Legislature(2009 - 2010)BARNES 124

04/09/2010 01:00 PM House RESOURCES

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Delayed to 1:30 pm Today --
Heard & Held
Moved HCS CSSB 243(RES) Out of Committee
<Bill Hearing Rescheduled to 4/12/10>
+ Bills Previously Heard/Scheduled TELECONFERENCED
        SB 305-SEPARATE OIL & GAS PROD. TAX/ DEDUCTIONS                                                                     
              [Contains brief mention of HB 337.]                                                                               
1:43:14 PM                                                                                                                    
CO-CHAIR NEUMAN  announced that the  first order of  business was                                                               
CS  FOR SENATE  BILL NO.  305(FIN)(title am),  "An Act  providing                                                               
that the  tax rate  applicable to  the production  of oil  as the                                                               
average production  tax value  of oil, gas  produced in  the Cook                                                               
Inlet sedimentary  basin, and  gas produced  outside of  the Cook                                                               
Inlet sedimentary  basin and  used in  the state  increases above                                                               
$30  shall  be   0.4  percent  multiplied  by   the  number  that                                                               
represents   the   difference   between  that   average   monthly                                                               
production tax  value and $30, or  the sum of 25  percent and the                                                               
product of 0.1  percent multiplied by the  number that represents                                                               
the difference between that average  monthly production tax value                                                               
and  $92.50,  except  that  the  total  rate  determined  in  the                                                               
calculation may not exceed 50  percent; providing for an increase                                                               
in  the rate  of tax  on  the production  of gas  as the  average                                                               
production  tax value  on a  Btu equivalent  barrel basis  of gas                                                               
produced  outside of  the Cook  Inlet sedimentary  basin and  not                                                               
used in  the state increases  above $30; relating to  payments of                                                               
the oil  and gas  production tax; relating  to availability  of a                                                               
portion  of the  money  received  from the  tax  on  oil and  gas                                                               
production  for appropriation  to the  community revenue  sharing                                                               
fund;  relating  to  the allocation  of  lease  expenditures  and                                                               
adjustments  to   lease  expenditures;   and  providing   for  an                                                               
effective date."                                                                                                                
1:43:42 PM                                                                                                                    
SENATOR BERT STEDMAN, Alaska State  Legislature, as sponsor of SB
305, mentioned a  letter from Dr. David Wood (ph),  which he said                                                               
shows what would  have happened in 2008 and 2009  with the cross-                                                               
subsidy  that is  currently in  place.   In response  to Co-Chair                                                               
Neuman, he suggested  either Roger Marks or Dr.  Wood could offer                                                               
explanation of the letter.  He  said Mr. Marks is a consultant to                                                               
the Legislative  Budget and Audit  Committee, and  he recommended                                                               
the committee invite him to answer questions.                                                                                   
1:46:02 PM                                                                                                                    
SENATOR STEDMAN,  in response to Representative  Guttenberg, said                                                               
he had  not yet had time  to have a discussion  with Commissioner                                                               
Galvin regarding his presentation at the last hearing on SB 305.                                                                
1:47:17 PM                                                                                                                    
MARILYN  CROCKETT,   Executive  Director,  Alaska  Oil   and  Gas                                                               
Association (AOGA), testifying in opposition  to SB 305, said she                                                               
would highlight key points of  her written testimony [included in                                                               
the committee packet.]   She said AOGA continues  to believe that                                                               
legislation that  proposes a major  tax, such as  production tax,                                                               
needs  to be  evaluated to  ensure that  it will  not impact  the                                                               
investment  climate  in  Alaska.     Ms.  Crockett  listed  three                                                               
concerns  AOGA  has  regarding  SB  305:    it  is  premature  to                                                               
establish  decoupling   at  this  time;  the   justification  for                                                               
decoupling is  flawed; and  determining an  appropriate mechanism                                                               
for cost  allocations is complex  and further analysis  should be                                                               
done to ensure a proper methodology is established.                                                                             
1:49:23 PM                                                                                                                    
MS.  CROCKETT, regarding  premature decoupling,  stated that  the                                                               
impetus  to pass  SB  305  appears to  be  driven  by the  Alaska                                                               
Gasline Inducement Act (AGIA) provision  that purports to provide                                                               
gas tax  fiscal certainty through  a lock-in provision on  May 1.                                                               
She said AOGA is concerned that  the apparent rush to address the                                                               
issue will yield a fix that is  not needed now and will result in                                                               
further complexity to Alaska's already complex tax regime.                                                                      
MS.  CROCKETT,  regarding  flawed justification  for  decoupling,                                                               
emphasized AOGA's  concern about the  idea of decoupling  and the                                                               
justification  that  is  being  offered.    She  stated  that  in                                                               
determining  the rate  of return  to the  state, there  are three                                                               
factors that  come into play:   the netback value, the  amount of                                                               
lease expenditures  or deductable  cost, and  the number  of Btu-                                                               
equivalent  barrels  that  are  being produced.    She  said  the                                                               
analysis  of  the   $2  billion  figure  was   based  on  generic                                                               
deductable cost  data released by  the Department of  Revenue for                                                               
the North  Slope for 2008, and  it also relied on  oil production                                                               
forecasts published  by the  State of Alaska.   She  stated, "The                                                               
way these  data were used in  the analysis yield figures  that we                                                               
believe are  not likely to  reflect actual circumstances  in 2020                                                               
when a  major gas [pipeline]  is likely  to begin operation.   In                                                               
particular, oil production in 2020  is likely to be significantly                                                               
lower than the  state estimate, which reflects  an annual decline                                                               
of  only 2.7  percent  during  the current  decade  from 2010  to                                                               
1:51:00 PM                                                                                                                    
MS.   CROCKETT  pointed   out  that   historically,  annual   oil                                                               
production decline  rates have been  5.1 percent during  the last                                                               
20 years  and 6.6 percent  during the  last five.   She explained                                                               
that the  difference in decline  rate means that whatever  the $2                                                               
billion analysis  used as the  figure for lease  expenditures per                                                               
barrel, the  cost per barrel  using these historic  decline rates                                                               
would be one-third  to almost two-thirds higher,  which means the                                                               
analysis significantly  overstated the taxable margin  per barrel                                                               
and overstated the tax rate  to the extent it shows progressivity                                                               
as applying.   Ms. Crockett  said these distortions  are inherent                                                               
simply  from the  design of  the  analysis that  produced the  $2                                                               
billion figure and did not  depend on the particular numbers that                                                               
analysis  used as  the  netback  prices of  gas  or  oil, or  the                                                               
deductible cost  per barrel.   She  said BP, in  a letter  to the                                                               
Senate Finance  Committee, dated March  12, 2010, stated  that it                                                               
is  possible in  some situations  that the  state would  actually                                                               
receive  more production  tax without  decoupling  than with  it.                                                               
Ms. Crockett  stated, "If, however, this  committee believes that                                                               
SB 305  needs to be passed  this session, then the  key effective                                                               
date  of  its  provisions,  oil  and  gas  decoupling,  and  cost                                                               
allocations, should  be deferred  until commercial  production of                                                               
Alaska North Slope gas commences."                                                                                              
1:52:08 PM                                                                                                                    
MS.  CROCKETT, regarding  AOGA's  concern that  the state  should                                                               
establish  a proper  cost methodology,  emphasized  that AOGA  is                                                               
troubled over  the potential cost  allocations that SB  305 would                                                               
require before major  gas development.  She  indicated that under                                                               
the   proposed  legislation,   tax  payers   would  be   required                                                               
immediately  to  begin  allocating  costs between  oil  and  gas,                                                               
whereas AOGA  recommends that tax  payers begin  allocating costs                                                               
between oil and gas when  commercial Alaska North Slope (ANS) gas                                                               
production  begins.    She said  developing  a  cost  methodology                                                               
allocation is a very complex issue.                                                                                             
MS. CROCKETT pointed  out that the enactment of  Alaska's Clear &                                                               
Equitable  Share (ACES)  was designed,  in  part, to  incentivize                                                               
