Legislature(2015 - 2016)BARNES 124

02/25/2016 01:00 PM RESOURCES

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01:02:46 PM Start
01:03:12 PM HB247
03:11:37 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
enalytica Oil & Gas Tax Credit Overview
+ Bills Previously Heard/Scheduled TELECONFERENCED
1:03:12 PM                                                                                                                    
CO-CHAIR  NAGEAK announced  that the  only order  of business  is                                                               
HOUSE BILL NO. 247, "An  Act relating to confidential information                                                               
status and public record status  of information in the possession                                                               
of the Department of Revenue;  relating to interest applicable to                                                               
delinquent tax; relating to disclosure  of oil and gas production                                                               
tax credit information;  relating to refunds for  the gas storage                                                               
facility tax  credit, the liquefied natural  gas storage facility                                                               
tax   credit,   and   the   qualified   in-state   oil   refinery                                                               
infrastructure expenditures  tax credit; relating to  the minimum                                                               
tax for certain  oil and gas production; relating  to the minimum                                                               
tax  calculation for  monthly installment  payments of  estimated                                                               
tax;  relating to  interest on  monthly  installment payments  of                                                               
estimated  tax; relating  to limitations  for the  application of                                                               
tax credits; relating  to oil and gas production  tax credits for                                                               
certain  losses and  expenditures;  relating  to limitations  for                                                               
nontransferable oil and  gas production tax credits  based on oil                                                               
production  and  the  alternative  tax credit  for  oil  and  gas                                                               
exploration;  relating to  purchase  of  tax credit  certificates                                                               
from the oil  and gas tax credit fund; relating  to a minimum for                                                               
gross  value  at  the  point of  production;  relating  to  lease                                                               
expenditures  and tax  credits for  municipal entities;  adding a                                                               
definition   for  "qualified   capital  expenditure";   adding  a                                                               
definition for  "outstanding liability  to the  state"; repealing                                                               
oil  and   gas  exploration  incentive  credits;   repealing  the                                                               
limitation on  the application of  credits against  tax liability                                                               
for  lease   expenditures  incurred   before  January   1,  2011;                                                               
repealing provisions related to  the monthly installment payments                                                               
for  estimated tax  for oil  and gas  produced before  January 1,                                                               
2014;  repealing  the  oil  and gas  production  tax  credit  for                                                               
qualified  capital expenditures  and  certain well  expenditures;                                                               
repealing   the  calculation   for  certain   lease  expenditures                                                               
applicable before January 1,  2011; making conforming amendments;                                                               
and providing for an effective date."                                                                                           
1:03:48 PM                                                                                                                    
JANAK  MAYER,  Chairman  &  Chief  Technologist,  enalytica,  and                                                               
consultant to  the Legislative Budget and  Audit Committee, noted                                                               
that enalytica will be providing  two presentations over the next                                                               
two days  analyzing the projected  impacts of  HB 247 on  the oil                                                               
and  gas  industry  in  Alaska.     He  said  today's  PowerPoint                                                               
presentation, "IMPACT OF  HB 247:  NORTH  SLOPE ASSESSMENT," will                                                               
focus on  the North  Slope and  how enalytica  views some  of the                                                               
proposed   changes  from   a  North   Slope  prospective,   while                                                               
tomorrow's presentation will focus on the Cook Inlet.                                                                           
1:06:03 PM                                                                                                                    
MR. MAYER turned  to slide 2, "KEY QUESTIONS RAISED  BY HB 247 RE                                                               
NORTH SLOPE," to provide some  of enalytica's high level thoughts                                                               
and conclusions.  He said the  biggest thing in looking at HB 247                                                               
with regard to the North Slope is  that on the one hand it is not                                                               
a tax  overhaul, it is not  looking at fundamental pieces  of the                                                               
fiscal system and making widespread  changes.  On the other hand,                                                               
the  bill  includes  a  number  of  very  small  changes  in  key                                                               
parameters that  collectively have  a substantial effect.   There                                                               
are legitimate concerns that the  bill raises, including many big                                                               
ones such as  the roll of the gross floor,  how that protects the                                                               
state when  prices are low, and  what the right approach  to that                                                               
is - the balance between what  the fiscal system does when prices                                                               
are high  and what the  fiscal system  does when prices  are low,                                                               
what  the state's  potential liability  is in  terms of  refunded                                                               
credits  in  various  scenarios  into  the  future.    These  are                                                               
important questions to be contemplated.                                                                                         
MR. MAYER advised that the  impact of the bill's proposed changes                                                               
will be highly  variable per company depending  on each company's                                                               
positions  and investment  profiles.   Most  companies would  see                                                               
substantial  adverse  effects  over  the coming  years  from  the                                                               
biggest changes that are being  proposed.  He said enalytica also                                                               
