  which to compare                                                                    
regimes was  cost. He explained  that every  jurisdiction on                                                                    
the  slide  had cost  variability,  as  did Alaska.  He  had                                                                    
access to a number of  informational databases and the graph                                                                    
depicted a good estimate of  the average cost for production                                                                    
under development in peer group of regimes.                                                                                     
Mr. Marks continued to discuss  slide 8, indicating that the                                                                    
regimes being  compared were across  the bottom axis  of the                                                                    
graph, and the government take  on the left-hand column. The                                                                    
graph assumed an  oil price $55 per barrel  (bbl). He stated                                                                    
that of the  five United States regimes  represented; all of                                                                    
them had royalties, and three  had production taxes based on                                                                    
gross revenue. Of the five  international regimes; three had                                                                    
royalties, one had a production  tax. All the ten regimes on                                                                    
the graph had corporate income taxes.                                                                                           
9:14:41 AM                                                                                                                    
Co-Chair Giessel  stated that  Alaska was  commonly compared                                                                    
to Norway, and wondered if the country had a royalty tax.                                                                       
Mr. Marks  answered in the  negative. He furthered  that the                                                                    
country  had  a  combination  of two  different  taxes  that                                                                    
basically  functioned  like  an  income  tax,  at  about  78                                                                    
percent of net  income. He characterized the  structure as a                                                                    
neutral system  - whether oil  prices were high or  low, the                                                                    
tax  was  roughly 78  percent  and  neither progressive  nor                                                                    
regressive. He  added that oil  taxes in the  United Kingdom                                                                    
were similarly structured.                                                                                                      
Senator Meyer asked where Alaska fit within the group.                                                                          
Mr. Marks stated  he would address Alaska's  position in the                                                                    
group later in the presentation.                                                                                                
Senator  Wielechowski  thought that  Alaska  was  in the  60                                                                    
percent  range, but  was  unsure if  it  signified that  the                                                                    
state  took  60  percent  of   $55/bbl.  He  referred  to  a                                                                    
presentation  by the  Department of  Natural Resources  from                                                                    
the previous day, which had  shown that at $60/bbl the state                                                                    
received $2.03, which was an  effective tax rate of a couple                                                                    
percentage points. He  asked if the number  was accurate and                                                                    
thought the  oil companies  got transportation  costs, lease                                                                    
expenditure costs, and profit.                                                                                                  
Mr.  Marks  looked  at  slide 10,  "Government  Take  SB  21                                                                    
(Legacy   Fields),"  which   showed   a   line  graph   that                                                                    
demonstrated  how  Alaska  fit  in to  the  peer  group.  At                                                                    
$55/bbl,  the   government  take  was  67   percent  of  the                                                                    
divisible income.  He stated that later  in the presentation                                                                    
he would discuss the production tax amount.                                                                                     
9:17:31 AM                                                                                                                    
Senator Micciche  asked to go  back to slide 6.  He referred                                                                    
to the $22  in divisible income indicated on  the slide, and                                                                    
thought  the  government take  of  $15  would equate  to  60                                                                    
Mr. Marks  confirmed that 15  percent divided by  22 percent                                                                    
would be the government take.                                                                                                   
Senator Micciche  asked to go  back to slide 8.  He pondered                                                                    
the  68 percent,  and wondered  if there  was an  equivalent                                                                    
comparison with the peer group list on the slide.                                                                               
Mr.  Marks  stated  that  given  that  government  take  was                                                                    
looking at the  percentage of divisible income  that went to                                                                    
government, the comparison was looking at the same metric.                                                                      
Senator  Stedman   referred  to  slide  8,   and  asked  for                                                                    
discussion  on how  the private  royalties  were handled  in                                                                    
Texas and  North Dakota.  He asked  for more  information on                                                                    
the regime in North Dakota,  which was frequently used as an                                                                    
example for  comparison. He  noted that  the state  of North                                                                    
Dakota did not own sub-surface rights.                                                                                          
Mr.  Marks  affirmed that  the  states  of Texas  and  North                                                                    
Dakota  both  had  a  number   of  different  royalty  rates                                                                    
depending  on  the  ownership  structure  of  the  land.  He                                                                    
explained that  to be  conservative he  was using  a royalty                                                                    
rate of 19  percent for North Dakota, and a  royalty rate of                                                                    
25 percent for Texas.                                                                                                           
Senator Stedman  thought the amounts sounded  reasonable. He                                                                    
expressed  interest in  discussing the  calculations further                                                                    
with Mr. Marks  after the meeting. He expressed  a desire to                                                                    
recognize the minimum tax range within the $55/bbl range.                                                                       
9:20:34 AM                                                                                                                    
Senator Stedman  asked to review  slide 6. He  thought there                                                                    
was  several  ways to  view  the  information, including  by                                                                    
changing the  order of information  and view  production tax                                                                    
value.  He wondered  if  Mr. Marks  could  elaborate on  the                                                                    
Mr.  Marks  stated  that  divisible  income  was  much  like                                                                    
production  tax   value,  and  the  government   take  being                                                                    
examined  was  exactly the  split  of  divisible income  (or                                                                    
production  tax  value)  between   the  government  and  the                                                                    
Senator  Stedman  thought  that  royalties  would  come  out                                                                    
first. He thought  the point of the list  was to demonstrate                                                                    
production  tax value,  and acknowledged  the list  could be                                                                    
presented in many ways.                                                                                                         
Mr. Marks  stated that in  calculating taxes  and royalties,                                                                    
the portion of  production was paid, and taxes  were paid on                                                                    
the   non-royalty  portion.   The  spreadsheet   showed  the                                                                    
financial  impact of  both royalty  and  production tax.  He                                                                    
thought  one   could  do  a  slightly   different  split  to                                                                    
calculate  what  happened  after deduction  of  royalty.  He                                                                    
believed  it was  important in  looking at  total government                                                                    
take, in terms of analyzing the real outcome of the tax.                                                                        
9:23:06 AM                                                                                                                    
Senator Stedman agreed that it  was important to look at all                                                                    
components, but reiterated that  he wanted his colleagues to                                                                    
look  at  the total  value  rather  than merely  per  barrel                                                                    
numbers. He  commented that  a previous  discussion included                                                                    
the total  production tax value  moving about  $1.3 billion.                                                                    
He thought it  was possible to forget the  magnitude of what                                                                    
was being discussed.                                                                                                            
Mr. Marks returned  to slide 8, which  showed the government                                                                    
take at $55/bbl.                                                                                                                
Mr. Marks  turned to slide  9, "Government  Take Competitive                                                                    
Boundary,"  which showed  a line  graph with  one descending                                                                    
blue  line. All  prices  between $40/bbl  and $100/bbl  were                                                                    
examined  for  an  average government  take  among  the  ten                                                                    
regimes, which created  the blue line on  the graph entitled                                                                    
"Competitive Boundary."  There was high take  at low prices,                                                                    
and  lower  take  at  high   prices.  There  was  a  general                                                                    
regressive pattern,  because most of the  jurisdictions were                                                                    