investment  and  exploration   of  Alaska's  resources;  however,                                                               
requiring cost  allocations prior to major  gas development could                                                               
undermine that objective.  She continued:                                                                                       
     For example, if cost  allocations are required prior to                                                                    
     major gas development, how  would costs associated with                                                                    
     any lease or property, which  ... contains both oil and                                                                    
     gas  or ...  currently produces  only oil  and possibly                                                                    
     trace amounts  of gas, be  handled when  the production                                                                    
     of  the oil  provides information  about the  reservoir                                                                    
     and its  potential gas development?   Would any  of the                                                                    
     costs  be  required to  be  allocated  to gas,  thereby                                                                    
     raising the tax on current oil operations?                                                                                 
MS. CROCKETT  said on  the North Slope  there are  producers with                                                               
current oil  production from  one field  that are  also incurring                                                               
gas related  expenses for another  field without  gas production.                                                               
She  questioned  how  those  gas-related  expenditures  would  be                                                               
handled.  She  asked if the those expenditures  would be allowed,                                                               
for that  producer, against its oil-related  production income or                                                               
against  future  gas  revenues   from  future  gas  production  -                                                               
revenues that  the producer  may not have  until many  years into                                                               
the future, if at all.                                                                                                          
MS. CROCKETT said cost allocation  prior to major gas development                                                               
could also result in unintended  consequences for explorers.  She                                                               
said  currently an  explorer who  takes the  risk and  incurs the                                                               
cost  to  explore in  Alaska,  does  so  with the  knowledge  its                                                               
expenses  are deductible  regardless  of whether  oil  or gas  is                                                               
discovered.  She said SB 305  is not clear, and AGOA is concerned                                                               
that  decoupling might  be interpreted  to mean  that exploration                                                               
expenditures will be  deducted only for oil if  oil is discovered                                                               
and only for  gas if gas is  discovered.  She stated  that for an                                                               
explorer  with  no production,  or  for  one  that only  has  oil                                                               
production,  discovering gas  would  mean there  is nothing  from                                                               
which its exploration  costs can be deducted  for that discovery.                                                               
She said  the present  tax without  decoupling does  not penalize                                                               
explorers in  this way,  which is  another reason  why decoupling                                                               
should be deferred until commercial  gas productions begins.  She                                                               
reminded the committee that AOGA  has advocated for reexamination                                                               
of the entire  production tax structure to  ensure that structure                                                               
really is achieving the goals originally set in 2007.                                                                           
1:55:06 PM                                                                                                                    
MS. CROCKETT summarized her testimony.                                                                                          
1:55:44 PM                                                                                                                    
CO-CHAIR  NEUMAN  said he  agrees  with  much of  Ms.  Crockett's                                                               
testimony; however,  where his  opinion differs  is in  regard to                                                               
the statement  that AOGA feels  it is premature to  do decoupling                                                               
at this  time.  He  said an incentive of  AGIA is that  those who                                                               
participate in  the first  open season  would potentially  have a                                                               
lock-in on tax  rates for ten years.  The  current tax rates were                                                               
basically established  for oil under  ACES.  Because of  that, he                                                               
said, the  aforementioned lock-in  would be  at those  tax rates,                                                               
which could  have a  substantial negative  effect on  the state's                                                               
general fund revenue.                                                                                                           
CO-CHAIR  NEUMAN offered  his understanding  that  the intent  of                                                               
some of  the language in  SB 305 is to  allow the state  to "come                                                               
back again  and look at  how taxes should be  regulated," because                                                               
gas is a product different from oil and should be treated thus.                                                                 
1:58:52 PM                                                                                                                    
CO-CHAIR  JOHNSON  requested   Ms.  Crockett  specify  particular                                                               
points in the proposed legislation that are of concern.                                                                         
1:59:35 PM                                                                                                                    
MS. CROCKETT said she cannot  point to specific provisions in the                                                               
bill  right now,  but she  will get  that to  members.   She said                                                               
essentially,  it  all depends  on  the  operation that  is  being                                                               
conducted.  She continued:                                                                                                      
     If you are  producing oil with trace amounts  of gas in                                                                    
     an existing  field, you have  a single  facility that's                                                                    
     doing that.  But as  you spend time and gain experience                                                                    
     in  developing  that field,  you  learn  more and  more                                                                    
     about the  reservoir, and  eventually you  learn enough                                                                    
     about  that reservoir  - you  determine  where the  gas                                                                    
     component of it is, if you  will.  So, in some respects                                                                    
     you  are  spending dollars,  your  primary  goal is  to                                                                    
     produce oil,  but at the  same time you're  also having                                                                    
     the  benefit of  learning  more  about that  reservoir,                                                                    
     which, in worst case, somebody  could point to and say,                                                                    
     "Well,  no, ...  we believe  that this  portion of  the                                                                    
     expenses  that  you've  incurred really  are  aimed  at                                                                    
     determining what  the reservoir qualities are  and will                                                                    
     benefit gas."  That's one example.                                                                                         
2:00:34 PM                                                                                                                    
CO-CHAIR JOHNSON  said producers  at Point  Thomson are  going to                                                               
sink a  well that brings up  gas, then turn that  into liquid and                                                               
put the  gas back.  He  asked if, under  SB 305, that would  be a                                                               
gas expenditure because  the producer is learning  about what the                                                               
fuel  is  going to  be,  or  if it  would  be  considered an  oil                                                               
2:01:07 PM                                                                                                                    
MS. CROCKETT  said she  is not  sure she  is qualified  to answer                                                               
that question, but can find out the answer for the committee.                                                                   
2:01:23 PM                                                                                                                    
CO-CHAIR JOHNSON  expressed his concern that  Point Thomson could                                                               
be declared  through regulation  to be a  gas field,  which would                                                               
mean its expenditures  would not be allowed as  a deduction until                                                               
it sells the gas,  which could be ten years down  the road, if at                                                               
all.   The result, he said,  would be the shutting  down of Point                                                               
Thomson.   Companies may decide  that it  is not worth  the risk.                                                               
He said he wants the committee to focus on this issue.                                                                          
2:03:00 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG,  in   regard  to  Co-Chair  Johnson's                                                               
question,  said he  believes it  is even  more complex  than that                                                               
because generally  there are multiple partners  in any operation.                                                               
He questioned  how costs  and profits would  be allocated  to one                                                               
partner versus  another.  He  asked, "Somebody has  an investment                                                               
for  one purpose  or another,  and they  ... want  to see  what's                                                               
allocated for gas  or oil ... even though they're  doing the same                                                               
thing.  ... [Does] that happen now?"                                                                                            
2:04:21 PM                                                                                                                    
MS. CROCKETT replied  she does not believe so.   One reason it is                                                               
so  complicated is  the  example  that Representative  Guttenberg                                                               
just used.   A  further complication, she  related, is  the whole                                                               
issue of the joint interest billings.   When partners do not have                                                               
"all that data,"  the best they can  do to pay taxes  is based on                                                               
the  joint interest  billing  received from  the  operator.   She                                                               
said, "They  have no  way of  knowing -  assuming that  we're now                                                               
separating out  costs for gas and  for oil - how  that allocation                                                               
was ... made."                                                                                                                  
2:05:07 PM                                                                                                                    