has  concerns in  regard  to  the retroactivity  of  some of  the                                                               
proposals as  well as the  proposed July 1 [2016]  effective date                                                               
in the context  of investment cycle in that they  are on numerous                                                               
major projects  currently underway, and some  projects sanctioned                                                               
as recently as  late last year.  Additionally, large  oil and gas                                                               
companies have  a budgeting  cycle and have  made plans  for this                                                               
year.  They  would need to come back because  halfway through the                                                               
year everything has  substantially changed due to  the passage of                                                               
new legislation.                                                                                                                
1:08:16 PM                                                                                                                    
MR. MAYER  stressed that  stability, more  than anything,  is the                                                               
single most important  element in any fiscal system as  long as a                                                               
system  is  broadly  competitive  and does  not  have  horrendous                                                               
problems in  terms of  what the  returns are  to the  investor or                                                               
horrendous  problems  in  terms  of the  sustainability  for  the                                                               
sovereign.   More  than anything,  what matters  is that  when an                                                               
investor calculates  the economics  on its  projects and  makes a                                                               
final investment decision  to proceed or not,  the investor needs                                                               
to know  that the  terms it  counted on are  going to  remain the                                                               
terms into  the future or  that if  the terms change  they change                                                               
very rarely  and for  reasons that are  well understood  and well                                                               
thought through.                                                                                                                
MR. MAYER said enalytica's biggest  concern with HB 247 in regard                                                               
to the  North Slope  is not  any single one  of the  changes, but                                                               
rather  a collection  of  small incremental  steps,  each one  of                                                               
which is a  small tax hike.  From an  investor's or oil company's                                                               
perspective it  is easy to  look at this incremental  approach of                                                               
taking a  little more revenue  here and  a little more  there and                                                               
wonder where  it will  stop.   That is  scary from  an investor's                                                               
perspective.  When it is one  change because it was not the right                                                               
policy  call  and  needs  to  be changed  and  there  is  clearly                                                               
articulated rationale  for why  it needs  to change,  an investor                                                               
can look  at that and  understand it even  if not liking  it, but                                                               
have some degree of certainty  that from this point forward there                                                               
will be some  stability.  Mr. Mayer said that  more than anything                                                               
else  when looking  at a  series  of incremental  revenue-raising                                                               
measures, his biggest concern is  about the message that is being                                                               
given  about the  stability of  the regime  in terms  of not  big                                                               
policy decisions but the danger of incrementalism.                                                                              
1:10:56 PM                                                                                                                    
REPRESENTATIVE HAWKER  asked whether  Mr. Mayer  is aware  of any                                                               
other jurisdiction  that is significantly increasing  taxes on an                                                               
industry  that is  clearly  losing money  all  around the  world,                                                               
particularly when  the stated intent  behind the tax  increase is                                                               
only for the purpose of raising government revenues.                                                                            
MR. MAYER  replied he thinks  anyone would say that,  in general,                                                               
raising  taxes on  industries  that make  losses  is not  optimal                                                               
policy.    When looking  around  the  world  the answer  to  that                                                               
question   depends   greatly   on  how   resource   dependent   a                                                               
jurisdiction is.   Oil and  gas companies  consider jurisdictions                                                               
with high  degrees of resource  dependency a form  of substantial                                                               
political  risk  precisely  for  this worry.    Large  and  well-                                                               
diversified economies  for whom oil  and gas revenues are  only a                                                               
small piece  of a well-managed  overall tax base can  manage this                                                               
sort of volatility.  One would  therefore expect that in times of                                                               
an industry downturn  jurisdictions would be trying  to make life                                                               
easier  for that  industry, not  harder.   However,  that is  not                                                               
always  the case  in smaller,  less-diversified, highly  resource                                                               
dependent economies and that is  one reason why companies look at                                                               
those places  and think twice about  what things are going  to be                                                               
like in a range of circumstances  before investing.  So, while he                                                               
wouldn't say  that nowhere  in the  world does  it happen  that a                                                               
resource dependent economy  tries to extract more  when times are                                                               
tough  from  the  goose  that  lays  the  golden  egg,  it  would                                                               
certainly not be optimal policy if one could avoid it.                                                                          
1:12:52 PM                                                                                                                    
REPRESENTATIVE  HAWKER opined  that for  a company  to invest  in                                                               
Alaska,  a highly  resource dependent  state,  the company  would                                                               
understand that  Alaska is a  much higher political risk  than is                                                               