on a gross  taxation basis. He stated he would  talk more in                                                                    
detail about the reasoning behind  the shape of the line. He                                                                    
explicated that generally if the  government take fell above                                                                    
the line,  it was  not competitive;  and if  government take                                                                    
fell below the  line, it was competitive. He  stated that he                                                                    
would present  the competitive boundary  when he  showed the                                                                    
impacts of the current tax and the proposed tax.                                                                                
9:25:11 AM                                                                                                                    
Mr. Marks  went back  to slide  10, which  had a  line graph                                                                    
showed how  SB 21 [Oil  and gas tax reform  legislation that                                                                    
passed in 2013] lined up  with the competitive boundary.  He                                                                    
noted that  when SB 21  had been  designed, its goal  was to                                                                    
get a government  take of between 60 and 65  percent at high                                                                    
oil prices.  Since that time, competitive  jurisdictions had                                                                    
dropped taxes in response to  low prices. In the peer group;                                                                    
United Kingdom, Norway, and Alberta  had done so. He pointed                                                                    
out  the  difference  between  Alaska  and  the  competitive                                                                    
boundary  as shown  on the  graph. He  noted that  every one                                                                    
percent difference in government  take represented about $30                                                                    
Co-Chair Giessel asked  if Mr. Marks could  elaborate on the                                                                    
gap between lines  on the left-hand side of  the graph below                                                                    
$60/bbl. She wondered  why Alaska was so  different than the                                                                    
competitive boundary.                                                                                                           
Mr. Marks stated that most  of the jurisdictions were taxing                                                                    
on gross,  and most of  them had  a royalty based  on gross.                                                                    
The graph  showed the  percent of the  net value  (not gross                                                                    
value) that  went to government.  When taxing on  percent of                                                                    
gross, it was a much larger  percent of net, because net was                                                                    
so low. The reason Alaska was  so much higher was not due to                                                                    
the tax system,  but rather the fact that  the state's costs                                                                    
were   so  much   higher.  He   compared  Alaska's   $10/bbl                                                                    
transportation  cost compared  to  most Lower-48  production                                                                    
with $3/bbl. The  extra cost of doing business  on the North                                                                    
Slope raised  the tax from $5  to $10 more than  the average                                                                    
Lower-48 cost.  The higher costs  resulted in how  the graph                                                                    
manifested at the low end.                                                                                                      
9:28:03 AM                                                                                                                    
Senator Stedman asked if it  was possible to get a breakdown                                                                    
of  slide 10  with major  components including  minimum tax,                                                                    
royalty,  income tax,  and property  tax. He  also requested                                                                    
Mr. Marks to  help the committee understand  how tax credits                                                                    
were used in the calculations.                                                                                                  
Mr. Marks  agreed to provide additional  information through                                                                    
the Legislative Budget and Audit Committee.                                                                                     
Mr. Marks showed slide 11, "Calculation of SB 21 Tax":                                                                          
     Higher of                                                                                                                  
     -Net calculation                                                                                                           
     -Gross Minimum Tax (market price less transportation):                                                                     
     4% of gross*                                                                                                               
     Can use loss carryforward credits to bring tax below                                                                       
     gross minimum                                                                                                              
     * Legacy fields are on gross minimum tax until about                                                                       
Mr. Marks  explained that net  income signified  gross value                                                                    
after subtracting the upstream  costs. He explained that the                                                                    
gross was the market price less transportation.                                                                                 
Mr. Marks  turned to  slide 12,  "Basic Net  Calculation for                                                                    
North Slope Legacy Fields (Old Oil)":                                                                                           
     Net calculation:                                                                                                           
          35% X Net Value                                                                                                       
          less sliding scale per barrel produced credit                                                                         
Mr. Marks reiterated that net  value was divisible income or                                                                    
the production tax value.                                                                                                       
9:30:46 AM                                                                                                                    
Mr.  Marks turned  to slide  13, "Sliding  Scale Credit  Per                                                                    
Barrel Produced Calculation: Legacy Fields":                                                                                    
     •Gross value less than $80/bbl: $8/bbl                                                                                     
     •$80-$90/bbl: $7/bbl                                                                                                       
     •$90-$100/bbl: $6/bbl                                                                                                      
     •$100-$110/bbl: $5/bbl                                                                                                     
     •$130-$140/bbl: $2/bbl                                                                                                     
     •$140-$150/bbl: $1/bbl                                                                                                     
     •Over $150/bbl: $0/bbl•For old oil cannot use credit                                                                       
     to bring tax below gross minimum tax                                                                                       
Mr. Marks  discussed how  the net  calculation was  done. As                                                                    
prices went up,  the per-barrel credit went  down. Under the                                                                    
current  statute  for  the  legacy  fields,  the  per-barrel                                                                    
credit  could not  be  used  to bring  tax  below the  gross                                                                    
minimum.  Carry-forward losses  could be  used to  bring tax                                                                    
below the gross minimum.                                                                                                        
Mr. Marks turned to slide 14, "The $45/bbl Gross Pie                                                                            
($55/bbl market price)," which showed  a pie chart. He mused                                                                    
about  the purpose  of  a per-barrel  credit.  He stated  he                                                                    
would discuss gross taxation. He  addressed the pie chart on                                                                    
the slide.  Of the  $45/bbl gross  amount, $23  was upstream                                                                    
costs, and  $22 was divisible  income. Royalty was  based on                                                                    
gross value, so  half of a royalty payment to  the state was                                                                    
for costs. With  gross as the basis, half  the royalty would                                                                    
be  a payment  on cost;  which was  the reason  that at  low                                                                    
prices, the government take was so high.                                                                                        
Mr.  Marks  spoke  to  slide  15,  "The  $45/bbl  Gross  Pie                                                                    
($55/bbl  market  price)." The  slide  showed  the same  pie                                                                    
chart as the  previous slide, broken down  into who received                                                                    
the divisible income. He commented  on the breakdown between                                                                    
the state, the federal government, and producers.                                                                               
9:33:07 AM                                                                                                                    
Mr. Marks referred to slide  16, " January 2016: The $20/bbl                                                                    
Gross Pie($30/bbl market price)":                                                                                               
     Costs     $23/bbl (115%)                                                                                                   
     State     $4/bbl (20%)                                                                                                     
     Feds      -$2/bbl (-10%)                                                                                                   
     Producers -$5/bbl (-25%)                                                                                                   
     •Taxpayers pay 16% of $20, plus property tax, while                                                                        
     they are $3 in the hole                                                                                                    
     •Government take is off the charts (Slide 10)                                                                              
Mr. Marks discussed why the  information on slide 16 was not                                                                    
interpreted into a pie chart.  He indicated that Excel could                                                                    
not process the numbers for  a chart when the costs exceeded                                                                    
the  amount of  the whole.  He noted  that in  January 2016,                                                                    
there was  $20 in gross  revenue and $23 in  cost. Producers                                                                    
started out  $3 in the  hole, and paid royalty  and property                                                                    