REPRESENTATIVE  TUCK  directed  attention   to  language  in  Ms.                                                               
Crockett's  written   testimony,  on  page  2,   second  to  last                                                               
paragraph, which  relates that oil  production in 2020  is likely                                                               
to  be  lower than  the  state  estimate,  and which  shows  some                                                               
historic  decline rates.   He  asked Ms.  Crockett if  she has  a                                                               
forecast, and he  questioned, "What's wrong with  the 2.7 percent                                                               
current decline rate?"                                                                                                          
2:06:02 PM                                                                                                                    
MS. CROCKETT  said she  is quite certain  that the  Department of                                                               
Revenue wishes it  had a crystal ball to figure  out what decline                                                               
rates would be, and  she said she wishes the same.   She said she                                                               
is confident that the department did  the best job it could based                                                               
on the information  it has to come up with  those estimates.  She                                                               
pointed  out that  these  are estimates  were  made currently  to                                                               
predict   the  production   levels   in   the  future;   however,                                                               
historically, the decline  rate has been much  greater than that.                                                               
The whole point  of the discussion is that  nobody's figures will                                                               
be accurate  because there is  no way of knowing  what production                                                               
will be.                                                                                                                        
2:07:13 PM                                                                                                                    
REPRESENTATIVE  TUCK  asked if  the  2.7  percent was  forecasted                                                               
before  the committee  passed out  some  tax credit  bills as  an                                                               
incentive to bring in more production.                                                                                          
2:07:34 PM                                                                                                                    
MS. CROCKETT said she suspects that  is true, but said she cannot                                                               
speak for Commissioner Galvin.                                                                                                  
2:07:48 PM                                                                                                                    
CO-CHAIR NEUMAN said  Governor Sean Parnell is  trying to address                                                               
the decline rate with HB 337.   He indicated that the legislature                                                               
is reactive  when considering industry  ups and downs  in decline                                                               
rates, and continues to create jobs in the state.                                                                               
2:08:21 PM                                                                                                                    
REPRESENTATIVE  TUCK, in  regard  to the  Point Thomson  scenario                                                               
presented by Co-Chair Johnson, asked  if Point Thomson is able to                                                               
take advantage  of capital  credits right  now with  "the coupled                                                               
MS.  CROCKETT replied  that she  does  not know  the answer,  but                                                               
could find out.                                                                                                                 
2:08:57 PM                                                                                                                    
CO-CHAIR  NEUMAN asked  Ms. Crockett  to produce  information for                                                               
the  committee  regarding   how  a  field  is   developed  -  the                                                               
geological work, the  development, the credits, and  the ratio of                                                               
gas and oil.                                                                                                                    
2:09:46 PM                                                                                                                    
CO-CHAIR  JOHNSON  offered  his understanding  that  Commissioner                                                               
Galvin had [nodded]  his head in confirmation  that Point Thomson                                                               
is able to take advantage of the tax credits under current law.                                                                 
2:10:20 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  drew attention  to the  final sentence                                                               
in the  first paragraph under  "Decoupling is Premature,"  in the                                                               
written  testimony  of  Ms.  Crockett, which  read:    "And  that                                                               
failure  to  address the  dilution  issue  prior  to that  May  1                                                               
deadline might prohibit a future  correction."  He suggested that                                                               
it might  not.  He  asked, "Isn't  it possible to  correct things                                                               
that  are mutually  beneficial to  both parties  after the  May 1                                                               
2:10:58 PM                                                                                                                    
MS. CROCKETT answered that she believes that is correct.                                                                        
2:11:04 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG   asked  if   it  is   Ms.  Crockett's                                                               
contention  that   "we  haven't  gone  anywhere   far  enough  in                                                               
exploring the dilution issue."                                                                                                  
2:11:17 PM                                                                                                                    
MS. CROCKETT responded  that AOGA's primary concern  is that this                                                               
is a  very complicated and comprehensive  situation, and everyone                                                               
believes they  are trying to  do the  right thing; however,  in a                                                               
complicated tax  provision such as  this, everyone runs  the risk                                                               
of "not getting it right."                                                                                                      
2:12:14 PM                                                                                                                    
REPRESENTATIVE SEATON,  in regard to decoupling  being premature,                                                               
directed attention to AS 43.90.320(a), which read:                                                                              
     Sec. 43.90.320.  Gas production tax exemption.                                                                             
          (a) If a person qualified for a resource                                                                              
     inducement under AS 43.90.300  agrees under (c) of this                                                                    
     section, the person is entitled  to an annual exemption                                                                    
     from the state's gas production  tax in an amount equal                                                                    
     to the  difference between the  amount of  the person's                                                                    
     gas production tax obligation  calculated under the gas                                                                    
     production tax in  effect during that tax  year and the                                                                    
     amount of  the person's  gas production  tax obligation                                                                    
     calculated under  the gas production  tax in  effect at                                                                    
     the start of  the first binding open  season held under                                                                    
     this chapter. If the difference  is less than zero, the                                                                    
     gas production tax exemption is zero.                                                                                      
REPRESENTATIVE SEATON noted  that exemption is only  for 10 years                                                               
of  production.   He asked  if  it is  AOGA's view  that the  gas                                                               
production tax in  effect at the start of the  first binding open                                                               
season includes a  coupling with oil or "will be  the ACES amount                                                               
of  gas tax  and progressivity  and  those elements  alone."   He                                                               
said, "I  guess what  I'm trying  do is  find out  whether AOGA's                                                               
position is that  the gas tax is irrelevant  whether it's coupled                                                               
or decoupled, as far as the law goes for this inducement."                                                                      
2:14:09 PM                                                                                                                    
MS. CROCKETT responded that AOGA's  primary concern is the impact                                                               
on producers and  explorers today, and it is  the cost allocation                                                               
issue that is the most troubling.                                                                                               
2:14:28 PM                                                                                                                    
REPRESENTATIVE  SEATON  said  the   committee  has  an  important                                                               
decision to make,  and the basis of that decision  is to find out                                                               
whether gas  production tax is  the whole  system of oil  and gas                                                               
taxes or whether  it's the tax rate and  progressivity applied to                                                               
gas at  the start of  the open season.   He  asked if AOGA  has a                                                               
position on  whether it makes any  difference to the tax  rate on                                                               
gas whether it is coupled or not.                                                                                               
2:15:12 PM                                                                                                                    
MS. CROCKETT replied that she is  not sure AOGA has answered that                                                               
2:15:30 PM                                                                                                                    
REPRESENTATIVE  P.  WILSON  offered her  understanding  that  Ms.                                                               
Crockett had  testified that  AOGA would  be against  any measure                                                               
that would make producers have to pay more.                                                                                     
2:15:54 PM                                                                                                                    
MS. CROCKETT said if she had  stated thus, it was not her intent.                                                               
She  clarified AOGA's  concern  is  in regard  to  the impact  on                                                               
explorers  and  producers  today  and  how  costs  are  allocated                                                               
between the  expenses that  they incur that  they can  then apply                                                               
against the  tax that they  need to pay to  get to the  tax rate.                                                               
She  said, "We  don't know  what  any of  that means  yet."   For                                                               
example, she questioned  whether a company exploring  for oil but                                                               
instead  finding  gas  would  only  be  allowed  to  apply  those                                                               
