Legislature(2009 - 2010)BARNES 124

04/11/2010 12:00 PM House RESOURCES

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to a Call of the Chair --
-- Continued from 04/10/10 --
Scheduled But Not Heard
Moved Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
Heard & Held
        SB 305-SEPARATE OIL & GAS PROD. TAX/ DEDUCTIONS                                                                     
CO-CHAIR NEUMAN announced that the  first order of business would                                                               
be SENATE BILL  NO. 305, "An Act  relating to the tax  on oil and                                                               
gas production; and providing for an effective date."                                                                           
[Before  the Committee  was the  House committee  substitute (CS)                                                               
for  committee  substitute  (CS)  for SB  305(RES),  Version  26-                                                               
LS1577\M, Bullock, 4/10/11.]                                                                                                    
12:38:14 PM                                                                                                                   
PAT GALVIN, Commissioner, Department  of Revenue (DOR), indicated                                                               
that  he  would   be  referring  to  a  hard  copy   of  a  slide                                                               
presentation  [included in  the  committee  packet], rather  than                                                               
actually showing the slides.                                                                                                    
12:39:03 PM                                                                                                                   
COMMISSIONER  GALVIN  said  the  slides  offer  modeling  tables,                                                               
compare the  overall oil and gas  tax under SB 305  to the status                                                               
quo,  and  they   show  the  oil  tax  and   gas  tax  components                                                               
separately.  He  pointed out that 90 percent of  the time, SB 305                                                               
results  in  numbers  in  green   blocks,  which  means  that  it                                                               
increases the  overall tax  revenue to the  state, except  in the                                                               
few situations where there are  red boxes.  He directed attention                                                               
to page  20, which begins  the section  of the slides  that shows                                                               
the  modeling on  gas  production tax  obligation,  and page  21,                                                               
which shows the comparisons of  the gas production tax status quo                                                               
compared to  the gas production tax  under SB 305.   He explained                                                               
that numbers in red boxes indicate  that the status quo is higher                                                               
than  what it  would be  under SB  305.   Slide 21  shows figures                                                               
based on barrels  of oil equivalent (BOE)  cost allocation; slide                                                               
22  shows  figures  based  on  point  of  production  (POP)  cost                                                               
allocation, which he pointed out is still mostly red boxes.                                                                     
COMMISSIONER  GALVIN, in  response to  Representative P.  Wilson,                                                               
explained that the yellow boxes in  the models mean that there is                                                               
no difference between  the status quo and SB 305.   He said, "For                                                               
those low oil  prices, at any parity, there is  no gas production                                                               
tax, so it's all zero.   It isn't until you actually start having                                                               
a gas that's  worth enough to have a gas  production tax that you                                                               
see the deviation."                                                                                                             
12:43:22 PM                                                                                                                   
COMMISSIONER GALVIN  noted that across  the top of the  models is                                                               
shown the  oil prices, and in  the left-hand column is  shown the                                                               
gas price parity -  the ratio between the oil and  gas price.  He                                                               
demonstrated that  at an  oil price  of $40 and  a gas  parity of                                                               
8:1,  the  price would  be  $4.    Commissioner Galvin  said  one                                                               
determination  that was  made was,  under SB  305, how  far costs                                                               
would  have  to  be pushed  to  oil  in  order  to make  the  gas                                                               
production tax obligation  higher after decoupling.   He stated a                                                               
figure of 90 percent and said  the results are shown on slide 24.                                                               
He  said  the  rest  of  the  models  show  varying  assumptions,                                                               
including lower oil production.                                                                                                 
12:45:32 PM                                                                                                                   
REPRESENTATIVE TUCK  asked what has to  be done in order  to push                                                               
the cost to 90 percent oil and 10 percent gas.                                                                                  
COMMISSIONER  GALVIN responded  that since  the statute  does not                                                               
indicate  a  cost  allocation method,  the  potential  allocation                                                               
method is  "somewhat loose."   He  explained that  the department                                                               
would have  to go through  a regulatory process to  develop that.                                                               
He stated that the volume metric  BOE basis and the POP basis are                                                               
fairly  straightforward, but  other  methods could  be used  that                                                               
would result in different allocations.   He said production could                                                               
be set up at 100 percent,  so that, for example, only those costs                                                               
that are  100 percent gas  would be attributed  to gas.   He said                                                               
the department  was not trying  to identify a  particular method,                                                               
but rather  was attempting to  determine:  "If the  method [that]                                                               
was  chosen  resulted in  this  kind  of disparate  treatment  of                                                               
costs,  how  far would  they  have  to go  in  order  to cause  a                                                               
different outcome?"                                                                                                             
12:47:19 PM                                                                                                                   
COMMISSIONER GALVIN said the charts  are significant.  The charts                                                               
that show  a lot of green  boxes indicate that under  SB 305, the                                                               
overall revenue would be increased.   However, he emphasized that                                                               
it is important to  note that "this is not locked  in."  In fact,                                                               
he recollected that the presentation  to the committee on 4/10/10                                                               
"indicated that it's  expected that it will  be negotiated down."                                                               
However,  he said  the slides,  starting  with 21,  show what  is                                                               
going to be locked  in.  He said, "The red part  is what gets set                                                               
in the  [Alaska Gas Inducement  Act] AGIA inducement."  The state                                                               
gas tax obligation will be lower.                                                                                               
12:48:23 PM                                                                                                                   
CO-CHAIR NEUMAN directed attention to  the model charts on slides                                                               
3 and  21, and noted that  they are basically an  inverse of each                                                               
other.  He  offered his understanding that the figures  in red on                                                               
slide 21  are locked in,  while the figures  in green on  slide 3                                                               
get locked in.                                                                                                                  
COMMISSIONER  GALVIN responded  that  that is  not  correct.   He                                                               
explained that  on slide 3, the  only figures that are  locked in                                                               
are those in red.   He said, "The oil portion  is not locked in."                                                               
He noted  that some of the  statements that had been  made during                                                               
the 4/10/10  hearing indicated  that there  is some  confusion on                                                               
this point.   He offered  further clarification, noting  that the                                                               
gas tax  obligation is locked  in at  the open season,  while the                                                               
oil tax portion is not.   Therefore, the numbers in green are not                                                               
locked in.  Furthermore, he  offered his understanding that it is                                                               
the expectation of the bill  sponsor that those numbers are going                                                               
to change before gas is actually produced.                                                                                      
12:50:23 PM                                                                                                                   
CO-CHAIR  NEUMAN  responded  that  the discussion  is  about  gas                                                               
obligations that  would be  locked in  at the  start of  the open                                                               
season, as with AGIA, not about locking in oil.                                                                                 
COMMISSIONER GALVIN said  that is right, which,  he explained, is                                                               
why the  discussion about a $2  billion loss is not  a reflection                                                               
on what  is actually  being locked  in; that is  not part  of the                                                               
dynamic.   He  concluded,  "What's  being locked  in  is the  gas                                                               
portion of  it, which is going  to lower under SB  305 than under                                                               
the status quo."                                                                                                                
CO-CHAIR  NEUMAN  said  he  thinks  Senator  Stedman  had  [at  a                                                               
previous meeting] tried  to make the point that the  value of gas                                                               
to  the state  is  considerably lower.   He  said  the amount  of                                                               
revenue from  oil and gas  that the state  would be taking  in to                                                               
the General Fund  revenue would be lower "because  the gas prices                                                               
are so much lower, and it dilutes the price of the oil."                                                                        
COMMISSIONER  GALVIN answered  that  is correct.    He said  that                                                               
would be  in effect when gas  is shipped only if  the legislature                                                               
"decides not to change that between now and first gas."                                                                         
CO-CHAIR NEUMAN said, "Only if we don't decouple it."                                                                           