tax. If  producers had prior  loss carry-forwards,  it could                                                                    
be used to  bring tax below the 4 percent  of gross. If not,                                                                    
the producers would be paying 16 percent of the $20 gross.                                                                      
Mr. Marks  turned back to  slide 10 to illustrate  the graph                                                                    
in an even  lower price scenario, where  the government take                                                                    
would be off the charts.                                                                                                        
Senator Stedman  wanted more information on  how tax credits                                                                    
affected the  share calculation. He  asked if it  was common                                                                    
around the world  that the industry took  business risk (and                                                                    
low-price  risk), and  most  sovereigns structured  business                                                                    
relationships to have a constant revenue source.                                                                                
Mr. Marks answered  in the affirmative. He  stated that most                                                                    
fiscal systems around the world  were regressive; and took a                                                                    
high government  take at the  low end, and a  low government                                                                    
take at  the high end.  In Alaska  the industry took  a high                                                                    
end at  the low-price scenario, and  a high end at  the high                                                                    
price scenario. He  relayed that he would  be discussing the                                                                    
rationale  for the  system. In  most regressive  systems the                                                                    
taxpayer  took the  low  side risk,  but  received a  bigger                                                                    
share  of the  upside as  a trade-off.  He informed  that he                                                                    
would be  concluding his presentation by  explaining how the                                                                    
typical regressive system did not happen in Alaska.                                                                             
9:37:41 AM                                                                                                                    
Mr.  Marks turned  to  slide 17,  "Disadvantage  of Taxes  &                                                                    
Royalties Based on Gross (vs. Net)":                                                                                            
     •Ever increasing gross/net value divide                                                                                    
     •Net more reflective of actual economics                                                                                   
     •Under gross a field with $20/bbl costs is taxed the                                                                       
     same as a field with $50/bbl costs                                                                                         
     •A net system automatically adjusts                                                                                        
     •Some other jurisdictions do tax on gross                                                                                  
          -Alaska's high costs exacerbate the problem                                                                           
     •At prices under $65/bbl Alaska essentially operating                                                                      
     on a gross system                                                                                                          
Mr. Marks commented  that Alaska had a  gross system through                                                                    
2006, and had  changed due to declining  production. Under a                                                                    
gross system  companies could not deduct  upstream costs. As                                                                    
the North  Slope was  extending to  more and  more expensive                                                                    
fields,  there  was  an ever-increasing  gap  between  gross                                                                    
value and  net value,  and taxing  on growth  was distorting                                                                    
the economics. He  stated that taxing on the  net profit was                                                                    
much more  reflective of the  actual economics. He  used the                                                                    
example of Kuparuk  River Unit which had a  number of fields                                                                    
with much different production costs.  Under a gross system,                                                                    
all fields paid the same  amount in tax because the upstream                                                                    
costs were not being deducted.                                                                                                  
Mr. Marks  restated that most  other jurisdictions  taxed on                                                                    
gross  value,  but  Alaska's   high  costs  exacerbated  the                                                                    
problem. With  a "higher-of" system  in which gross  and net                                                                    
were being  compared, legacy fields  switched from  gross to                                                                    
net at  about $65/bbl. Until prices  reached $65/bbl, Alaska                                                                    
operated under a gross system.                                                                                                  
Mr. Marks showed  slide 18, "Govt Take With  and Without Per                                                                    
Barrel Credit  - SB 21  Legacy Fields," which showed  a line                                                                    
graph. As  prices went higher,  cost was a smaller  slice of                                                                    
the gross  amount, and royalty  based on growth  became less                                                                    
of  a  problem.  As  prices  increased,  the  tax  rate  was                                                                    
lowered.  The goal  in 2013  was  to get  a government  take                                                                    
between 60 percent and 65 percent to be competitive.                                                                            
Mr. Marks  explained that  the blue and  green lines  on the                                                                    
graph  represented  SB  21  and  the  competitive  boundary,                                                                    
respectively.  He highlighted  the  red  line, which  showed                                                                    
what the  government take would  be without a  sliding scale                                                                    
credit. The effect made a  huge difference in making the tax                                                                    
competitive and  off-setting the negative aspects  of taxing                                                                    
on gross at low prices.                                                                                                         
Mr. Marks  displayed slide 19,  "Summary: Sliding  Scale Per                                                                    
Barrel Produced Credit":                                                                                                        
     •Adjustment of effective tax rate to offset high                                                                           
     royalty at low prices                                                                                                      
     •Economically should not be considered a credit or                                                                         
     called a credit                                                                                                            
     •An important feature                                                                                                      
9:41:50 AM                                                                                                                    
Senator Wielechowski asked  to return to slide  18. He asked                                                                    
if Mr. Marks was suggesting  that the state should lower its                                                                    
tax rate.                                                                                                                       
Mr.  Marks reiterated  that the  red  line on  the graph  on                                                                    
slide 18 showed what the  government take would be if Alaska                                                                    
did  not  have the  sliding  scale  per-barrel royalty.  The                                                                    
slide had illustrated that the  point of putting the feature                                                                    
in SB 21  was to bring the government  take down competitive                                                                    
international norms.                                                                                                            
Senator Wielechowski  reiterated his question as  to whether                                                                    
the state should be lowering its tax rate.                                                                                      
Mr.  Marks  referred to  the  blue  line, which  showed  the                                                                    
current system  under SB 21.  He noted that at  prices above                                                                    
$50/bbl,  the state  was  fairly  competitive. Prices  below                                                                    
$50/bbl  yielded a  higher government  take  because of  the                                                                    
state's higher costs.                                                                                                           
Senator Wielechowski  referred to the revenue  forecast, and                                                                    
numbers provided by DNR. He  pondered that if the government                                                                    
take  was 100  percent at  $40/bbl,  it was  100 percent  of                                                                    
virtually nothing.  According to the Department  of Revenue,                                                                    
Alaska received  $1.23/bbl out of  an oil price  of $40/bbl,                                                                    
which  was an  effective  tax rate  of 3  or  4 percent.  He                                                                    
considered that between a price  of $40/bbl and $55/bbl, the                                                                    
state  got virtually  nothing because  any  funds were  paid                                                                    
back  in tax  credits. He  offered that  the estate  had tax                                                                    
credit liabilities of hundreds of millions of dollars.                                                                          
Senator Wielechowski  compared Alaska's tax scenario  to the                                                                    
State of  North Dakota, where he  had seen 25 percent  to 30                                                                    
percent royalty  rates for private  land owners.  He thought                                                                    
if one  examined the  raw numbers  of monetized  oil running                                                                    
through the pipeline;  North Dakota was at  an effective tax                                                                    
rate of 35  percent to 40 percent, which  equated to between                                                                    
$3 billion and  $4 billion. He asked Mr. Marks  if the state                                                                    
should adopt the tax and  royalty structure of North Dakota,                                                                    
and  wondered how  much more  the state  would get  with the                                                                    
Mr.  Marks turned  back to  the bar  graph on  slide 8,  and                                                                    