expenses  against  gas.    She  stated  that  producers  will  be                                                               
required to allocate their costs  between what they spend for oil                                                               
and what they  spend for gas, separately.  So,  the incentive for                                                               
a company  that does not  currently have gas production  today to                                                               
explore for gas is reduced.                                                                                                     
2:17:34 PM                                                                                                                    
The committee took an at-ease from 2:17 p.m. to 2:23 p.m.                                                                       
2:23:37 PM                                                                                                                    
ROGER MARKS, Logsdon  & Associates, Inc., offered  a reminder for                                                               
the  record that  Logsdon &  Associates, Inc.  is under  contract                                                               
with the Legislative Budget and  Audit Committee to assist on gas                                                               
taxation   issues.     He  offered   a  PowerPoint   presentation                                                               
interpreting the  presentation from the Department  of Revenue on                                                               
April 7  [entitled, "Comments  on CSSB 305(FIN)"].   He  said his                                                               
remarks would  relate how the  department's results  were derived                                                               
and what  they mean.   He directed attention  to [slide 2  of his                                                               
presentation, which  shows] page  8 of  the DOR  presentation, to                                                               
the graph in the upper left-hand  quadrant.  The graph shows that                                                               
under $120 oil  and $8 gas, there would be  $8.5 billion in total                                                               
oil and gas  taxes if taxes were calculated  separately, and $5.5                                                               
billion if calculated combined.  He continued:                                                                                  
     Again, we're going to focus on what was called the tax                                                                     
          that's apportionable to gas, under these two                                                                          
     scenarios:   the separate gas  calculated - if  oil and                                                                    
     gas  are  calculated  separately  -  at  $2.3  billion,                                                                    
     versus the attributed  gas if ... under  the status quo                                                                    
     with oil and gas taxes are calculated combined.                                                                            
2:25:57 PM                                                                                                                    
MR. MARKS, [referring to the  information on slide 4], said gross                                                               
value  is derived  by subtracting  transportation costs  from the                                                               
market price.   That amount is  then multiplied by the  amount of                                                               
oil or barrels  of oil equivalent (BOE), and  then upstream costs                                                               
are subtracted,  and the result  is a tax base  and progressivity                                                               
rate based on  the production tax value per BOE  equivalent.  Mr.                                                               
Marks  offered  a  scenario to  illustrate  this  calculation  as                                                               
     We start  out with  $120 and  the $8,  and as  we march                                                                    
     down, we  subtract the transportation costs  to get the                                                                    
     gross  value.   These  are volumes:    we used  500,000                                                                    
     barrels a  day of oil and  4.5 Bcf a day  of gas, which                                                                    
     on  a BOE  ...  is  750,000 barrels  of  oil.   And  we                                                                    
     multiply the gross  value times the BOE ...  to get the                                                                    
     total gross  value.  We  add them  up, we take  out the                                                                    
     non-royalty portion  - one eighth  - since tax  is only                                                                    
     paid  on  the  non-royalty  portion, and  we  had  $4.4                                                                    
     billion  in costs,  so track  that for  a net  value of                                                                    
     $18,754 billion,  and divide  that by the  total amount                                                                    
     of  BOEs for  the year  - 456  million -  we get  a net                                                                    
     value of $46.98.   And based on  that, progressivity is                                                                    
     calculated on the  portion above $30, so  based on that                                                                    
     we  get  a   25  percent  tax  rate   and  6.7  percent                                                                    
     progressivity for a tax rate  of 31.79 percent.  And we                                                                    
     multiply  that  by the  production  tax  value, and  we                                                                    
     subtract  the  credits,  and  we  get  a  tax  of  $5.5                                                                    
     billion, and that matches what the administration got.                                                                     
2:28:00 PM                                                                                                                    
MR. MARKS said  AGIA has stabilized the gas portion  of that tax.                                                               
In  response to  Representative Seaton,  he explained  that under                                                               
AGIA, any shipper  that subscribes to the open  season receives a                                                               
tax exemption  equal the difference  between current tax  and the                                                               
tax in place at the time of the open season.                                                                                    
2:29:48 PM                                                                                                                    
MR.  MARKS  said with  $5.5  billion  in  total taxes,  then  the                                                               
question is:  How  much of that is attributable to  gas?  He said                                                               
this is a  question that the Department of Revenue  had to answer                                                               
to  implement the  AGIA provision,  and  the department  recently                                                               
adopted regulations  to do  that:   15 AAC 55  220.   Because the                                                               
AGIA tax  inducement applied only to  gas and the current  tax is                                                               
combined  with  oil,  it  was necessary  for  the  department  to                                                               
ascribe that  portion which is  gas; the proportion of  the total                                                               
gross value that was  gas is the amount of the  total tax that is                                                               
attributable to  gas.  He  explained that the department  was not                                                               
allocating costs; it was allocating  tax.  Using the gross value,                                                               
the biggest determinant  of the difference between  oil taxes and                                                               
gas  taxes   is  the  difference   in  gross   value;  therefore,                                                               
allocating  the  tax   by  means  of  the   gross  value,  seemed                                                               
reasonable to [Logsdon & Associates].                                                                                           
2:31:41 PM                                                                                                                    
MR.  MARKS  turned   to  the  information  on  slide   4  of  his                                                               
presentation, which  shows that  the gross value  for oil  is $20                                                               
billion  and the  gross value  for [gas]  is $5.7  billion, which                                                               
proportionally is 78 percent oil and  22 percent gas.  He said 22                                                               
percent  multiplied by  "the  5.5 billion"  results  in what  DOR                                                               
called  the "attributed  gas tax"  of  $1.2 billion.   Mr.  Marks                                                               
turned to  slide 6, which  shows what taxes  would be if  oil and                                                               
gas were decoupled.   In the example, the total  gross values for                                                               
oil  and gas  are the  same,  and the  cost of  $4.4 billion  was                                                               
allocated based  on the relative  amount of BOEs,  which resulted                                                               
in $1.76 billion  in costs allocated to oil and  $2.64 billion in                                                               
costs  allocated to  gas.   If those  amounts are  subtracted and                                                               
then divided by  the number of BOEs, the result  is the net value                                                               
of gas per BOE  of $9.98.  Since it is less than  $30 there is no                                                               
progressivity.   There is  a 25  percent tax  rate, and  with the                                                               
credits,  there  is  a  tax  of $0.3  billion,  which  Mr.  Marks                                                               
reiterated is  what the department  figured.  He said,  "So, what                                                               
we're looking  at is the attributed  tax under the status  quo of                                                               
$1.2  billion for  gas versus  if the  gas was  calculated alone:                                                               
$0.3 [billion]."                                                                                                                
2:34:03 PM                                                                                                                    
MR. MARKS  directed attention to slide  7, and said if  the $9.98                                                               
net  value per  BOE from  slide 6  is put  on a  per million  Btu                                                               
equivalent  and divided  by  6, the  value of  the  gas would  be                                                               
$1.66/MMBtu.   Under the  combined methodology  the tax  rate for                                                               
gas was based on the combined net  value of $46.98 per BOE.  When                                                               
that amount is divided by 6, the  result is $7.83 per Btu.  Using                                                               
the status  quo and the methodology  to ascribe tax to  gas under                                                               
the department's regulations, gas with  a value of $1.66 would be                                                               
taxed as  if it had a  value of $7.83,  he said.  He  added, "And                                                               
this is what  would be locked in under AGIA  using the status quo                                                               
tax system."                                                                                                                    
2:35:53 PM                                                                                                                    
REPRESENTATIVE  SEATON  asked Mr.  Marks  to  clarify that  under                                                               
existing regulations,  the gas  system in place  at the  start of                                                               
open season would be "basically the 1.199."                                                                                     
2:36:12 PM                                                                                                                    
MR.  MARKS  responded,  "Given these  assumptions  of  this  much                                                               