COMMISSIONER GALVIN  responded no.   He explained that  there are                                                               
other ways of dealing with it without decoupling it.                                                                            
12:52:05 PM                                                                                                                   
REPRESENTATIVE  TUCK, based  on what  was just  imparted, offered                                                               
his understanding that because of  the current structure in place                                                               
going into  open season, the  state is  not locking in  oil taxes                                                               
whatsoever, but is  putting a system in place  that producers can                                                               
take advantage of  when the first open season begins.   So, there                                                               
is no dilution effect, unless the  state allows the status quo to                                                               
continue after  the gas taxes have  been set.  He  said the state                                                               
has  the opportunity  to make  changes later  on.   He concluded,                                                               
"All we're  really talking about  is locking  in the gas  rate at                                                               
open season."                                                                                                                   
12:53:13 PM                                                                                                                   
COMMISSIONER GALVIN  replied that  is correct.   He  reminded the                                                               
committee that because of what  the modeling results show, if the                                                               
status  quo is  left in  place through  the open  season and  the                                                               
higher gas  tax amount is locked  in, and then SB  305 is passed,                                                               
the  end  result will  be  the  same.    He explained,  "You  can                                                               
decouple afterwards in  the same manner SB 305  proposes, and the                                                               
lock-in  at the  open season  will  not impact  that; you're  not                                                               
losing any ground."                                                                                                             
12:53:53 PM                                                                                                                   
REPRESENTATIVE TUCK  asked if "going  to one bucket,  two bucket,                                                               
back to one  bucket" would have the same effect  as postponing SB
305 until after open season.                                                                                                    
COMMISSIONER GALVIN answered no.                                                                                                
12:54:32 PM                                                                                                                   
REPRESENTATIVE  GUTTENBERG,   using  a  combination  lock   as  a                                                               
metaphor, described  oil, gas, parity,  cost allocation,  and the                                                               
dilution   effect  as   ongoing,   fluctuating  components,   and                                                               
described the  gas tax  [obligation] scheduled for  May 1  as the                                                               
one  tumbler that  locks in  place.   He asked  how long  all the                                                               
other components would remain in play.                                                                                          
COMMISSIONER  GALVIN responded,  "If somebody  qualifies for  the                                                               
AGIA inducement,  then they would have  the right to that  for 10                                                               
years after first gas."                                                                                                         
REPRESENTATIVE  GUTTENBERG,   regarding  the  "one   bucket,  two                                                               
bucket"  scenario, asked  if  that entity  would  "come back  and                                                               
negotiate the fiscal terms."                                                                                                    
COMMISSIONER  GALVIN  answered,  "That  was  what  was  presented                                                               
(indisc. - overlapping voices)."                                                                                                
12:56:19 PM                                                                                                                   
REPRESENTATIVE  P.   WILSON  said  she   knows  it  is   the  gas                                                               
obligation, not the gas tax, which  gets locked in, but she asked                                                               
Commissioner Galvin to shed light on that issue.                                                                                
COMMISSIONER  GALVIN   said  under   the  AGIA   inducement,  tax                                                               
obligation  on gas  being shipped  will be  calculated under  the                                                               
taxes in  place at the  time.  Those  taxes are then  compared to                                                               
the gas production  tax obligation under the tax  system that was                                                               
in effect  at the beginning of  the open season.   He said, "It's                                                               
the dollar amount that you would  owe under the tax system in the                                                               
future compared  to what you  would owe  under the tax  system at                                                               
the time of the open season."                                                                                                   
REPRESENTATIVE  P.  WILSON asked  what  the  obligation would  be                                                               
right  now  if  gas  was  being   moved.    She  said  she  knows                                                               
percentages  and volume  are  not part  of  the calculation,  but                                                               
numbers  are,  and  she  asked Commissioner  Galvin  to  offer  a                                                               
comprehensible explanation using numbers.                                                                                       
COMMISSIONER  GALVIN responded  that currently  gas is  not taxed                                                               
separately; therefore, there is no separate gas tax rate.                                                                       
CO-CHAIR NEUMAN  asked, "What is the  tax rate on gas  right now,                                                               
12:58:33 PM                                                                                                                   
COMMISSIONER GALVIN responded, "It is  the combination of the oil                                                               
and  the  gas taxed  at  25  percent,  plus progressivity."    He                                                               
continued as follows:                                                                                                           
     If  you   only  had  gas  production,   then  that  gas                                                                    
     production  would   be  taxed   at  25   percent,  plus                                                                    
     progressivity.   What we do  for the purposes  of being                                                                    
     able to  calculate your  gas production  tax obligation                                                                    
     under  today's system,  is we  allow  you to  basically                                                                    
     calculate your  total tax obligation under  oil and gas                                                                    
     combined.   ...  So, you  take  your oil  and your  gas                                                                    
     production  together, and  you combine  them under  the                                                                    
     current  system, to  establish  what  your overall  tax                                                                    
     obligation is.   And then  we use the percent  of value                                                                    
     represented   by  the   oil   and  the   gas  to   take                                                                    
     proportionally  that obligation  and  split it  between                                                                    
     oil and  gas.   And so,  depending on  the amount  of a                                                                    
     particular  tax  payer's  oil   and  their  gas,  their                                                                    
     overall rate, as it were,  will be different.  But what                                                                    
     the  modeling shows  is that  that method  of combining                                                                    
     your oil  and your gas,  taxing at today's  system, and                                                                    
     then  [proportioning] that  obligation between  oil and                                                                    
     gas results  in a higher gas  production tax obligation                                                                    
     than  what you  would get  if you  calculated your  tax                                                                    
     separately under SB 305.                                                                                                   
1:00:45 PM                                                                                                                    
REPRESENTATIVE   P.  WILSON   offered   her  understanding   that                                                               
Commissioner  Galvin  is  saying  that  overall  it  is  best  to                                                               
separate, because that will result  in a higher obligation to the                                                               
COMMISSIONER   GALVIN  responded   that   as   it  is   currently                                                               
structured, there will  be a lower obligation to  the state under                                                               
the separate  calculation than under  the current  calculation; a                                                               
lower obligation  to the state would  be locked in.   In response                                                               
to Co-Chair  Neuman, he  said he means  under gas;  he explained,                                                               
"They  have no  lock-in on  their total  obligation."   The total                                                               
obligation calculated would generally be  higher when oil and gas                                                               
are calculated together.   He added, "But the oil  portion is not                                                               
locked in; only the gas portion is being locked in."                                                                            
REPRESENTATIVE  P. WILSON  asked, "So,  why would  we do  that if                                                               
it's going to be less money to the state."                                                                                      
COMMISSIONER GALVIN said he thinks  the argument is that doing so                                                               
would  provide  further  inducement  at  the  open  season.    He                                                               
deferred to the bill sponsor for further reasons.                                                                               
1:02:21 PM                                                                                                                    
REPRESENTATIVE  P. WILSON  surmised  that the  idea  is to  offer                                                               
inducement through a  good deal on gas, and "as  soon as they get                                                               
that, then they're going to start working on us on the oil."                                                                    
COMMISSIONER GALVIN said  he thinks that is the  idea behind "the                                                               
two bucket thing."                                                                                                              
REPRESENTATIVE  P. WILSON  proffered  that  the legislature  must                                                               
decide if this is a good idea.                                                                                                  
COMMISSIONER  GALVIN  concurred  that  that is  the  job  of  the                                                               
1:02:54 PM                                                                                                                    