acknowledged  that North  Dakota  had  a healthy  government                                                                    
take given the  assumptions used on the slide.  He was happy                                                                    
to look at Alaska under  North Dakota's system if requested.                                                                    
He stated that he would  discuss the tax credit situation as                                                                    
he   furthered  his   presentation.  He   acknowledged  that                                                                    
Alaska's  tax  credit  situation  was a  problem  given  the                                                                    
state's cash  flow issue. He  did not disagree  with Senator                                                                    
Wielechowski  that  the  affordability  of  oil  credits  at                                                                    
current oil prices for Alaska was a significant issue.                                                                          
Co-Chair  Giessel  referred to  the  low  profit per  barrel                                                                    
number  that DOR  had presented,  and asked  if it  included                                                                    
only  the severance  tax or  other things  such as  royalty,                                                                    
corporate income tax, etc.                                                                                                      
Mr.  Marks  understood  that  the   DNR  numbers  were  only                                                                    
considering the production tax.                                                                                                 
9:46:44 AM                                                                                                                    
Senator Stedman  referred to North Dakota,  and recalled the                                                                    
state  had  a royalty  rate  of  20  percent or  higher.  He                                                                    
thought  Alaska's net  system had  an advantage  relative to                                                                    
the gross systems; and thought  the state should balance its                                                                    
high-cost environment  and be able to  compete against North                                                                    
Dakota's structure.  He asked Mr.  Marks if he could  tie in                                                                    
the relationship  between the  35 percent  base tax  and the                                                                    
per-barrel deduction to get the  effective tax rate down. He                                                                    
mentioned  net  operating  loss  (NOL)  and  carry-forwards,                                                                    
which he wanted to be included in the ongoing discussion.                                                                       
Co-Chair Giessel suspected the  matter would be addressed in                                                                    
the several hours of testimony that would follow.                                                                               
Senator von  Imhof thought it  was important to look  at the                                                                    
combined nature of  all the different mechanisms  that SB 21                                                                    
encompassed.  She referred  to  testimony  the previous  day                                                                    
that suggested  considering the mechanisms  separately could                                                                    
have unintended consequences. She  referred to slide 18, and                                                                    
thought the  red line reminded  her that HB 111  removed the                                                                    
$8 per barrel  credit. She thought it seemed  that the state                                                                    
may  be  uncompetitive  at  any  oil  price.  She  found  it                                                                    
interesting that  Alaska took a  100 percent minimum  tax at                                                                    
prices of $40/bbl  or below. She thought  North Dakota might                                                                    
also be examining the tax regime practices of Alaska.                                                                           
9:50:10 AM                                                                                                                    
Mr. Marks looked at slide 20, "Tax Rate Vocabulary":                                                                            
     •Statutory Rate:                                                                                                           
          -Nominal rate in tax code applied to some base                                                                        
          that may be increased or decreased by other                                                                           
     •Effective Rate:                                                                                                           
          -Tax as percentage of pre-tax income (divisible                                                                       
     •Marginal Rate:                                                                                                            
          -How much additional tax is when price goes up $1                                                                     
     •Can look at the production tax in isolation or all                                                                        
     taxes and royalties as a whole                                                                                             
     •Investor economics depend on the total payments to                                                                        
     government without regard to specific sources                                                                              
Mr. Marks  had been  asked to  present tax  rate vocabulary;                                                                    
and   explain  the   difference  between   statutory  rates,                                                                    
effective   rates,   and   marginal  rates.   He   discussed                                                                    
differences in  statutory tax rates.  He thought it  was not                                                                    
possible to go  far in discussing the statutory  tax rate in                                                                    
isolation without referring to  everything it applied to. He                                                                    
thought the effective  rate was a much  more useful concept.                                                                    
He reiterated that investors cared  most about the total tax                                                                    
that  would  be   paid,  rather  than  the   amount  of  the                                                                    
Mr. Marks  discussed slide 21, "Effective  and Marginal Prod                                                                    
Tax and  Total Tax/Roy Rates -  SB 21," which showed  a line                                                                    
graph.  He explained  that  the bottom  two  lines were  the                                                                    
effective and marginal production tax  rates under SB 21. He                                                                    
pointed out  the top  two lines were  total tax  royalty. He                                                                    
recalled  that  Ken Alper  (Tax  Division  Director for  the                                                                    
Department  of  Revenue)  had  shown  a  similar  graph  the                                                                    
previous day; but used numbers  from the average North Slope                                                                    
cost instead of a legacy field.                                                                                                 
Mr.  Marks continued  discussing  slide  21, addressing  the                                                                    
bottom  line representing  marginal severance  tax rate.  He                                                                    
discussed  how  the  marginal rate  varied  with  price.  He                                                                    
looked  at   the  line  depicting  the   total  tax  royalty                                                                    
effective rate.  He commented that  the Alaska  marginal tax                                                                    
rate was higher than the worldwide competitive norm.                                                                            
9:54:36 AM                                                                                                                    
Senator Micciche  referred back  to slide  8. He  thought it                                                                    
was clear  that more dollars  went into  the GF than  in the                                                                    
past tax  regime. He asked  how many  of the tax  regimes on                                                                    
the slide would be at 100  percent of government take at the                                                                    
oil price of $40/bbl.                                                                                                           
Mr.  Marks preferred  to  contemplate  the question  further                                                                    
before offering an answer.                                                                                                      
Senator Micciche thought  the number would be  next to zero,                                                                    
considering  that  most  were  on  a  gross  tax  basis.  He                                                                    
referred to  slide 6, and  thought most of the  regimes were                                                                    
based on the  economics of drawing investment.  He asked how                                                                    
many  successful oil  producing  regimes were  based on  the                                                                    
philosophy of wanting more money.                                                                                               
Mr.  Marks  thought most  regimes  were  similarly based  on                                                                    
trying to  get as  much profit as  possible while  keeping a                                                                    
competitive environment. He thought  the dynamics were a bit                                                                    
skewed because  of the high  percentage of income  the state                                                                    
gathered  from oil,  where  most other  regimes  had a  more                                                                    
balanced and diverse source of income.                                                                                          
9:57:08 AM                                                                                                                    
Vice-Chair Bishop  referred to slide 21,  which was modelled                                                                    
on legacy  fields. He thought  Mr. Marks had  commented that                                                                    
Ken Alper  had modelled after  the aggregate of  North Slope                                                                    
Mr. Marks referred  to the Revenue Source  Book. He conveyed                                                                    
that 90  percent of  production was  from legacy  fields. He                                                                    
stated he would discuss new oil.                                                                                                
Senator Stedman  thought there were distortions  embedded in                                                                    
the system.  He referred  to the current  structure of  a 35                                                                    
percent tax rate,  and thought the state could  have just as                                                                    
well set a  45 percent or 55 percent tax  rate and increased                                                                    
the per-barrel  deduction. He  thought the  committee should                                                                    
try and get as many of the distortions out of the system.                                                                       
Mr. Marks commented that focusing  on the statutory rate was                                                                    
a  limited exercise  without considering  how it  interacted                                                                    