volume gas, this much volume oil,  [and] these prices - under ...                                                               
the status quo  tax and the department's regulations  - yes, that                                                               
would  be  ... what  would  be  stabilized  for ...  someone  who                                                               
subscribes to the AGIA open season."                                                                                            
2:36:38 PM                                                                                                                    
MR.  MARKS,  directing  attention   to  slide  8,  reviewed  that                                                               
combining oil and gas dilutes the  oil tax down, but related that                                                               
it also "dilutes the  gas value up."  The net  result is that oil                                                               
tax goes down  more than the gas  tax goes up, which  is not only                                                               
bad for the state's finances, but  is also bad for the producers.                                                               
He concluded  that locking in a  rate that may be  too high would                                                               
negate the  value of the AGIA  inducement and may not  be healthy                                                               
for  the project.   He  said,  "This underscores  the problem  of                                                               
combining substances of vastly different values for taxation."                                                                  
2:38:47 PM                                                                                                                    
PATRICK GALVIN, Commissioner, Department  of Revenue, in response                                                               
to Chair  Neuman, said  in general  Mr. Marks'  observations have                                                               
been accurate.  However, he said,  "It's just a matter of how you                                                               
decide to look at a combined  tax system."  In the aforementioned                                                               
assumption, wherein oil is $120 and  gas is $8, the taxable value                                                               
of the  oil is being  moved faster than the  value of the  gas is                                                               
being increased,  because the oil  is on progressivity  while the                                                               
gas is not.  He continued as follows:                                                                                           
     If you were  in a different situation  where the values                                                                    
     were  at different  places  on  the progressivity,  you                                                                    
     could end  up in the  opposite direction where  ..., by                                                                    
     combining them,  the gas is  coming down and  the oil's                                                                    
      going up.  It's just that when you accept a combined                                                                      
     system, you're saying that we're going to tax the oil                                                                      
     and the gas as one mix going forward.                                                                                      
COMMISSIONER  GALVIN said  Mr. Marks'  observation regarding  the                                                               
implication for the open season is  valid.  He said that from the                                                               
perspective of  the state's policy  makers, the question  is what                                                               
to have  on the  table going  into the open  season.   Having the                                                               
status quo will result in a  higher gas tax, which means that the                                                               
state would be providing "less  of an attractive inducement going                                                               
in."  On  the other hand, he said, the  state could always "offer                                                               
it lower after the open season and bring that down."                                                                            
2:42:02 PM                                                                                                                    
COMMISSIONER  GALVIN,  regarding  the overall  economic  picture,                                                               
said a system  that combines oil and gas makes  the gas component                                                               
part  of the  conversation going  forward.   He  said that  issue                                                               
should be included  as part of the  consideration for decoupling.                                                               
He  said   what  he  tried   to  show  during   the  department's                                                               
presentation  last Wednesday,  and what  Mr. Marks  is trying  to                                                               
show,  is that  the  state  can decouple  now,  but  it can  also                                                               
decouple later  without any financial impact  "because you're not                                                               
locking in anything lower."                                                                                                     
2:42:58 PM                                                                                                                    
CO-CHAIR  NEUMAN  said he  thinks  that  the  May 1  lock-in  was                                                               
Representative Seaton's  question and  AOGA's concern.   He asked                                                               
Commissioner Galvin if that lock-in could result in a lawsuit.                                                                  
2:43:41 PM                                                                                                                    
COMMISSIONER  GALVIN  answered that  the  Department  of Law  has                                                               
looked at this  issue very closely, and the issue  with regard to                                                               
what  is being  locked in  is the  gas production  tax obligation                                                               
that is  in effect on April  30.  There are  questions pertaining                                                               
to exactly how  much is locked in, what is  being locked in under                                                               
the status quo, and what would be  locked in if SB 305 is passed.                                                               
He stated,  "The fact that  the status  quo is higher  means that                                                               
you can  implement SB 305 after  the open season, it  will reduce                                                               
the  gas  production tax  obligation,  and  therefore it  doesn't                                                               
implicate what's been locked in; it's  lower than it, so it won't                                                               
create an  exemption -  it won't impact  the ability  to actually                                                               
put in place  SB 305 as it's currently structured  after the open                                                               
2:45:35 PM                                                                                                                    
CO-CHAIR NEUMAN  said the committee has  given much consideration                                                               
to the  equanimity of the  inducements and the issue  of changing                                                               
rules after  the license is  done.  He asked  Commissioner Galvin                                                               
to think about that.                                                                                                            
2:46:02 PM                                                                                                                    
REPRESENTATIVE  TUCK asked  if there  are  North Slope  producers                                                               
that do only oil or only gas.                                                                                                   
2:46:35 PM                                                                                                                    
COMMISSIONER  GALVIN  said he  thinks  the  question is  actually                                                               
whether the  fields are producing one  or the other, and  he said                                                               
that depends on  the field.  For example, he  said Prudhoe Bay is                                                               
producing tremendous  amounts of oil and  gas simultaneously, and                                                               
currently the gas  is being re-injected.  In other  fields on the                                                               
North  Slope where  there is  production, it  is almost  entirely                                                               
oil,  with very  little  gas that  has  to be  handled.   In  the                                                               
Foothills the inverse  may occur, where there  is almost entirely                                                               
gas and very little, if any, oil.   He said currently there is no                                                               
one who  is producing only  gas, because "there's nobody  to sell                                                               
it to."                                                                                                                         
2:47:36 PM                                                                                                                    
REPRESENTATIVE  TUCK  recalled  that  Mr.  Marks  had  said  that                                                               
combining  oil  and  gas  dilutes  the  gas  tax  up.    However,                                                               
regarding slide 3, he said, "We  still see with it being combined                                                               
... in  status quo that  overall everything is down,  even though                                                               
they dilute the  gas tax up."  He asked,  "Wouldn't that still be                                                               
good for the producers?"                                                                                                        
2:48:26 PM                                                                                                                    
MR. MARKS  confirmed that  with combining,  oil is  diluted down,                                                               
which  many   people  think  undermines  the   state's  financial                                                               
interest,  and that  is the  purpose of  the hearing  today.   He                                                               
said, "That  which is valued  more gets diluted down;  that which                                                               
is valued less gets diluted up."   He said he is not guaranteeing                                                               
the future, but if gas was worth  more than it is today, it would                                                               
be possible that  "the combining of them" would raise  taxes.  He                                                               
indicated  that  the   rationale  behind  SB  305   is  that  the                                                               
volatility could be removed by separating the substances.                                                                       
2:49:35 PM                                                                                                                    
REPRESENTATIVE TUCK asked Mr. Marks  to explain how combining oil                                                               
and gas would be bad for producers.                                                                                             
2:49:56 PM                                                                                                                    
MR. MARKS explained  that the result of combining is  that tax on                                                               
gas then  goes from $0.3  billion to  $1.2 billion, which  is bad                                                               
for  the  producers.    What  undermines  the  state's  financial                                                               
interest  is that  the  oil  changes from  $8.2  billion to  $4.3                                                               
billion, and "the oil effect  overwhelms the gas," so overall the                                                               
tax  revenues change  from  $8.5  billion to  $5.5  billion.   He                                                               
added, "Whereas  when you  go from  the status  quo to  the bill,                                                               
state's ... revenues go up [and] the gas taxes go down."                                                                        
2:51:36 PM                                                                                                                    