REPRESENTATIVE SEATON,  directing attention to slides  21 and 22,                                                               
surmised that  whether a BOE  or POP allocation, the  state would                                                               
be locking  in a  much lower rate  on gas for  the start  of open                                                               
season if it adopts CSSB 305(FIN).                                                                                              
COMMISSIONER GALVIN  replied that  he would not  say that  in all                                                               
cases the  state would locking in  a much lower rate;  he said it                                                               
generally would  be the  same or lower,  and only  sometimes much                                                               
REPRESENTATIVE SEATON, directing attention  to the [yellow] boxes                                                               
in  the charts  on slides  21 and  22, offered  his understanding                                                               
that "the  only place where it  basically appears to be  the same                                                               
in those is where it's zero."                                                                                                   
COMMISSIONER GALVIN  answered, "Generally  it's where  ... you're                                                               
moving the costs to the side  where you're lowering the gas value                                                               
to  the point  where there  isn't much  tax being  acquired under                                                               
either system."                                                                                                                 
1:04:33 PM                                                                                                                    
REPRESENTATIVE  SEATON,  regarding  Version   M,  "where  we  are                                                               
rolling it in  for a day or  two and then rolling  it out," asked                                                               
how the  calculations would be  made and what  the administrative                                                               
liabilities  or complications  would  be "on  a  short window  of                                                               
COMMISSIONER GALVIN answered that they  would be significant.  He                                                               
said the  department anticipates a  tremendous amount of  work to                                                               
establish the two-day cost allocation  and accounting method.  He                                                               
indicated he is talking about  a method by which accounting would                                                               
need to  be taken care of  for two days a  month when calculating                                                               
progressivity and two days a year  when calculating base tax.  He                                                               
said there are  seven different buckets to  allocate between, and                                                               
then some  would be combined,  and he predicted that  would "take                                                               
some  figuring  out."    He   said  the  Department  of  Law  and                                                               
Department  of Revenue  have  been struggling  over  the last  24                                                               
hours to  figure out how  exactly this  would be done,  and there                                                               
are still  a lot of  unanswered questions.   He said, "For  us it                                                               
raises significant  concerns about ...  what would happen  if you                                                               
actually did this  sort of two-day gimmick of popping  [in] a tax                                                               
system ... in a short period of time."                                                                                          
1:06:37 PM                                                                                                                    
REPRESENTATIVE  SEATON  asked  if  the  administration  would  be                                                               
constrained in  its ability to  negotiate gas and oil  during the                                                               
operation of  the pipeline if  there are conditional  bids during                                                               
open season and negotiations on fiscal terms is anticipated.                                                                    
COMMISSIONER  GALVIN responded  that  if the  gas tax  obligation                                                               
that  has been  locked in  is lowered,  then arguably  that would                                                               
potentially impact  what the expectations  of the parties  are in                                                               
terms of  what they have  already acquired  a right to  and "what                                                               
they  would be  seeking  to  work outside  of  that."   Regarding                                                               
[Version M],  he expressed concern  about the gimmick  of "having                                                               
the tax kind of  pop in for two days and pop back  out."  He said                                                               
the Department  of Law finds no  precedent for this and  does not                                                               
know what kind of  legal issues that may raise.   It could have a                                                               
detrimental impact,  because it creates  a sense of,  "Well, what                                                               
did you do, what was this  two-day thing?"  He said decoupling or                                                               
not decoupling and  when it happens or doesn't is  a policy call.                                                               
Version M, he  stated, "throws a whole different layer  on top of                                                               
that,"  which he  said  is,  in and  of  itself,  troubling.   He                                                               
recommended that  the state make  a decision on which  tax system                                                               
it wants and put it into place.                                                                                                 
1:09:54 PM                                                                                                                    
COMMISSIONER  GALVIN, in  response to  Co-Chair Neuman,  said the                                                               
current   tax  rate   on  oil   and  gas   is  25   percent  plus                                                               
progressivity.   If SB  305 is  passed, then  there would  be one                                                               
rate on oil and  one on gas, and although they  would be the same                                                               
rate, decoupling  would result in much  different tax obligations                                                               
to the State of Alaska.   In response to a follow-up question, he                                                               
clarified that  the gas  production tax that  is being  locked in                                                               
would  be  lower  if  [SB  305]  is  passed,  while  the  overall                                                               
obligation of oil and gas would be expected to be higher.                                                                       
1:11:28 PM                                                                                                                    
CO-CHAIR NEUMAN  clarified that he  wants to know what  the total                                                               
effect would be  to the General Fund revenue, and  he offered his                                                               
understanding that  Commissioner Galvin  had just said  that with                                                               
or  without decoupling,  gas and  oil will  both be  taxed at  25                                                               
percent   plus   progressivity.      He   further   offered   his                                                               
understanding that  under AGIA, rates  for gas will be  locked in                                                               
for up to  10 years, so that at the  projected rates, there would                                                               
be a decline in revenue to the state's General Fund.                                                                            
COMMISSIONER GALVIN said that is  not correct.  He explained that                                                               
"the chart  with all the green"  - the chart that  shows that the                                                               
tax revenue is going  to go up with SB 305 -  is not being locked                                                               
in.   He observed  that the  committee seems  to be  in confusion                                                               
regarding this  issue, and he  emphasized the willingness  of the                                                               
Department of  Law to come  offer clarification.  He  stated that                                                               
overall, oil and  gas obligation is not being locked  in; what is                                                               
being locked in  is the gas production tax portion  that is lower                                                               
under SB 305.                                                                                                                   
1:13:12 PM                                                                                                                    
REPRESENTATIVE NEUMAN said, "So, the  ... gas tax obligation will                                                               
be locked in."                                                                                                                  
COMMISSIONER GALVIN  answered, "No, it  is not.  The  overall gas                                                               
direct tax obligation is not locked in."                                                                                        
REPRESENTATIVE  NEUMAN said,  "Not  the obligation,  but the  tax                                                               
COMMISSIONER GALVIN  responded, "No,  it's not locked  in either.                                                               
You can change the oil tax any time after the open season."                                                                     
CO-CHAIR NEUMAN  observed that Commissioner Galvin  had just said                                                               
oil  tax, and  he said,  "The  gas tax  will be  25 percent  plus                                                               
COMMISSIONER  GALVIN   corrected,  "No,   it  won't.     The  gas                                                               
production tax  obligation that is  calculated under  the current                                                               
system, which  includes the regulations,  is locked in -  not the                                                               
CO-CHAIR NEUMAN asked, "So, the  25 percent plus progressivity is                                                               
not locked in?"                                                                                                                 
COMMISSIONER GALVIN answered, "No, it's not."                                                                                   
1:13:54 PM                                                                                                                    
CO-CHAIR  NEUMAN   offered  his  understanding   that  previously                                                               
Commissioner Galvin had said it was, and he said he is confused.                                                                
COMMISSIONER GALVIN  denied he  had done so.   He  indicated that                                                               
previously, when  it was  suggested that the  tax rate  was being                                                               
locked in, he had specifically said it is not being locked in.                                                                  
1:14:12 PM                                                                                                                    
REPRESENTATIVE EDGMON  offered his understanding  that decoupling                                                               
would increase  the overall  tax obligation "on  the oil  side of                                                               
the equation," and he opined that  that may be a disincentive and                                                               
could  "engender certain  behavior by  the industry."   He  said,                                                               
"So, the  notion that ...  this is all  about oil, and  that it's                                                               
going  to create  more revenue  for the  State of  Alaska over  a                                                               
period of time, has to undergo  that test of the reality of maybe                                                               
the higher  tax, by virtue  of decoupling, having  an adversarial                                                               
impact on the  oil industry's behavior ...."  He  asked Mr. Marks                                                               