with the whole. He thought  solely focusing on the statutory                                                                    
rate could not go far in understanding the tax.                                                                                 
9:59:44 AM                                                                                                                    
Senator  Wielechowski  asked  to  return  to  slide  8,  and                                                                    
recalled that the  royalty rate in Texas was  25 percent for                                                                    
private land owners.                                                                                                            
Mr. Marks relayed that there  was a variety of royalty rates                                                                    
in Texas.  The high end  was 25  percent, which he  used for                                                                    
the analysis in order to be conservative.                                                                                       
Senator Wielechowski asked about the gross tax in Texas.                                                                        
Mr. Marks answered in the affirmative.                                                                                          
Senator Wielechowski had a hard  time comprehending that the                                                                    
government take in Texas was the  same as that in Alaska. He                                                                    
wondered about corporate income tax and sales tax in Texas.                                                                     
Mr. Marks  stated that the  combined state and  federal rate                                                                    
was 36 percent in Texas.                                                                                                        
Senator  Wielechowski  suggested  that   if  there  was  $10                                                                    
billion of oil going down  the pipeline, royalties and taxes                                                                    
would add up to $3.6 billion  in Texas. In Alaska, the state                                                                    
would only  get $1.5 billion  in royalties and taxes  for $9                                                                    
million worth of oil in the pipeline.                                                                                           
Mr. Marks stated  that the big difference was  that in Texas                                                                    
it was not  necessary to spend $10 per barrel  to get oil to                                                                    
market, which  made a  huge difference in  the value  of the                                                                    
Senator Wielechowski stated that  there was tremendous value                                                                    
to the fact that Alaska had  a net profit system. He thought                                                                    
it  was not  possible to  compare Texas  and Alaska  fairly,                                                                    
since Alaska  had a net system  and Texas was able  to write                                                                    
off all its costs.                                                                                                              
Mr.  Marks stated  that  the  $10 per  barrel  cost made  an                                                                    
enormous difference in the value of  the oil in terms of low                                                                    
oil prices.                                                                                                                     
10:02:57 AM                                                                                                                   
AT EASE                                                                                                                         
10:04:26 AM                                                                                                                   
Senator  Wielechowski  clarified   that  the  transportation                                                                    
costs  were incurred  in large  part  to Aleyeska  pipeline,                                                                    
which was owned by the oil  companies. So in large part, the                                                                    
$10 per barrel was staying in the same company.                                                                                 
Mr.  Marks  emphasized that  nearly  all  tax tariff  was  a                                                                    
repayment of actual costs incurred.  He relayed that most of                                                                    
the Trans-Alaska  Pipeline System (TAPS) had  been recovered                                                                    
through  depreciation,  and  there  was a  small  amount  of                                                                    
undepreciated costs on which a profit was made.                                                                                 
Mr. Marks displayed slide 22, "New Oil":                                                                                        
          -Units created after 2002                                                                                             
         -Fields in older units created after 2011                                                                              
          -Extensions of existing fields                                                                                        
          -About 5%-10% of total oil                                                                                            
     •Can cost $10-$20/bbl more than legacy fields                                                                              
     •Differential tax provisions                                                                                               
          -Gross reduced by 20% in calculating production                                                                       
          tax value                                                                                                             
     •(Reduced by 30% for high royalty fields)                                                                                  
          -Per barrel credit set at $5/bbl at all prices                                                                        
          -Can use per barrel credits and loss carryforward                                                                     
          credits to bring tax below gross minimum tax                                                                          
Mr. Marks explained  that sometimes new oil  was referred to                                                                    
as "GVR  oil," since  there was a  gross value  reduction to                                                                    
the  oil.  He  explained  that unlike  legacy  oil,  it  was                                                                    
possible to have a per barrel credit for new oil.                                                                               
10:07:10 AM                                                                                                                   
Mr. Marks  showed slide 23, "Govt  Take for New (GVR)  Oil -                                                                    
SB  21," which  showed a  line  graph. He  pointed out  that                                                                    
starting on  the left-hand side, the  blue line representing                                                                    
Alaska government take  was very high. He  explained that it                                                                    
was  possible for  companies to  use loss  carry-forwards as                                                                    
well as  a per-barrel  credit to bring  taxes down  to zero.                                                                    
The  graph showed  high government  take that  occurred when                                                                    
there was  zero tax.  He explicated that  even with  no tax,                                                                    
companies  were  paying  $33   in  upstream  costs,  $10  in                                                                    
transportation, property tax, and  a royalty based on gross.                                                                    
He calculated  that a tax would  kick in at an  oil price of                                                                    
about $75/bbl.  The break-even  price under  the assumptions                                                                    
on the slide was about $55/bbl.                                                                                                 
Mr. Marks turned  to slide 24, "Govt Take for  New (GVR) Oil                                                                    
-  SB 21  -  Focus on  $55  - $75."  He  reiterated that  at                                                                    
$55/bbl price, the government take  would be 80 percent; and                                                                    
at  $75/bbl price  (when oil  companies  began paying  tax),                                                                    
there  was   a  competitive  boundary.  He   understood  the                                                                    
department's  concern about  companies not  paying taxes  on                                                                    
"new  oil."  He thought  the  economics  for new  oil,  even                                                                    
without taxes, was very daunting.                                                                                               
Co-Chair  Giessel reminded  that the  legislature had  put a                                                                    
timespan on  new oil the  previous session. The limit  was 7                                                                    
years, or 3 years if the price of oil reached $70/bbl.                                                                          
Mr. Marks discussed slide 25,  "Major Economic Provisions of                                                                    
HB 111 - North Slope":                                                                                                          
     •Floor hardened to gross minimum tax                                                                                       
     •No per barrel credits for legacy fields                                                                                   
     •Base rate on net reduced from 35% to 25%                                                                                  
     •Progressivity after ptv exceeds $60                                                                                       
    •Fields are ring-fenced for exploration/development                                                                         
     •Elimination of refundable credits                                                                                         
     •After 7 years losses carried forward lose 10%                                                                             
Mr. Marks stated that he would  focus on the North Slope. He                                                                    
stated that  the first  four points on  the slide  were four                                                                    
major economic  parameters, and he  would later  explain how                                                                    
the  items affected  government  take. He  informed that  he                                                                    
would  discuss other  provisions in  the bill  such as  ring                                                                    
fencing,  elimination of  refundable  credits, and  reducing                                                                    
the value of loss carry-forward credits after 7 years.                                                                          
10:10:53 AM                                                                                                                   
Mr.  Marks  showed  slide 26,  "Ring  Fencing  /  Refundable                                                                    
     •PPT was set up in 2006 to ring fence a company's                                                                          
     operations North Slope-wide                                                                                                
          -A company with production could offset its                                                                           
          exploration / development costs                                                                                       
          -This provided a very significant net present                                                                         
          value benefit                                                                                                         