REPRESENTATIVE TUCK said  he hears what is being said,  but it is                                                               
the first  time he has  heard anyone  say that in  one particular                                                               
scenario, what is bad for the state is bad for producers.                                                                       
2:52:23 PM                                                                                                                    
REPRESENTATIVE  OLSON expressed  concern that  the committee  has                                                               
until April 18,  2010, to address this issue.   He said the ratio                                                               
of the aforementioned $120/$8 example  is 15:1, but currently oil                                                               
and gas prices are approximately  20:1.  He asked, "Wouldn't that                                                               
strengthen  the argument  of  the  sponsor of  this  bill on  the                                                               
concerns for  doing something in the  next 10 days?   Because the                                                               
numbers that  are on  the screen are  off significantly  based on                                                               
recent prices."                                                                                                                 
2:53:07 PM                                                                                                                    
MR. MARKS  responded that Logsdon  & Associates, Inc.,  has never                                                               
made any representation  on what future prices  will be; however,                                                               
the bigger the  gap between oil and gas, the  more the status quo                                                               
undermines the  state's financial  interest by having  gas dilute                                                               
oil taxes.                                                                                                                      
2:53:29 PM                                                                                                                    
REPRESENTATIVE  OLSON recollected  that a  couple years  ago, the                                                               
legislature was emphatically  told that the ratio  would never be                                                               
20:1 or 15:1.                                                                                                                   
2:53:42 PM                                                                                                                    
COMMISSIONER  GALVIN indicated  that historically  the ratio  has                                                               
been between  8:1 and  12:1.   He said no  matter the  ratio, the                                                               
relationship  holds that  when decoupling  is done,  the gas  tax                                                               
goes down  and the overall tax  generally goes up.   He said, "If                                                               
you're concerned  about the  fact that  oil tax  is significantly                                                               
lower going into  the open season, that can be  changed after the                                                               
open season - that's not at stake."                                                                                             
2:55:28 PM                                                                                                                    
REPRESENTATIVE   GUTTENBERG  opined   that  the   key  issue   in                                                               
considering the  right course  of action is  figuring out  if the                                                               
best position for  the state on May  1 would be to  have a higher                                                               
or a  lower gas tax.   He asked if  it is an  accurate assessment                                                               
that the state would be better  off with a higher gas tax without                                                               
decoupling than with  decoupling when the producers  come back to                                                               
negotiate fiscal terms.                                                                                                         
2:56:40 PM                                                                                                                    
COMMISSIONER  GALVIN   responded  that   although  that   is  one                                                               
consideration, he would  not say that is  the soul consideration.                                                               
He indicated that  the state is balancing the desire  to have the                                                               
inducement be attractive with the  ability to retain flexibility.                                                               
He said the  AGIA inducement was to ensure that  the state retain                                                               
sovereignty over oil  tax - that gas taxes would  be on the table                                                               
at the  open season.  The  legislature can only surmise  what tax                                                               
system  will work  today and  in  the future.   Furthermore,  the                                                               
legislature  will  decide whether  certain  aspects  of a  system                                                               
should be fixed now or later.                                                                                                   
2:58:47 PM                                                                                                                    
CO-CHAIR JOHNSON  expressed concern that  the state does  not put                                                               
itself in "a  weaker negotiating point," because there  will be a                                                               
"contract parade  on the pipeline,"  and "they're going  to agree                                                               
to something."                                                                                                                  
2:59:56 PM                                                                                                                    
COMMISSIONER  GALVIN responded  that in  establishing a  starting                                                               
point for negotiations, neither SB  305 nor the status quo offers                                                               
a  "clean   choice."    He   explained  that  at   certain  price                                                               
differentials, the  state will have  much less revenue  under the                                                               
status quo than  if it separates.  Going in  with a higher number                                                               
would limit  the state's ability  to change the gas  portion, but                                                               
would still  allow the  state to  maintain complete  control over                                                               
the oil.   He  said there  is no clear  path.   He said  from the                                                               
governor's perspective, the  interests align more on  the side of                                                               
leaving the  status quo, because  it leaves more  flexibility and                                                               
does not create  "a big shift of things just  going into the open                                                               
CO-CHAIR   NEUMAN   commended   Commissioner   Galvin   for   his                                                               
cooperation on this issue.                                                                                                      
3:03:05 PM                                                                                                                    
REPRESENTATIVE  SEATON reminded  everyone that  the charts  being                                                               
looked  at [on  slide 2]  do  not reflect  current numbers;  they                                                               
reflect a  situation in which there  is 4.5 Bcf/d of  gas flowing                                                               
at various  rates.  He asked  for confirmation that if  the state                                                               
chose  this   scenario,  it  would   be  guaranteeing   that  the                                                               
inducement  would be  whatever  is negotiated  and  could not  be                                                               
"higher than this 0.3 as shown under the left-hand column."                                                                     
COMMISSIONER GALVIN answered, "Not  entirely."  He explained that                                                               
the primary issue  is that the cost allocation method  is not set                                                               
in statute.  He directed attention  to slide 2, which assumes not                                                               
only the  4.5 Bcf/d  of gas  mentioned by  Representative Seaton,                                                               
but also  500 Mbbl/d in oil  production.  He said  at the $120/$8                                                               
scenario, the  $300 million  changes to $800  or $900  million if                                                               
the point of  production cost allocation method is used.   If the                                                               
system is  changed so  that 90  percent of the  costs are  put on                                                               
oil, then "it  goes up to $1.1 [million]."   He said, "It's lower                                                               
than the  status quo,  but it's  uncertain until  the regulations                                                               
that would allocate costs are in play."                                                                                         
3:06:44 PM                                                                                                                    
CO-CHAIR NEUMAN said he thinks the  500 Mbbl/d of oil and the 4.5                                                               
Bcf/d of  gas reflect  fairly accurate numbers  on which  to base                                                               
the differential.                                                                                                               
3:07:34 PM                                                                                                                    
MR. MARKS advised:                                                                                                              
     The  higher rate  that's  being locked  in  - would  be                                                                    
     locked  in  under the  status  quo  -  is ...  a  30-32                                                                    
     percent tax  rate on something  worth $1.66.   So, just                                                                    
     keep   that   in   mind  as   you   think   about   the                                                                    
     attractiveness  of locking  that  in, which  predicates                                                                    
     that higher number.                                                                                                        
3:08:34 PM                                                                                                                    
MR. MARKS returned to his  presentation and directed attention to                                                               
slide 9, which addresses the power  of the status quo.  He opined                                                               
that  it would  be a  mistake to  assume that  future discussions                                                               
will focus solely on gas,  because the same producers who produce                                                               
gas also produce oil.  He said  the argument will come up that if                                                               
the state  becomes unhappy  with gas taxes,  then it  can extract                                                               
value  from producers  through  oil tax  increases.   Because  of                                                               
that,  Mr.  Marks   said  he  thinks  there   is  a  considerable                                                               
likelihood that the issue will  move beyond gas, and oil taxation                                                               
will be predictably part of  the discussion.  Therefore, whatever                                                               
the status  quo is at the  time inevitably will become  the frame                                                               
of reference for  evaluation, and the state  may be inadvertently                                                               
or  inevitably locking  in oil  taxes on  May 1,  as well  as gas                                                               
3:10:13 PM                                                                                                                    
MR. MARKS  concluded by  talking about  the Point  Thomson issue,                                                               
which brought  up what  happens in developing  a gas  field under                                                               