if that is correct.                                                                                                             
COMMISSIONER GALVIN answered yes.                                                                                               
1:16:08 PM                                                                                                                    
REPRESENTATIVE  TUCK,   referring  to   Version  M,   stated  his                                                               
understanding that once there is  a gas production tax obligation                                                               
determination in  open season, potentially revenues  to the state                                                               
of oil  and gas  combined may decrease.   However,  initially the                                                               
gas  portion will  be higher  under status  quo.   He asked  if a                                                               
comparison  has been  made  as to  "what we  would  have in  that                                                               
scenario" with  production profits tax  (PPT).  He  asked, "Would                                                               
we still  be up  from where  we were in  2007 under  PPT program,                                                               
COMMISSIONER  GALVIN  answered that  the  issue  "cuts" a  couple                                                               
different ways.   He  said the  dilution effect of  oil &  gas is                                                               
exacerbated  by the  steepness  of  the progressivity  (indisc.),                                                               
because what is  happening is that as gas is  brought in, the per                                                               
barrel profit of the oil,  combined stream, is being lowered, and                                                               
because  the  progressivity  line  was  steep,  progressivity  is                                                               
falling at a  rapid rate, bringing down value, as  well.  He said                                                               
to  answer  Representative  Tuck's  question, he  would  have  to                                                               
compare two  different numbers,  and so,  the answer  is probably                                                               
not one or the  other.  Using $120 oil and $8  gas as an example,                                                               
he said  the current tax  system is bringing  a lot more  at $120                                                               
oil.   He mentioned  slides that show,  under a  combined system,                                                               
$5.5  billion, which  is  considered to  be a  huge  loss to  the                                                               
state, and  he said  that under  PPT, that  amount would  not get                                                               
"anywhere close  to $5.5 [billion],"  because there would  not be                                                               
$120 oil.                                                                                                                       
1:19:19 PM                                                                                                                    
CO-CHAIR NEUMAN questioned  if consideration is being  made to go                                                               
back to PPT.                                                                                                                    
REPRESENTATIVE  TUCK  said  "all   this"  was  determined  during                                                               
discussion  of Alaska's  Clear and  Equitable Share  (ACES); back                                                               
when the  state was figuring out  what needed to happen  to get a                                                               
gasline  going.   He  said  "this  coupling situation"  could  be                                                               
viewed as  a form  of incentive  to get a  gasline going  for the                                                               
state by allowing tax breaks to the  oil industry.  He said he is                                                               
talking about  behavior change.   He  expressed concern  in going                                                               
into   open  season   without  as   much  revenue   leverage  for                                                               
negotiations  "under  just  gas."     Furthermore,  he  expressed                                                               
concern regarding  the opportunity for  the oil and  gas industry                                                               
to  take  advantage  of "maneuvering  towards  gas"  by  allowing                                                               
discounts  for oil.   He  opined that  the state  would still  be                                                               
better off than it was with the  2007 PPT plan "if we leave it as                                                               
it is and go status quo."                                                                                                       
REPRESENTATIVE TUCK said  one policy decision is  whether to keep                                                               
things at status  quo, where the oil and gas  industry knows what                                                               
to  expect   and  the   state  has   more  leverage   going  into                                                               
negotiations, or to decouple because  of the concerns of the lost                                                               
revenue that the  State of Alaska will have.   He questioned what                                                               
the effects of decoupling would  have on future gas negotiations,                                                               
because  there will  be  less  revenue coming  in  under the  gas                                                               
portion of  decoupling.   Version M,  he highlighted,  proposes a                                                               
system "where we  opt in and out."  He  offered his understanding                                                               
that most oil and gas producers  are actually looking for oil but                                                               
finding gas along the way; they  are able to "write off what they                                                               
find  in gas,"  but they  may  not be  able  to do  so under  the                                                               
decoupling plan.   He said,  "I think  that's the reason  why ...                                                               
we're  going to  this  ...  one bucket,  two  bucket, one  bucket                                                               
REPRESENTATIVE TUCK said he wants  to see comparisons between the                                                               
proposed plan and PPT.                                                                                                          
1:23:03 PM                                                                                                                    
COMMISSIONER  GALVIN said  he thinks  it would  be an  intriguing                                                               
point  of reference  to go  back  to PPT,  and he  said he  would                                                               
attempt to formulate that model as soon as possible.                                                                            
1:23:18 PM                                                                                                                    
CO-CHAIR JOHNSON  said he  thinks Representative  Tuck's comments                                                               
are accurate.   He proffered that the purpose of  [Version M] and                                                               
"one bucket,  two bucket, one  bucket, two bucket" is  to protect                                                               
producers  for  cost  allocation,  so that  if  producers  drill,                                                               
allocating against gas, the producers  would not be able to write                                                               
that off  until they  sell the  gas.  He  said it  doesn't really                                                               
have anything to do with whether or not decoupling happens.                                                                     
1:24:20 PM                                                                                                                    
REPRESENTATIVE SEATON stated his  understanding that the dilution                                                               
effect  between   oil  and  gas  is   beneficial  to  production,                                                               
drilling, and  getting development going; however,  a policy call                                                               
is being made  that as soon as gas starts  down the pipeline, the                                                               
dilution effect  would be  negative, and the  state wants  to get                                                               
the maximum  tax from oil,  without any dilution effect  from the                                                               
gas rate.  He asked for confirmation that that is correct.                                                                      
1:25:48 PM                                                                                                                    
CO-CHAIR JOHNSON  clarified that  "the amendment" has  nothing to                                                               
do  with  whether  or  not  he  supports  decoupling;  it  is  an                                                               
opportunity  to protect  against  cost  allocation problems  that                                                               
have been  brought to his  attention.   He expressed his  wish to                                                               
see  the bill  moved out  of  committee "with  a protection  that                                                               
doesn't disincentivize production."                                                                                             
1:28:46 PM                                                                                                                    
REPRESENTATIVE SEATON  asked Co-Chair Johnson to  confirm that he                                                               
is  talking  about  [Amendment  4],  which  is  contained  within                                                               
Version M.                                                                                                                      
CO-CHAIR JOHNSON said that is correct.                                                                                          
REPRESENTATIVE  SEATON said  he  understands  the amendment,  but                                                               
that is  not the only thing  that may pass out  of committee; the                                                               
purpose of the bill is to decide whether to couple or decouple.                                                                 
CO-CHAIR  JOHNSON clarified  that he  does not  think the  larger                                                               
policy  call regarding  coupling  or decoupling  has  to do  with                                                               
bucket progressivity calculations.  He continued as follows:                                                                    
     We're spending an  awful lot of time on the  two days -                                                                    
     the window,  and I want to  be very clear why  that was                                                                    
     done:  not to doing  anything, not to lock anything in,                                                                    
     wish  we didn't  have  to  do that;  it  is to  protect                                                                    
     future  investment  so  that they  can  allocate  their                                                                    
     costs in a way that they  can ... best maximize what we                                                                    
     did when we passed ACES.                                                                                                   
1:31:00 PM                                                                                                                    
REPRESENTATIVE SEATON  asked, "So that's what  the amendment does                                                               
between  now and  the flow  of gas  at 1.5  [billion cubic  feet]                                                               
REPRESENTATIVE JOHNSON  said [Amendment  4] locks in  a structure                                                               
for cost  allocation and taxes.   The  bigger issue, he  said, is                                                               
whether to chose coupling or  decoupling.  He reiterated that the                                                               
committee is spending  a lot of time on the  bucket issue, and he                                                               
would like the focus to be on coupling and decoupling.                                                                          
1:32:11 PM                                                                                                                    
COMMISSIONER  GALVIN,  as  a  tax  administrator,  beseeched  the                                                               