     •Refundable credits were originally designed to put                                                                        
     explorers/developers on an even basis with producers                                                                       
          -A company with no offsetting income could                                                                            
          realize the tax value of expenditures in the same                                                                     
          timely manner                                                                                                         
     •By ring  fencing exploration /  development separately                                                                    
     and  eliminating   the  refundable  credits,   the  net                                                                    
     present value  of exploration  / development  costs are                                                                    
     significantly diminished to everyone                                                                                       
     •The state's cash affordability of refundable credits                                                                      
     is an issue                                                                                                                
     •The way most of the rest of the world does it:                                                                            
          -Company operations are ring-fenced jurisdiction-                                                                     
          -Explorers/developers carry their losses forward                                                                      
          without refundable credits until they have                                                                            
          offsetting income                                                                                                     
Mr.  Marks  explained  that   ring  fencing  and  refundable                                                                    
credits  were  related.  He   explained  that  ring  fencing                                                                    
signified (in tax parlance) the  size of the entity that was                                                                    
being examined for tax calculations.  He gave the example of                                                                    
the  United  States, which  was  ring  fenced for  corporate                                                                    
income taxes; one  could offset income in  one state through                                                                    
losses in another. Oil fields  and geographic areas could be                                                                    
ring fenced.                                                                                                                    
Mr.  Marks relayed  that ConocoPhillips  was developing  the                                                                    
Willow  field under  the ring  fencing provision.  Under the                                                                    
status quo,  the company  could offset  the cost  for Willow                                                                    
with  income  from Prudhoe  Bay;  but  could not  under  the                                                                    
provisions  of HB  111. He  thought the  committee would  be                                                                    
hearing  from  Conoco Phillips  in  the  following days.  He                                                                    
encouraged  the  committee  to  ask  the  company  what  the                                                                    
legislation would do to the  rate of return and viability of                                                                    
the  Willow project.  He  suspected the  bill  would have  a                                                                    
significant impact.                                                                                                             
10:13:26 AM                                                                                                                   
Mr.  Marks continued  to discuss  slide 26,  noting that  in                                                                    
2007  refundable  credits  were   established  to  put  non-                                                                    
producers   and  producers   on  an   even  basis.   Without                                                                    
refundable credits, an exploring  company with no offsetting                                                                    
income would have to wait for production to deduct costs.                                                                       
Mr.  Marks explained  that previously,  all parties  were on                                                                    
the same basis for the  positive value of the economics; and                                                                    
HB 111 would  put all parties on the same  basis in terms of                                                                    
the  negative value  of  the economics  (not  being able  to                                                                    
monetize the losses  in a timely manner). He  thought it was                                                                    
difficult  to determine  the state's  cash affordability  of                                                                    
refundable credits.                                                                                                             
Senator  Hughes thought  that slide  26  indicated that  the                                                                    
combination  of ring  fencing and  refundable credits  would                                                                    
deter exploration and development  and thereby reduce future                                                                    
production and revenue.                                                                                                         
Mr. Marks  thought that  the scenario  would reduce  the net                                                                    
present  value for  investors. He  thought that  some viable                                                                    
projects  would   not  be  so   without  ring   fencing  and                                                                    
refundable  credits. He  thought  there  were situations  in                                                                    
which  refundable  credits  could  be given  and  result  in                                                                    
either successful exploration or not.                                                                                           
10:17:37 AM                                                                                                                   
Mr. Marks turned to slide  27, "Reduction of Carried Forward                                                                    
Losses After 7 Years":                                                                                                          
     •If losses are incurred and not deducted:                                                                                  
          -Production tax value artificially elevated                                                                           
          -Application of the nominal tax rate will result                                                                      
          in an artificially elevated tax                                                                                       
     •Punishes taxpayers for delays not of their doing                                                                          
Mr. Marks  explained that  a provision  of HB  111 was  a 10                                                                    
percent  annual  decline  of  loss  carry-forwards  after  7                                                                    
years. He thought there had  been a representation that part                                                                    
of  the  provision was  intended  to  provide incentive  for                                                                    
earlier development.  He had observed  that there  were many                                                                    
reasons  that  projects  did  not  move  forward  that  were                                                                    
unrelated to the  investor. He thought the  state should not                                                                    
send the message for companies  to work with haste (in order                                                                    
to avoid losing value of  tax deductions) due to the fragile                                                                    
arctic environment.                                                                                                             
Senator Meyer asked  if it was safe to say  that some delays                                                                    
were due to permitting or  negotiations with the North Slope                                                                    
Borough,  both  of  which were  not  within  the  producer's                                                                    
Mr.  Marks answered  in the  affirmative, pointing  out that                                                                    
one of  Conoco Phillips  fields was  delayed for  years over                                                                    
the  issue of  building a  bridge in  a certain  area versus                                                                    
building  a  pipeline  underneath the  ground.  Negotiations                                                                    
between the company and regulators had taken a lot of time.                                                                     
Senator Stedman  thought the federal government  allowed for                                                                    
the carry-forward  of losses  for 20  years. He  mused about                                                                    
the appropriate  amount of time to  allow for carry-forward,                                                                    
and  referred  to problems  in  the  Arctic with  delays  of                                                                    
implementation. He  thought letting carry-forward  of losses                                                                    
run for the long term  it was problematic for accounting. He                                                                    
asked for Mr. Marks to comment on the subject.                                                                                  
Mr.  Marks   commented  that  not   only  did   the  federal                                                                    
government allow  for 20 years  of loss  carry-forwards, but                                                                    
losses  could also  be carried  back  for two  years to  get                                                                    
additional net present value. He  thought that if it was not                                                                    
possible to  deduct costs, ultimately  the tax  rate applied                                                                    
would  be to  an artificially  high income  base. He  opined                                                                    
that  he would  not place  any time  limitation on  carrying                                                                    
losses forward. He suggested that  no one was more motivated                                                                    
to get projects moving than the investors themselves.                                                                           
10:21:40 AM                                                                                                                   
Vice-Chair Bishop  spoke to  the last  bullet on  the slide,                                                                    
and  reminded  that  litigation   was  a  new  component  to                                                                    
consider.  He  referred to  a  mine  nearby that  took  over                                                                    
twenty  years of  litigation before  production. He  thought                                                                    
there was merit in extending  the seven-year time period for                                                                    
loss carry-forwards.                                                                                                            
Vice-Chair  Coghill  referred  to variability  of  commodity                                                                    
prices.  He thought  it  was important  to  consider that  a                                                                    
long-term investment  in Alaska had to  go through economic,                                                                    
litigation, and commodity price  cycles. He echoed the words                                                                    