both the current  tax and under SB  305.  He stated  that the way                                                               
current  law  works  and  the  way  SB  305  would  work  is  not                                                               
different.  He continued as follows:                                                                                            
     Let's say  Point Thomson had  no condensate - it  was a                                                                    
     pure gas field.   If you're a North  Slope oil producer                                                                    
     incurring expenses  to develop  Point Thomson,  the way                                                                    
     ...  the  statute works  now  ...,  whatever costs  you                                                                    
     incur, you  allocate them between  oil or gas  based on                                                                    
     the amount  of oil or gas  you produce.  And  if you're                                                                    
     producing no gas, all of  those costs will be allocated                                                                    
     in oil, and you'd be  able to deduct every single penny                                                                    
     of expenditure you would incur to develop gas here.                                                                        
     … So,  we've looked  at this issue  and we  believe the                                                                    
     current statute and SB 305  are both clear that the way                                                                    
     the statute  works [is] ...  if a producer had  no gas,                                                                    
     [then]  any  expenditure  they  would  incur  would  be                                                                    
     deductable against oil at the time they incur it.                                                                          
3:11:47 PM                                                                                                                    
CO-CHAIR NEUMAN said Mr. Marks'  comments throw into question how                                                               
a  field  is  developed,  whether producers  pull  oil,  gas,  or                                                               
liquids, depending on what is available on market prices.                                                                       
3:12:18 PM                                                                                                                    
MR.  MARKS  responded  that  any  costs  incurred  are  allocated                                                               
against what  is produced during  the calendar year in  which the                                                               
costs  are incurred.    If  a producer  stated  its intention  of                                                               
looking on  for gas,  but found  only oil,  all the  expenses put                                                               
forth would be  allocated against the oil and  could be deducted;                                                               
the  producer  could  get  the  credit  as  those  expenses  were                                                               
incurred.   He said Logsdon  & Associates  does not see  any risk                                                               
that  those  deductions  would  have to  be  deferred  until  the                                                               
producer found gas.                                                                                                             
3:13:10 PM                                                                                                                    
CO-CHAIR JOHNSON asked whether Commissioner Galvin agrees.                                                                      
3:14:01 PM                                                                                                                    
COMMISSIONER GALVIN said  at this point he would not  make such a                                                               
blanket statement.   He said  the way current statute  is written                                                               
"leaves  the department  having  to evaluate  whether  or not  to                                                               
consider the  timing issue  associated with  how you  would apply                                                               
some  things,  such  as  a  Btu-type basis  if  it's  on  current                                                               
production or  if it's based  upon what  the purpose of  the cost                                                               
is."  For  example, if a particular tax payer  that currently has                                                               
only oil  production is drilling in  an area that is  known to be                                                               
almost exclusively gas, then the  question would be whether it is                                                               
appropriate to  allow that producer  to consider all  those costs                                                               
to be  oil costs when nobody  expects those costs to  be incurred                                                               
for the production of oil.   Commission Galvin said given the way                                                               
statute is  currently written, that  is something  the department                                                               
would have to consider as part  of the regulation process and put                                                               
out as part of the public review process.                                                                                       
3:15:08 PM                                                                                                                    
CO-CHAIR JOHNSON said that underlines  his concern.  He clarified                                                               
that he does not want to  leave this issue up to regulations, but                                                               
rather wants clearly delineated  whether or not expenditures will                                                               
be allowable  against oil production  until such time there  is a                                                               
market for the gas.   He said this is not an  issue of trust, but                                                               
a  desire  for clarity,  which  will  make the  department's  job                                                               
3:16:23 PM                                                                                                                    
CO-CHAIR  NEUMAN  offered  his understanding  that  both  current                                                               
statute and SB 305 allow flexibility  in a case in which there is                                                               
a decline in investments, so that the industry can thrive.                                                                      
3:17:34 PM                                                                                                                    
COMMISSIONER  GALVIN  concurred that  the  state  always has  the                                                               
ability to  adjust its tax  policy if  it finds its  actions have                                                               
caused a detrimental effect.                                                                                                    
3:17:55 PM                                                                                                                    
CO-CHAIR NEUMAN added, "Unless they're locked in on May 1."                                                                     
COMMISSIONER GALVIN  said that  is the only  caveat, but  the tax                                                               
payer is  not going to be  limiting the state's ability  to "make                                                               
something more fair."                                                                                                           
3:18:55 PM                                                                                                                    
REPRESENTATIVE SEATON asked Mr. Marks  to confirm that other than                                                               
the   gas  production   obligation  calculated   under  the   gas                                                               
production  tax  in effect  at  the  start  of the  binding  open                                                               
season, the  state may enter into  discussions and is "in  no way                                                               
obligated on oil taxes other than what we have in statute."                                                                     
3:19:55 PM                                                                                                                    
MR.  MARKS  answered  that  is  correct.   He  said  he  is  just                                                               
suggesting that  as discussions ensue,  they will  revolve around                                                               
the status quo, whether it is $8.5 billion or $5.5 billion.                                                                     
3:20:10 PM                                                                                                                    
REPRESENTATIVE SEATON  offered his  understanding that  Mr. Marks                                                               
is saying  that gas  production tax calculated  and in  effect at                                                               
the start  of the open  season is accurately reflected  in status                                                               
quo calculations,  and that the figure  of [$1,199,688,523] shown                                                               
on  slide 4  of Mr.  Marks' presentation  is an  example of  "the                                                               
current way the  calculation for gas tax would be,"  and is "what                                                               
we would  be obligated to honor  as a ... maximum  guarantee that                                                               
we are giving them that they could  have that if it's less than a                                                               
... few (indisc. -- coughing)."                                                                                                 
3:20:58 PM                                                                                                                    
MR. MARKS  responded, "If  future taxes  were above  that amount,                                                               
they  would get  a  tax  exemption equal  to  ... the  difference                                                               
between that amount and the $1.199."                                                                                            
CO-CHAIR NEUMAN indicated  that reference was being  made to [AS]                                                               
3:21:40 PM                                                                                                                    
REPRESENTATIVE  TUCK  referred  to the  term,  "reverse  dilution                                                               
effect," and  asked if  research has been  done yet  to determine                                                               
"how  recent  that  we  could   have  been  potentially  in  that                                                               
3:22:11 PM                                                                                                                    
MR. MARKS related  that a few days  ago he had sent  to the chair                                                               
an  analysis  regarding  crossover  points  -  when  there  is  a                                                               
positive  and  a  negative  delusion  effect.    He  offered  his                                                               
understanding  that  an  analysis  has  been  done  to  determine                                                               
whether total oil and gas taxes  would have been higher under the                                                               
combined taxation, and the answer was rarely.                                                                                   
3:23:10 PM                                                                                                                    
REPRESENTATIVE  SEATON requested  that the  chair distribute  the                                                               
aforementioned analysis to the other committee members.                                                                         
3:23:47 PM                                                                                                                    
SENATOR  BERT STEDMAN,  Alaska  State  Legislature, testified  on                                                               
behalf  of the  sponsor of  SB 305,  the Senate  Finance Standing                                                               
Committee, on which he serves as  co-chair.  He reviewed that the                                                               
state  changed from  economic limit  factor  (ELF) to  production                                                               
profits  tax (PPT),  there  were  discussions regarding  changing                                                               
from a  tax and royalty  to a production-based system,  and there                                                               