committee  not  to  put  in  place a  two-day  tax  policy.    He                                                               
     You can  add in a  cost allocation in the  statute that                                                                    
     says that  costs will be  allocated based  upon current                                                                    
     production,  not   upon  some  expectation   of  future                                                                    
     production,  and relieve  this concern  and have  it so                                                                    
     that you  have a system in  place on one day  and a new                                                                    
     system the next day, and that's the tax policy of the                                                                      
      state.  To have it come in, come out, come in, come                                                                       
     out ... [is] just not good tax policy.                                                                                     
COMMISSIONER GALVIN,  in response to Co-Chair  Neuman, said taxes                                                               
for progressivity are done monthly,  and taxes for the 25 percent                                                               
base   are  done   annually.     He  explained   that  taxes   on                                                               
progressivity are  based on  a monthly average  price of  oil and                                                               
gas,  which is  why he  is concerned  about the  proposed two-day                                                               
separate  tax  system.   He  said  daily production  numbers  are                                                               
available; however,  what is  not known  are: the  selling price,                                                               
the costs  for that particular day,  and how to take  those costs                                                               
and attribute them to a single day's worth of activity.                                                                         
CO-CHAIR  NEUMAN suggested  that if  the two-day  plan saves  the                                                               
state  billions of  dollars, then  perhaps  the department  could                                                               
afford additional staff to manage it.                                                                                           
COMMISSIONER  GALVIN  remarked that  if  the  plan were  to  save                                                               
billions of dollars, then it may be worth it.                                                                                   
1:34:44 PM                                                                                                                    
REPRESENTATIVE  EDGMON opined  that this  is an  important point.                                                               
He  offered  his  understanding  that   it  is  not  possible  to                                                               
predetermine what oil revenues would be in the future.                                                                          
COMMISSIONER  GALVIN  said  one  issue is  regarding  what  could                                                               
potentially happen  at the end of  the month if the  state shifts                                                               
to a different tax system for two days.                                                                                         
REPRESENTATIVE EDGMON emphasized that there  is no way to predict                                                               
that  the state  will have  so much  more money  by shifting  the                                                               
taxes for two  days that it will  be able to hire  more people in                                                               
the department.                                                                                                                 
COMMISSIONER GALVIN responded:                                                                                                  
     No, we won't have any more  money this year as a result                                                                    
     of this.   In fact, we're going to lock  in a lower tax                                                                    
     rate, so  there's no guarantee  of more  money anywhere                                                                    
     down the line.                                                                                                             
1:36:22 PM                                                                                                                    
REPRESENTATIVE EDGMON  observed that many suppositions  are being                                                               
made, and  he offered his  understanding that  the administration                                                               
is saying that it is difficult  to base a model upon supposition.                                                               
He said  he wants  to know if  a plan is  actually going  to make                                                               
money for the state.                                                                                                            
CO-CHAIR NEUMAN  related his understanding  that the plan  is not                                                               
formulated  to  gain money,  but  to  protect the  state  against                                                               
losing money.                                                                                                                   
1:37:38 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG asked  if an analysis has  been done by                                                               
the Office  of the  Attorney General  regarding [the  two-day tax                                                               
COMMISSIONER GALVIN  answered yes.   In  response to  a follow-up                                                               
question, he  said he would  prefer that someone from  the Office                                                               
the Attorney General  relates the details of the  analysis to the                                                               
1:38:34 PM                                                                                                                    
REPRESENTATIVE  SEATON offered  his understanding,  based on  all                                                               
the  examples the  committee  has been  given,  that the  current                                                               
system  of  taxation based  on  $128  BOE  gives the  state  $5.5                                                               
billion in  tax revenue, and  "if we  split them apart,  we'll be                                                               
able to get  ... $ 3 billion more revenue  from the oil company."                                                               
He said he  is confused, because he has heard  from oil companies                                                               
and some testifiers  that "tax extractions from  the North Slope"                                                               
are too high,  and bills have been introduced to  lower tax rates                                                               
and progressivity.  He asked  Commissioner Galvin if he thinks an                                                               
annual  increase from  $5.5 billion  to  $8.8 billion  "extracted                                                               
from  producers on  the  North  Slope" would  have  an effect  on                                                               
exploration, production, and operation on the North Slope.                                                                      
1:40:15 PM                                                                                                                    
COMMISSIONER GALVIN  said that would depend  on the profitability                                                               
of the  operations in general.   He explained, for  example, that                                                               
just because one  tax obligation is higher  than another, doesn't                                                               
automatically  make it  a less  attractive investment  fund.   He                                                               
     That said, when  you look at the  stated expectation of                                                                    
     getting this maximum dollar that's  identified - if you                                                                    
     separate  the two  and ...  keep  the same  system -  I                                                                    
     think  that calls  into question  whether  or not  that                                                                    
     provides  an  incentive  for  participation  in  a  gas                                                                    
     project.   That  number's  fairly  significant, and  it                                                                    
     does not react to changes  in prices like you'd like to                                                                    
     see  if  you  were   an  investor  worried  about  your                                                                    
1:41:24 PM                                                                                                                    
REPRESENTATIVE   JOHNSON   asked   Commissioner  Galvin   if   he                                                               
understands  what it  is he  is  trying to  do in  regard to  the                                                               
"start/stop."   He stated, "This  is what [Legislative  Legal and                                                               
Research Services] came  up with as a solution to  my very simple                                                               
request."   He said he  has a  conceptual amendment that  he does                                                               
not think  would quite  work, because  he said  he thinks  "for a                                                               
period of time  in between, the little guy's hurt  - the explorer                                                               
who  has no  production."   He  asked Commissioner  Galvin if  he                                                               
could  come up  with an  amendment  to SB  305 so  that the  cost                                                               
allocation  would  be applied  to  oil  and the  cost  allocation                                                               
between  gas and  oil would  not be  separated during  the period                                                               
until first gas flows.  He  said neither he nor Legislative Legal                                                               
and Research Services could do so.                                                                                              
1:42:36 PM                                                                                                                    
COMMISSIONER  GALVIN responded  that there  is a  two-step policy                                                               
call that  would have  to be  made for that  purpose.   The first                                                               
step is to choose a cost  allocation method based upon either BOE                                                               
or POP value.  That allows the  second step to be taken, which is                                                               
that cost  will be allocated  based on current  production rather                                                               
than  anticipation  of future  production.    He emphasized  that                                                               
without knowing  the actual underlying  allocation methodologies,                                                               
it is difficult  to "write the second step."   He concluded, "And                                                               
so, if you  want to go through  both those steps and  put that in                                                               
place,  then, yes,  we can  ...  help write  that for  you."   In                                                               
response to  a follow-up  question, he  said the  cost allocation                                                               
method for  the Cook Inlet to  North Slope relationship was  on a                                                               
BOE basis; there is  no law of the land in  terms of overall cost                                                               
1:44:11 PM                                                                                                                    
COMMISSIONER  GALVIN, in  response  to  Co-Chair Neuman,  stated,                                                               
"The way  that we value  gas is we  use a [British  thermal unit]                                                               
Btu equivalent in  order to be able to blend  it with oil; that's                                                               
your BOE  combination."   He offered  his understanding  that Co-                                                               
Chair Johnson  is asking what  current cost allocation  method is                                                               
being used  in "the one portion  of the law in  which we allocate                                                               