of Vice-Chair Bishop.                                                                                                           
Mr. Marks showed slide 28, "Hardening the Floor":                                                                               
     •Losing costs                                                                                                              
          -Suppose gross value is $21/bbl                                                                                       
          -Suppose upstream costs are $25/bbl                                                                                   
          -So there is a $4/bbl loss                                                                                            
               •There are two parts to the $25/bbl cost:                                                                        
               -Part that took income down to zero                                                                              
               -The other part that took income below zero                                                                      
               ($4/bbl). This is the loss.                                                                                      
          -When  paying   on  the  gross  minimum   tax,  by                                                                    
          hardening  the  floor,  and  carrying  the  losses                                                                    
          forward,  only those  latter costs  get recovered.                                                                    
          The former never do.                                                                                                  
     •January 2016 Situation (Slide 16):                                                                                        
          -With the hard floor, taxpayers would have been                                                                       
          $3 in the hole, then paid royalties and property                                                                      
          tax, and then paid production tax.                                                                                    
10:24:20 AM                                                                                                                   
Senator  Stedman referred  to  extensive  dialogue over  the                                                                    
previous  years regarding  hardening the  floor. He  thought                                                                    
there  was $80  million worth  of $5  credits that  would go                                                                    
below the floor  in 2017; and suggested it  would change the                                                                    
investment dynamics  of companies it applied  to. He thought                                                                    
if the floor  was hardened it was important  to consider how                                                                    
to not negatively distort the economics of projects.                                                                            
Mr. Marks  stated that he  would present a slide  that would                                                                    
explicitly demonstrate  the effects of hardening  the floor,                                                                    
particularly regarding the economics of legacy fields.                                                                          
Mr. Marks looked  at slide 29, "Section 21:  Gross Value May                                                                    
Not Be Less Than Zero":                                                                                                         
     •High pipeline costs are not a trivial occurrence                                                                          
          -Pt Thomson, Smith Bay, etc.                                                                                          
     •In circumstances of high pipeline costs and low                                                                           
     prices gross value could be less than zero                                                                                 
     •Production tax value (ptv) is gross value less                                                                            
     upstream costs                                                                                                             
     •Losses are negative production tax value                                                                                  
     •If gross value has a floor of zero, those costs that                                                                      
     brought ptv below zero are never recovered                                                                                 
Mr.  Marks relayed  that the  tariff for  the Point  Thomson                                                                    
pipeline was  between $15/bbl and  $20/bbl. The cost  was so                                                                    
high due  to the  settlement between  the operators  and the                                                                    
state, in  which the state  had insisted that  the operators                                                                    
build  a pipeline  that could  transport 70,000  barrels per                                                                    
day. He thought  much of the capacity of the  pipe was empty                                                                    
and still  being paid for.  He mentioned very  high pipeline                                                                    
costs as the Western North Slope was developed.                                                                                 
10:27:44 AM                                                                                                                   
Senator  Stedman  asked  if  the  state  ring  fenced  Point                                                                    
Thomson, if  it would disallow  the producer to  take losses                                                                    
from  other areas  where there  was a  gain. He  asked about                                                                    
hypothetical  distortion  of  economics  by  different  ring                                                                    
fencing configurations.                                                                                                         
Mr.  Marks informed  that after  the initial  development of                                                                    
Point Thomson,  the project was  probably not  losing money.                                                                    
Ring  fencing  could  affect the  economics  of  large-scale                                                                    
development. Under  the existing code, he  thought the Smith                                                                    
Bay project would  get refundable credits, which  would be a                                                                    
huge amount  of money. He  discussed offsetting of  costs in                                                                    
the absence  of ring  fencing, and  thought Smith  Bay would                                                                    
probably be ring fenced.                                                                                                        
10:30:45 AM                                                                                                                   
Mr.  Marks  turned to  slide  30,  "Government Take:  Legacy                                                                    
Fields." He stated that for  the rest of the presentation he                                                                    
would show  government take graphs,  comparing SB 21  and HB
111.  He  explained that  the  four  basic elements  working                                                                    
dynamically in the  graphs were the hardening  of the floor,                                                                    
the repealing  of the  per-barrel credits,  the drop  in the                                                                    
tax rate (from 35 percent  to 25 percent), and progressivity                                                                    
at higher prices.                                                                                                               
Mr. Marks showed  slide 31, "Government Take - SB  21 vs. HB
111   -  Legacy   Fields,"  which   showed  a   graph  which                                                                    
illustrated  the  government  take for  legacy  fields.  The                                                                    
bottom  line showed  the competitiveness  boundary, and  the                                                                    
top line showed  HB 111. He wanted to focus  on the range of                                                                    
prices between  $50/bbl and  $70/bbl, where  the was  a huge                                                                    
gap between SB 21 and HB 111.                                                                                                   
10:32:06 AM                                                                                                                   
Mr. Marks showed slide 32, ""Government  Take - SB 21 vs. HB
111 -  Legacy Fields - Focus  on $50 - $70."  He stated that                                                                    
under SB 21,  the change-over from gross to  net happened at                                                                    
$65/bbl.  Under  HB  111,  the  switch  from  gross  to  net                                                                    
happened at  $40/bbl. He noted  that the  difference between                                                                    
the graph  and the previous graph  was entirely attributable                                                                    
to getting  rid of the  per-barrel credit. He  discussed the                                                                    
importance of the per-barrel credit  in tempering the tax to                                                                    
be within  international norms.  At $55/bbl,  the difference                                                                    
between the two  bills (for legacy fields)  was 8 percentage                                                                    
points and in government take (about $1.60/bbl).                                                                                
Senator  Wielechowski  referred  to  the  lower  green  line                                                                    
representing  the competitive  boundary, and  was distressed                                                                    
to  hear  the state  was  not  competitive. He  referred  to                                                                    
Security and Exchange Commission  (SEC) filings from Concoco                                                                    
Phillips; and  reported that in  2014 in Alaska  Conoco made                                                                    
$2.04  billion, and  lost $22  million in  the Lower  48. He                                                                    
discussed  company earnings  and losses.  He considered  the                                                                    
net income of  the company, and thought Alaska  was the most                                                                    
profitable place in the world where it did business.                                                                            
10:35:08 AM                                                                                                                   
AT EASE                                                                                                                         
10:35:13 AM                                                                                                                   
Co-Chair  Giessel   asked  if  Senator   Wielechowski  would                                                                    
provide  other   committee  members  with  a   copy  of  the                                                                    
documents he was referencing.                                                                                                   
Mr.  Marks replied  to Senator  Wielechowski's comments  and                                                                    
thought that  SB 21 showed  that the state  was competitive.                                                                    
He  compared  the SB  21  graph  line to  the  international                                                                    
competitive line  on the  graph on slide  32. He  thought it                                                                    
was   important  to   understand   the  difference   between                                                                    
ConocoPhillips'  operations in  Alaska versus  the Lower  48                                                                    
and the rest of the world.                                                                                                      