were 20 percent  credits, at which point  the legislature stepped                                                               
in with progressivity  to protect the state from  high oil prices                                                               
and a  declining percent  of government  take.   He said  now the                                                               
dream is to have a gasline.                                                                                                     
3:25:01 PM                                                                                                                    
SENATOR  STEDMAN expressed  concern  about  the $120/$8  forecast                                                               
presented from the federal government  on slide 6, when first gas                                                               
will  be  present  "'20  to  2030," and  there  is  an  impending                                                               
lockdown on  gas in just  a few weeks,  "only leaving us  the oil                                                               
lever to move."   He stated, "When  I look on slide 6,  and I see                                                               
$8.9 billion,  I feel that's  what belongs in the  state treasury                                                               
under this scenario, all other  things being equal."  He directed                                                               
attention to  slide 4, which  he said  shows that the  revenue to                                                               
the treasury is $5.5 billion.  He continued:                                                                                    
     The  spread is  $3.4 billion.   ...  There's only  $300                                                                    
     million in gas revenue on  the screen right there.  And                                                                    
     the  argument ...  [that] this  is an  incentive or  an                                                                    
     inducement to bring the industry  to the table to build                                                                    
     the line  - under  this scenario,  we'd be  losing $3.4                                                                    
     billion  a  year  on  a  $30  billion  dollar  project.                                                                    
     That's ...  10 percent of  the project.  [In]  10 years                                                                    
     you'd  pay  for  the  project.   It's  absurd;  it's  a                                                                    
     mathematical shell  game being  played on the  State of                                                                    
     Alaska.  And the best way  we can boil it down is count                                                                    
     the cash.                                                                                                                  
SENATOR  STEDMAN  talked  about  the challenging  issue  of  cost                                                               
allocation, and  said work is being  done to refine it.   He said                                                               
when building  financial models,  "it all comes  down to  the net                                                               
cash flow."  He reiterated that the numbers shown are alarming.                                                                 
3:28:04 PM                                                                                                                    
SENATOR STEDMAN said the highest  probability price scenario that                                                               
the state  will face  "is right in  front of us."   He  said when                                                               
incentivizing a  gasline, it is  imprudent to give away  the $333                                                               
million  in revenue.   He  added,  "And you  certainly don't  add                                                               
another $3  billion on the  table."   He indicated that  those in                                                               
the legislature in the future when  the gasline is up and running                                                               
will be  embarrassed by  the deal  that was made.   He  said some                                                               
people have made efforts to make  the public aware of this issue,                                                               
but it  is difficult, because it  is not possible to  set the gas                                                               
tax until  the infrastructure cost is  known.  He said  the state                                                               
is in a perilous position with  the impending May 1 deadline.  He                                                               
said there is a lot less risk  to the state to decouple the issue                                                               
and work  on the cost  allocation.  He  said he sees  that nobody                                                               
wants to  raise taxes on the  industry.  He said  the legislature                                                               
can solve those problems.                                                                                                       
3:30:07 PM                                                                                                                    
SENATOR STEDMAN continued as follows:                                                                                           
     But once we're  in a position like this, if  we were to                                                                    
     try  to raise  that  oil tax  $3 billion  -  up on  the                                                                    
     screen it's  $8.6 [billion] - that's  a third increase.                                                                    
     Politically, I  don't see  how you could  do it  in the                                                                    
     building - get the  support, and mathematically, if you                                                                    
     did  that, I  think you'd  have a  high probability  of                                                                    
     messing up your oil basin.   The whole just spirals out                                                                    
     of  control, and  the state's  in a  position where  we                                                                    
     can't  ...  fix  it.     So,  it  becomes  a  very  ...                                                                    
     destabilizing problem.                                                                                                     
3:30:48 PM                                                                                                                    
SENATOR   STEDMAN  recollected   that  during   PPT  talks,   the                                                               
legislature was  arguing over miniscule amounts,  but today there                                                               
are billions of dollars on the  table that could affect the state                                                               
for  2-10 years.   He  said  Dr. Wood's  work is  available.   He                                                               
warned  that "if  this was  to  happen two  or three  times in  a                                                               
decade,  it would  severely  hurt the  treasury."   He  expressed                                                               
gratitude for  the committee's efforts  to revue this issue.   He                                                               
posited that the  scope of the problem is so  large, it has taken                                                               
many legislators a long time to  grasp the magnitude.  He said he                                                               
wants to see good business practices  from the state, a fair deal                                                               
for the industry, and the basin opened up.                                                                                      
3:33:02 PM                                                                                                                    
CO-CHAIR  NEUMAN said  Senator  Stedman made  a telling  argument                                                               
when he said the only leverage that  will be left will be the oil                                                               
leverage.  He said  the tax rates on oil are  already some of the                                                               
highest in the world - up to 80-90 percent globally.                                                                            
3:33:31 PM                                                                                                                    
SENATOR JOE  PASKVAN, Alaska State  Legislature, stated  that the                                                               
6:1 ratio is  law, and said the question is  whether the dilution                                                               
effect previously  discussed should cause the  oil tax structures                                                               
to  be separated  from the  gas tax  structures.   He said  it is                                                               
known that market pricing has  dramatically deviated from the Btu                                                               
benchmark; it is at approximately 20:1.   Every one of the slides                                                               
shown illustrate  that combining the tax  will have consequences.                                                               
The risk  is real, not  theoretical, he emphasized.   He reminded                                                               
the committee that  the U.S. Department of  Energy forecast shows                                                               
that the risk will continue for  Alaska and that the magnitude of                                                               
that market deviation will impose substantial risk upon Alaska.                                                                 
3:35:11 PM                                                                                                                    
SENATOR  PASKVAN  recommended  that  the committee  rely  on  the                                                               
forecasts done by the U.S.  Department of Energy, because he said                                                               
the department is  not influenced by any  argument being advanced                                                               
by  the  legislature or  the  administration  and is,  therefore,                                                               
unbiased.  He said the department  can be relied upon to indicate                                                               
the  market  deviation  that  shows  the  risk  to  Alaska.    He                                                               
submitted to the  committee that "the combination of  all of that                                                               
provides a basis for decoupling as  the proper result to occur at                                                               
this time  to protect the  State of Alaska."   He said at  a 12:1                                                               
ratio, production tax  is lost; at a 15:1, royalty  is also lost;                                                               
and at  a 20:1 ratio,  production tax  and royalty are  lost, and                                                               
oil savings are compromised.                                                                                                    
SENATOR  PASKVAN, regarding  an  issue  raised by  Representative                                                               
Guttenberg, said  when Alaska goes  to the table  for discussion,                                                               
it  needs a  stand-alone tax  structure for  oil and  another for                                                               
gas;  the   state  should  start   those  discussions   with  its                                                               
production tax on gas, royalty from  gas, and savings from oil on                                                               
its side of the table.   He concurred with the comment of Senator                                                               
Stedman that the committee, when  looking at the charts provided,                                                               
should  be consider  how  much  is on  the  state's  side of  the                                                               
[SB 305 was held over.]                                                                                                         

Document Name Date/Time Subjects
Corrected Sectional Analysis Sb 243 version P.pdf HRES 4/9/2010 1:00:00 PM
SB 243
CSSB0243 P Fin.pdf HRES 4/9/2010 1:00:00 PM
SB 243
Geothermal Royalty Rates.pdf HRES 4/9/2010 1:00:00 PM
Ormat SB243 for Senate Resouce Hearing 3.10.10 ver0 (2).pdf HRES 4/9/2010 1:00:00 PM
SB 243
Royalty Sheet SB 243 SFIN.pdf HRES 4/9/2010 1:00:00 PM
SB 243
SB0243-3-1-040210-DNR-N.pdf HRES 4/9/2010 1:00:00 PM
SB 243
USGS Geothermal Packet.pdf HRES 4/9/2010 1:00:00 PM
SB0243-4-1-040210-ADM-N.pdf HRES 4/9/2010 1:00:00 PM
SB 243
CSSB305 Conceptual Amendment by Rep Guttenberg.pdf HRES 4/9/2010 1:00:00 PM
SB 305
CSSB305 Amendment WA.2.pdf HRES 4/9/2010 1:00:00 PM
SB 305
CSSB305 Conceptual amend to Amendment WA.2.pdf HRES 4/9/2010 1:00:00 PM
SB 305
SB 305 David Wood Memo 3.02.10.pdf HRES 4/9/2010 1:00:00 PM
SB 305
SB 305 Logsdon 4.09.10.pdf HRES 4/9/2010 1:00:00 PM
SB 305