costs."  He continued as follows:                                                                                               
     And in that we use a  volumetric basis that would use a                                                                    
     Btu equivalent.   So,  we can do  that and  expand that                                                                    
     within this law  to say that will be  the system that's                                                                    
     used  across the  board, and  then we  can say  that it                                                                    
     will be based  upon the current production  level."  We                                                                    
     can also  ... give you  both if  you want; I  can write                                                                    
     one that  says it's going  to be on the  relative value                                                                    
     of  the  point  of  production, and  then  it  will  be                                                                    
     allocated based upon current production, as well.                                                                          
1:45:49 PM                                                                                                                    
REPRESENTATIVE JOHNSON asked Commissioner  Galvin to explain how,                                                               
after May 1,  the state can go  back to "doing it the  way we are                                                               
1:46:12 PM                                                                                                                    
COMMISSIONER GALVIN  said there are  two issues created  today by                                                               
decoupling:  the state currently  allows producers to blend their                                                               
oil and  gas when calculating  their progressivity rate;  and the                                                               
state  has   a  different  methodology   to  determine   the  tax                                                               
obligation for  gas that's produced in  the state and for  oil or                                                               
gas that  is produced in  Cook Inlet, but  allows all that  to be                                                               
blended for  the purposes of determining  progressivity for North                                                               
Slope oil.  He continued as follows:                                                                                            
     The  way  that the  bill  is  currently structured  ...                                                                    
     requires us to break it  down into even buckets between                                                                    
     Cook Inlet oil, Cook Inlet  gas, North Slope oil, North                                                                    
     Slope  gas, and  then blend  the ones  that we  want to                                                                    
     blend currently,  and have those blended  throughout so                                                                    
     that  we  can have  a  system  that sustains  the  open                                                                    
     season and  into first gas,  and we don't have  to have                                                                    
     things change around.                                                                                                      
     You can do  a cost allocation method  that ensures that                                                                    
     the costs  are going  to flow  with the  production and                                                                    
     into the bucket  that you're trying to  have them apply                                                                    
     against.  I  think that's what Roger  attempted when he                                                                    
     wrote  the conceptual  amendment he  described, and  we                                                                    
     can work  with him to  refine that, so that  that's the                                                                    
     way that it would flow.  But  it has to have, as a base                                                                    
     assumption, that you're either going  to use a BOE or a                                                                    
     POP methodology.                                                                                                           
REPRESENTATIVE JOHNSON requested that  Co-Chair Neuman write both                                                               
amendments.     He  asked  Commission   Galvin  if  he   has  the                                                               
aforementioned conceptual amendment.                                                                                            
COMMISSIONER GALVIN answered yes.                                                                                               
1:48:09 PM                                                                                                                    
CO-CHAIR JOHNSON said:                                                                                                          
     The concern is that --  and the committee can have this                                                                    
     if they  want to  see what  we're --  I think  they may                                                                    
     already  have  it  --  but  two  --  number  one  works                                                                    
     (indisc.)  people  no  production  that  are  ...  only                                                                    
     explorers  and  no  production, it  might,  during  the                                                                    
     period  of time,  if the  open season  was expanded  to                                                                    
     more  than a  few days,  they  might have  no place  to                                                                    
     apply their ...  cost.  So, if we could  fix that point                                                                    
     in this  conceptual amendment, I'm  more than  happy to                                                                    
     shred this.  This is  what our legal department came up                                                                    
     with as a solution to the problem.                                                                                         
     Then  we  get  on  to the  bigger  policy  decision  of                                                                    
     whether or not we want to couple or decouple.                                                                              
1:49:09 PM                                                                                                                    
CO-CHAIR NEUMAN  offered his  understanding that  not all  oil is                                                               
the same;  the amount of Btus  makes a difference, and  if it has                                                               
more energy it is worth more.                                                                                                   
COMMISSIONER  GALVIN responded  that  Btus make  a difference  in                                                               
regard  to gas;  however, with  oil there  are other  issues with                                                               
regard to impurities, et cetera,  which establish the quality and                                                               
CO-CHAIR NEUMAN  recollected being told  that dry gas with  a lot                                                               
of methane lowers  the value of the gas, whereas  Prudhoe Bay gas                                                               
or white  gas with a  lot of natural gas  liquids in it  is worth                                                               
more, based on a Btu value.   He said, then, that it is necessary                                                               
to look  at the quantities  of gas and the  value of it  based on                                                               
the Btus.  In other words,  he concluded that the amount produced                                                               
multiplied by  the Btu equivalent  value equals the value  of the                                                               
COMMISSIONER  GALVIN said  there are  more regulations  involved;                                                               
however, in  response to  Co-Chair Neuman, he  said that  is "one                                                               
way to look at it."                                                                                                             
1:51:14 PM                                                                                                                    
REPRESENTATIVE TUCK  offered his  understanding that it  has been                                                               
determined that the  state would not lock in  the dilution effect                                                               
when  it goes  into open  season  in status  quo; therefore,  the                                                               
state would not  be locking in oil taxes.   Furthermore, there is                                                               
a concern that  the state wants to keep things  status quo, which                                                               
is why  Version M is before  the committee, "to opt  in, opt out,                                                               
or go from one bucket to  two buckets, [and] back to one bucket."                                                               
He offered  his understanding that the  reason to go back  to one                                                               
bucket after  a couple days is  "to protect the gas  and how it's                                                               
combined with  oil currently, so  that oil and gas  producers can                                                               
continue with that tax advantage."   Furthermore, he said "we" do                                                               
not want  to stifle the  future of gas production  by prematurely                                                               
REPRESENTATIVE TUCK,  regarding Co-Chair Johnson's  concern about                                                               
what decoupling would  do to the current system  until gas starts                                                               
flowing, said  it almost sounds like  it would be better  to wait                                                               
to "do something like SB 305 until after open season."                                                                          
1:54:32 PM                                                                                                                    
The committee took an at-ease from 1:54 p.m. to 1:56 p.m.                                                                       
1:56:58 PM                                                                                                                    
ROGER   MARKS,   Consulting   Petroleum  Economist,   Logsdon   &                                                               
Associates,  told the  committee that  he would  discuss the  tax                                                               
under  the  status  quo versus  decoupling,  including  what  the                                                               
numbers mean, what rates are behind  them, and why one appears to                                                               
be so  much higher than  the other.   He directed attention  to a                                                               
slide  presentation  in the  committee  packet  labeled "SB  305:                                                               
Notes on Operation of Tax," which  he said was presented on April                                                               
9 and was mistakenly labeled SB  350.  He then directed attention                                                               
to  slide  6 of  that  handout,  to  the  tax amount  made  under                                                               
decoupling, which is  $333,539,063.  He said  that number divided                                                               
by  the gross  rate  is approximately  6 percent  of  gross.   He                                                               
recollected  that someone  had asked  if that  is similar  to the                                                               
economic limit  factor (ELF)  and whether  it is  a good  idea to                                                               
compare it  to ELF.   Mr.  Marks said he  would give  a different                                                               
MR. MARKS said  the $333,539,063 was derived  through the current                                                               
tax,  which  is   25  percent  of  production   tax  value,  plus                                                               
progressivity,  minus  credits.    He said  decoupling  does  not                                                               
change the  tax rate; the rate  would be locked in  under SB 305.                                                               
He relayed that  this tax rate came out of  ACES, and "insofar as                                                               
ACES was appropriate  then, it's appropriate now."   He explained                                                               