Mr. Marks  discussed different compositions between  gas and                                                                    
oil  in  the state  versus  elsewhere.  He stated  that  the                                                                    
economics  between oil  and gas  were  very significant.  He                                                                    
asserted that natural  gas markets in the Lower  48 had been                                                                    
poor,  as  had   oil.  He  noted  that   companies  did  not                                                                    
separately report oil and gas  income, but there were shared                                                                    
costs. He  discussed financial statement reporting,  and the                                                                    
difference between  oil and  gas on  a British  Thermal Unit                                                                    
(BTU) basis.  He did  not think it  was possible  to compare                                                                    
per-barrel numbers  between different geographic  areas that                                                                    
had different compositions of oil and gas.                                                                                      
10:37:22 AM                                                                                                                   
Senator  Stedman commented  on the  complexity of  the topic                                                                    
and asked Mr.  Marks to elaborate on  the difference between                                                                    
a net tax system and a gross  tax system, as well as how the                                                                    
proposed  bill would  affect the  system  under various  oil                                                                    
price contingencies.                                                                                                            
Mr.  Marks turned  back  to slide  11,  which explained  the                                                                    
calculation of tax  under SB 21. He stated that  there was a                                                                    
"higher  of" calculation  between  a net  calculation and  a                                                                    
gross  calculation.  Under SB  21  the  crossover point  was                                                                    
$65/bbl  (using cost  assumptions  with  legacy fields);  at                                                                    
which point  the net  calculation became  higher, and  a net                                                                    
system was in effect.                                                                                                           
Mr. Marks  showed slide 25,  which explained  major economic                                                                    
provisions of  HB 111.  He explained that  under HB  111 the                                                                    
dynamic shifted;  the per-barrel credit was  eliminated, and                                                                    
the  base rate  was reduced.  The crossover  point was  then                                                                    
changed from $65/bbl to $40/bbl.                                                                                                
Senator Stedman suggested that the  current year was under a                                                                    
gross tax  structure. He wondered  if the bill  was adopted,                                                                    
if the  crossover point would  be moved, and change  the tax                                                                    
structure  to  a  net  tax   system  as  well  as  create  a                                                                    
substantial change in tax that was due.                                                                                         
Mr.  Marks  referred  to  slide  32,  and  answered  in  the                                                                    
10:40:33 AM                                                                                                                   
Mr. Marks read slide 33, "Government Take: New (GVR) Oil."                                                                      
Mr.  Marks showed  slide 34  through  slide 37,  "Government                                                                    
Take: New (GVR)  Oil - SB 21 vs. HB  111," which each showed                                                                    
a line  graph. He  indicated that he  would break  the graph                                                                    
down  in to  three different  graphs  in order  to see  what                                                                    
happened  with  different  oil prices  between  $45/bbl  and                                                                    
$55/bbl and above.                                                                                                              
Mr. Marks shared  that with oil at  $45/bbl, government take                                                                    
went  from  230  percent  to 260  percent.  He  thought  the                                                                    
numbers were daunting, given the  cost of new oil. He stated                                                                    
that the  difference between SB 21  and HB 111 was  about 30                                                                    
percentage points in government  take, which was worth about                                                                    
60 cents  per barrel  at $45/bbl. He  also noted  that under                                                                    
both   curves  the   lines  were   significantly  over   the                                                                    
international competitive boundary.                                                                                             
Mr. Marks  explained that new  oil was allowed to  bring tax                                                                    
down to zero  with a per-barrel credit.  The government take                                                                    
under SB 21 was a high  take with no tax. When examining the                                                                    
graph  from  an  oil  price   of  $45/bbl  to  $55/bbl,  the                                                                    
difference between SB  21 and HB 111 was  about 6 percentage                                                                    
points, worth about  75 cents per barrel. Under  HB 111, the                                                                    
government  take was  about 23  percentage points  above the                                                                    
international competitive boundary.                                                                                             
Mr. Marks continued, and examined  the effects of oil priced                                                                    
between  $55/bbl   and  $65/bbl.  There  was   a  5  percent                                                                    
difference  between  SB 21  and  HB  111, which  equated  to                                                                    
approximately 90  cents per barrel. He  furthered that under                                                                    
HB 111, the  government take was about  17 percentage points                                                                    
above the international competitive boundary.                                                                                   
Mr. Marks  looked at higher  oil prices between  $65/bbl and                                                                    
$150/bbl;  at this  threshold he  thought SB  21 and  HB 111                                                                    
were not  too dissimilar.  He detailed  that up  until about                                                                    
$105/bbl, progressivity kicked in.                                                                                              
Mr. Marks turned  to slide 38, "Observations on  Gross & Net                                                                    
     •Gross value is higher than net value                                                                                      
     •Gross tax rates will generally be lower than net tax                                                                      
     •At low prices net value will be small and gross taxes                                                                     
     will generally be higher than net taxes                                                                                    
     •As prices increase, and costs become an increasingly                                                                      
     smaller share of gross value, net taxes will generally                                                                     
     be higher than gross taxes                                                                                                 
Mr. Marks commented that gross  tax system taxed on a higher                                                                    
base and a lower tax rate.                                                                                                      
10:44:38 AM                                                                                                                   
Mr. Marks showed slide 39, "Conclusion":                                                                                        
     -Notwithstanding the havoc low prices have played with                                                                     
     the state budget                                                                                                           
     -How is the misery of low prices allocated between                                                                         
     State and taxpayer?                                                                                                        
     -Generally there is a basic risk/reward symmetry in                                                                        
     the world between how investors and governments share                                                                      
     downside risk and upside potential (Slide 30)                                                                              
     -Alaska appears at odds with the general pattern                                                                           
Mr.  Marks went  back to  slide 31  to illustrate  how there                                                                    
were regressive  systems in the  world that taxed  on gross;                                                                    
in which  the investor bore  most of the downside  risk, but                                                                    
got most  of the upside  potential. He explained  that there                                                                    
were progressive systems in the  world that taxed on net; in                                                                    
which the government and producers  shared the downside risk                                                                    
and upside potential. He qualified  that most systems in the                                                                    
world  were  gross  systems, which  explained  the  downward                                                                    
slope  of the  competitive boundary  line on  the graph.  He                                                                    
reiterated  that regressive  systems were  high take  at low                                                                    
prices, and low  take at high prices. He  shared that Alaska                                                                    
was the  only place in  the world  where as oil  prices went                                                                    
up, the system was flipped from gross tax to net tax.                                                                           
Mr. Marks  continued discussing slide  39. He thought  SB 21                                                                    
was slightly at odds with  the general pattern of global tax                                                                    
systems. He  considered that HB  111 was noticeably  more at                                                                    
odds  with the  pattern,  especially  considering the  price                                                                    
range that was expected in the forthcoming years.                                                                               
Co-Chair  Giessel discussed  the agenda  and topics  for the                                                                    
afternoon joint meeting.                                                                                                        

Document Name Date/Time Subjects
Agendas - 4 - 15 - 17.pdf SRES 4/15/2017 9:00:00 AM
HB 111 - Presentation to SRES - Roger Marks - 4 - 15 - 17.pdf SRES 4/15/2017 9:00:00 AM
HB 111