that because  this is  a net  tax, as  prices and  production tax                                                               
value rise,  the tax, as  a percentage  of gross value,  would be                                                               
much higher.                                                                                                                    
1:59:53 PM                                                                                                                    
MR.  MARKS reviewed  that under  the attributed  gas tax  - DOR's                                                               
methodology  using  the  status   quo  of  allocating  the  total                                                               
combined tax -  the amount is $1,199,688,523 [shown  on slide 4];                                                               
under decoupling, the total is $333,539,063.                                                                                    
MR.  MARKS related  that  in  marketing there  is  a term  called                                                               
anchoring, which  is when marketers  plant suggestions as  to the                                                               
worth  of   a  product,  often   using  what  is  a   called  the                                                               
manufacturer's suggested retail price  (MSRP), and then lower the                                                               
price to  make people  think they  are getting a  good deal.   He                                                               
offered examples.   He said price  anchoring is what is  going on                                                               
in  terms of  the  $1,199,688,523 versus  the  $333,539,063.   In                                                               
response  to  Representative  Tuck,   he  explained  that  he  is                                                               
suggesting   that   committee   members  are   looking   at   the                                                               
$333,539,063  and thinking  that that  is a  low number,  because                                                               
they are comparing it to the  $1,999,688.523.  He said the latter                                                               
number  is high  because of  certain problems,  which he  said he                                                               
will define.                                                                                                                    
2:04:29 PM                                                                                                                    
REPRESENTATIVE TUCK offered his  understanding that these numbers                                                               
were  provided by  Mr. Marks,  and they  are numbers  that he  is                                                               
MR. MARKS  confirmed that is  correct.  Regarding  the perception                                                               
that the  $1,999,688,523 is  too high, Mr.  Marks said  "when you                                                               
combine things," the result is  the dilution effect, by which oil                                                               
gets "diluted  down" and gas  gets "diluted  up."  When  both oil                                                               
and gas are combined, the  progressivity is being calculated on a                                                               
production tax  value per  BOE equivalent  of $46.98,  which when                                                               
put on a  gas net value per Btu  is $7.83.  When oil  and gas are                                                               
decoupled, the value  of gas, undiluted by the  oil, is apparent;                                                               
when oil and  gas are coupled, the gas value  is being diluted by                                                               
the oil to  the $7.83 amount.   The net value per BOE  of the gas                                                               
alone is $9.98  or $1.66 thousand thousand  British thermal units                                                               
(MMBtu).  When combined, he said,  the gas gets valued as if it's                                                               
worth  $46.98 or  $7.83/MMBtu, thus  under status  quo, that  gas                                                               
with a  value of $1.66  is being taxed  as if  it has a  value of                                                               
$7.83.  He  said that is one  reason why the gas  tax shown under                                                               
status quo is so high.                                                                                                          
2:06:34 PM                                                                                                                    
REPRESENTATIVE P. WILSON asked:                                                                                                 
     The real  reason that we  do it  is so that  they don't                                                                    
     have to  pay as  much oil  tax, because  we're diluting                                                                    
     the gas and the oil, and  what this is allowing them to                                                                    
     do is  take off more  expenses, right?  So,  that's why                                                                    
     we did it, really, all together like that?                                                                                 
MR. MARKS  indicated that the  answer depends on  whether history                                                               
is interpreted such that it was  intended that oil and gas should                                                               
really be  combined to compute the  tax.  He added,  "And the way                                                               
the  tax was  written  it  does this,  but  it's  an effect  that                                                               
happens when  you combine them."   He offered  his interpretation                                                               
that when PPT  and ACES were enacted, people were  focused on oil                                                               
and it applied to gas "by happenstance."                                                                                        
2:08:28 PM                                                                                                                    
MR. MARKS,  in response to  a follow-up question, said  right now                                                               
there is  no gas that is  diluting the oil, but  with decoupling,                                                               
all the  costs would get to  be deducted, and the  decision would                                                               
need to be made as to how much cost is oil and how much is gas.                                                                 
2:09:46 PM                                                                                                                    
CO-CHAIR  NEUMAN opined  that absolutely  nothing  would be  done                                                               
except for in two days.                                                                                                         
2:09:54 PM                                                                                                                    
REPRESENTATIVE TUCK  recollected that  someone had  remarked that                                                               
decoupling was  never an issue  in ACES.  Conversely,  he pointed                                                               
out  that during  discussions of  ACES there  was a  lot of  talk                                                               
about the coupling and decoupling issue.                                                                                        
MR. MARKS said his views are  subjective, and the views of others                                                               
may differ.                                                                                                                     
2:11:21 PM                                                                                                                    
REPRESENTATIVE  SEATON relayed  that  when he  was  on the  House                                                               
Resources Standing  Committee during the discussions  on PPT, the                                                               
committee  considered   progressivity,  so,  the  issue   is  not                                                               
unanticipated.   Regarding  Mr.  Marks'  previous explanation  of                                                               
price anchoring, he  said he thinks folks  are more sophisticated                                                               
than  that.   He  said that  in the  past,  [the House  Resources                                                               
Standing  Committee]   talked  extensively   in  an   attempt  to                                                               
determine  the proper  Henry Hub  and accelerator  or decelerator                                                               
for taxes.  He said the  whole purpose was to leave them together                                                               
so  that at  negotiations the  state could  determine the  proper                                                               
relationship based on project cost and  prices.  He said he has a                                                               
problem  with  the  committee  now  attempting  in  one  week  to                                                               
determine that  the attributable costs are  wrong and determining                                                               
that  another  method  should  be   chosen  in  order  to  fix  a                                                               
contribution from  a gas tax for  ten years after gas  flows.  He                                                               
questioned  the  attempt to  fix  rates  and the  tax  obligation                                                               
calculated on gas production tax without the experts present.                                                                   
REPRESENTATIVE SEATON asked Mr. Marks:                                                                                          
     If  you were  going  into negotiations  on a  pipeline,                                                                    
     would  you  expect  the  ...   MSRP  to  fool  the  oil                                                                    
     companies; would you like to  have your hands tied at a                                                                    
     low rate before you ever went  in; or would you like to                                                                    
     have all  of those issues on  the table ... to  be able                                                                    
     to negotiate from a much stronger position?                                                                                
2:14:11 PM                                                                                                                    
MR.  MARKS clarified  that his  purpose in  bringing up  the MSRP                                                               
analogy was to indicate why  people may think the $333,539,063 is                                                               
too low, because they have  the $1,199,688,523, which is based on                                                               
the combined methodology.   Furthermore, he said  the analogy was                                                               
to show  that the  $333,539,063 is  based on  the 25  percent tax                                                               
rate in ACES, which  is in place now and would  be locked in, and                                                               
to explain why there are "some  problems with that high number" -                                                               
why it may  not be a productive number to  lock in going forward.                                                               
The analogy was not brought up  as a means to discuss negotiation                                                               
intricacies with the producers, he said.                                                                                        
MR. MARKS  referred to a chart  that he said he  handed out "this                                                               
2:16:02 PM                                                                                                                    
REPRESENTATIVE P.  WILSON asked, "Just  so I understand,  the ...                                                               
first two columns  are decoupled, so, the second  two columns are                                                               
MR. MARKS answered  that the first two columns  include the exact                                                               
same data that  is on [slide] 6,  which is that with  oil and gas                                                               
decoupled, the tax  rate with progressivity is  53.99 percent for                                                               
oil and 25 percent for gas.                                                                                                     
CO-CHAIR NEUMAN  asked Mr. Marks  to explain decoupled  tax rates                                                               
and implied attributed tax rates.                                                                                               
MR. MARKS, regarding implied attributed  tax rates, said when oil                                                               
and gas are decoupled, the result  is the ability to see what oil                                                               
and gas  are worth individually,  undiluted by each other.   When                                                               
combined, the  tax is based on  $46.98, and the value  of the oil                                                               
has  been diluted  down,  while the  value of  the  gas has  been                                                               
diluted up.  Under decoupling, the  oil is worth $102.48; the gas                                                               
is worth $9.98  per BOE or $1.66/MMBtu.  He  said with decoupling                                                               
there are  gross values  and costs that  are subtracted,  and the                                                               
production tax value  is $2,390,156,250, which is  subject to the                                                               
tax.  He  said, "So in this applied attributed  tax rate, we have                                                               
the same number:  that's  your production tax value, undiluted by                                                               
the oil."  He continued as follows:                                                                                             
     But  under  the  status  quo, with  the  Department  of                                                                    
     Revenue using these  attributed tax rates.   If we look                                                                    
     at  this $1.199  million as  the  tax, and  we look  at                                                                    
     $2.390  billion as  the production  tax value,  what is                                                                    
     the implied  tax value  that that ...  means?   And you                                                                    
     would need  a tax  value of 61  percent applied  to the                                                                    
     net value of $2.390 billion to get that tax.                                                                               
     So,  the reason  those numbers  are so  high under  the                                                                    
     status  quo,  with  the  combined  methodology,  is  in                                                                    
     essence in  this example  ... a 61  percent tax  on the                                                                    
MR.  MARKS  said last  night  he  reviewed the  information  from                                                               
Commissioner Galvin  that compares the  gas combined and  the gas                                                               
decoupled, and he  indicated that so much of  the included charts                                                               
are in  red that  "it looks  like a civil  war battlefield."   He                                                               
advised the  committee to question  whether high tax  rates would                                                               
be  the best  incentive for  getting people  to subscribe  to the                                                               
open season  and whether  "if that's what's  being locked  in" is                                                               
the best  environment in which  "to start a  deliberative process                                                               
down the road."                                                                                                                 
2:20:05 PM                                                                                                                    
REPRESENTATIVE  TUCK,  referring  to  the  Logsdon  &  Associates                                                               
presentation dated April  9, 2010, stated, "So, ...  when we look                                                               
at  implied  attributed  tax  rates,  we're  not  going  to  even                                                               
consider the decoupled tax rates  in making those determinations;                                                               
it's all going to  be in one bucket."  In  response to Mr. Marks,                                                               
he clarified that his statement pertains to current law.                                                                        
MR. MARKS  clarified that under  current law, "you'll  get $1.199                                                               
billion."   He  explained, "That's  because you've  calculated it                                                               
combined by  using $46.98 as the  value of the oil  and the value                                                               
of the gas, and  you get this ... number here."   He continued as                                                               
     If you look  at ... the tax you get  as a percentage of                                                                    
     your production  tax value,  you ...  would need  a tax                                                                    
     rate of  61 percent applied  to the decoupled  value of                                                                    
     the gas,  which is what  the gas is worth  undiluted by                                                                    
     the  oil.   You would  need a  61 percent  rate to  get                                                                    
     that.  So, in essence, under  the status quo, if SB 305                                                                    
     doesn't pass, ... you would  [be] taxing the production                                                                    
     tax  value of  gas as  it's undiluted  by oil  at a  61                                                                    
     percent tax rate.                                                                                                          
2:22:03 PM                                                                                                                    
REPRESENTATIVE  TUCK,  referring  to  slide  4  of  the  April  9                                                               
presentation, oil  and gas  tax combined, asked  what the  gas to                                                               
oil ratio was.                                                                                                                  
MR. MARKS responded that under  the regulations of the Department                                                               
of Resources,  the total tax  - the  $5.5 billion -  is allocated                                                               
based on  the relative gross  value; therefore, it is  22 percent                                                               
gas and 70 percent oil.   In response to a follow-up question, he                                                               
said the ratio  of the price of  gas to the price of  oil is $120                                                               
to $8.                                                                                                                          
REPRESENTATIVE  TUCK observed  that is  a  15:1 ratio.   He  then                                                               
directed attention to slide 2 of  the same handout, to the upper-                                                               
left  chart,  which  shows  the  15:1  ratio.    He  offered  his                                                               
understanding that Mr. Marks is saying  that "we should be at 1.9                                                               
attributed to gas rather than what  we have in PowerPoint 3."  He                                                               
     We have two examples of one -- we have that one, it's                                                                      
MR.  MARKS replied,  "Right, and  that's the  333 million  we get                                                               
under ... SB 305."                                                                                                              
REPRESENTATIVE TUCK  said, "And if  we separate  it we go  to ...                                                               
MR. MARKS confirmed that is correct.                                                                                            
2:24:06 PM                                                                                                                    
REPRESENTATIVE SEATON  indicated that  if the  status quo  is 1.2                                                               
attributable to  gas, then  there would  be 4  times as  much tax                                                               
attributable to gas under the status  quo as there would be under                                                               
SB 305.   He said the tax rate  on gas is the only  thing that is                                                               
fixed into law at open season.                                                                                                  
2:24:37 PM                                                                                                                    
REPRESENTATIVE  TUCK said,  "I just  wanted to  hear it  one more                                                               
time that that  is 0.3 or 305  and 1.2 on status quo."   He asked                                                               
Mr. Marks if he agrees with "those two numbers."                                                                                
MR. MARKS confirmed  that is correct.  He said,  "And again, that                                                               
matches these  numbers here:   there's the  1.2 on slide  4, when                                                               
it's  combined; and  there's the  0.3  on slide  6 where  they're                                                               
2:25:08 PM                                                                                                                    
REPRESENTATIVE EDGMON  directed attention to "the  slide with the                                                               
two bars"  on "page 3," and  he stated, "That $3  billion has got                                                               
to come  from somewhere,  right?   And it's  coming from  the oil                                                               
MR.  MARKS replied  that that  $3 billion  is "the  difference in                                                               
production tax by diluting the value of the oil through..."                                                                     
REPRESENTATIVE EDGMON said that represents  an increase in tax of                                                               
oil companies.                                                                                                                  
2:25:55 PM                                                                                                                    
MR. MARKS said  what that actually represents is the  drop in tax                                                               
that would  occur pursuant  to having oil  flowing by  itself and                                                               
then having gas  flow on top of that.   The $3 billion represents                                                               
the  decrease in  tax  resulting  from the  dilution  of the  oil                                                               
2:26:23 PM                                                                                                                    
MR. MARKS,  in response  to Chair Neuman,  said under  status quo                                                               
the state would be making $5.5 billion.   He said that prior to a                                                               
gas sale, the  state will have $8.7 billion in  tax on gas alone.                                                               
Under the  status quo, if  gas is brought  in, the state  ends up                                                               
with $5.5 billion,  which means about $3 billion of  oil tax that                                                               
was  being paid  before disappears,  even though  there is  a big                                                               
money-making gas operation overlaid on top of oil.                                                                              
2:28:14 PM                                                                                                                    
REPRESENTATIVE EDGMON reiterated his  concern that in the state's                                                               
attempt to provide an incentive to  the industry on the gas side,                                                               
it may  be providing a larger  disincentive on the oil  side.  He                                                               
surmised that Mr. Marks would disagree with that summation.                                                                     
2:28:48 PM                                                                                                                    
CO-CHAIR NEUMAN announced that SB 305 would be held over.                                                                       

Document Name Date/Time Subjects
SB 305 REV Qualifying For the AGIA Tax Inducement - Final.pdf HRES 4/11/2010 12:00:00 PM
SB 305
SB 305 LogsdonAssociates HRES 4.09.10.pdf HRES 4/11/2010 12:00:00 PM
SB 305
SB 305 REV Modeling Runs - Back-Up - Final.pdf HRES 4/11/2010 12:00:00 PM
SB 305
SB 305 REV How the AGIA Gas tax Inducement Works - final.pdf HRES 4/11/2010 12:00:00 PM
SB 305
SB 305 REV Cost Allocation Methodology - final.pdf HRES 4/11/2010 12:00:00 PM
SB 305