investing  in jurisdictions  with a  more balanced  economy.   He                                                               
inquired whether that  would not also lead to  a presumption that                                                               
the  industry, in  order to  invest  in Alaska,  would require  a                                                               
higher return in the face of a higher risk.                                                                                     
MR. MAYER agreed.  More than  anything else, he said, the biggest                                                               
thing Alaska can do in any  price environment to reduce that risk                                                               
is to  show over time  that in fact  it is a  stable jurisdiction                                                               
and that it does not try to tweak  the levers every time it has a                                                               
problem.   As a hybrid system,  Alaska tries to have  the best of                                                               
both taking on  the high side through net taxation  and taking on                                                               
the  low  side  through  gross  taxation.    Always  focusing  on                                                               
whichever price  environment the state is  in and trying to  do a                                                               
little better  has some serious  problems when it comes  to long-                                                               
term stability and predictability of  a regime and overcoming the                                                               
hurdle  of  being  a  resource  dependent  state,  and  therefore                                                               
needing to show that the state is in fact stable and dependable.                                                                
1:14:25 PM                                                                                                                    
REPRESENTATIVE SEATON  inquired whether  enalytica's presentation                                                               
is coming  to the  committee from the  perspective of  a resource                                                               
investor or from  the aspect of the  state's financial capability                                                               
to sustain these credits.                                                                                                       
MR. MAYER  responded he  would like to  think that  enalytica has                                                               
always tried to balance those  things and give the most objective                                                               
advice it can.   Part of enalytica's  responsibility in providing                                                               
dispassionate advice  to the state  is to think through  when the                                                               
state  has certain  policy objectives  and proposes  a course  of                                                               
action.  What are the impacts of  that on an investor?  If one of                                                               
the policy aims is to  encourage investment, do changes that meet                                                               
certain policy objectives have  unfortunate consequences on other                                                               
fronts because  of the way they  are seen by investors?   That is                                                               
part of what enalytica tries to give advice on.                                                                                 
REPRESENTATIVE SEATON  requested that  as Mr. Mayer  goes through                                                               
his presentation  he make  clear to the  committee as  to whether                                                               
enalytica  is  recommending  a policy  for  investors  and  their                                                               
stability or for Alaska's fiscal certainty and fiscal stability.                                                                
1:16:03 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON, following  the  logic described  where                                                               
the industry  might view  with more anxiety  a situation  where a                                                               
sovereign is virtually wholly dependent  on that industry, stated                                                               
that what this administration seems  to be saying is that through                                                               
no fault  of anyone  Alaska cannot do  that anymore,  Alaska must                                                               
wean itself from the industry  and find stability in another way.                                                               
The administration has about a dozen  measures and HB 247 is part                                                               
of  that fiscal  stability.   He asked  whether this  tracks with                                                               
what Mr. Mayer is saying about industry wanting stability.                                                                      
MR. MAYER  answered that it comes  back to his starting  point of                                                               
saying  that certain  big questions  are raised  by the  bill and                                                               
that are legitimate questions to  raise about what is optimal tax                                                               
policy for  the sovereign to  maintain its revenue base  across a                                                               
wide range of oil prices and  all the rest.  Different people can                                                               
come up with different conclusions in  that regard.  But, from an                                                               
investor's  perspective,  one could  see  changes  made that  one                                                               
really did not like or  found very painful, particularly if taxes                                                               
are being raised at  a time when there is no value  to tax and is                                                               
essentially just  extracting money.   One might still be  able to                                                               
live with that  in some scenarios if one thought  that this was a                                                               
solidly debated, well-thought-through change  and things were not                                                               
going to  change any  further after  that.   Mr. Mayer  said that                                                               
what  gives  him  the  most  cause for  concern  is  the  overall                                                               
impression   of   making  slice-by-slice-by-slice   progress   in                                                               
extracting  further revenue.    Always  most disconcerting  about                                                               
that approach from  an investor's perspective is  where does that                                                               
stop.  There is a  substantial difference between a well-reasoned                                                               
debate on some issues and a resolution  of them in a way that one                                                               
feels  confident  that things  are  not  going to  keep  changing                                                               
versus gradual incrementalism.  More  than anything else, that is                                                               
what he would warn against.                                                                                                     
1:19:03 PM                                                                                                                    
CO-CHAIR NAGEAK remarked that, like it or not, Alaska is a one-                                                                 
resource state.   He recounted  that when  he was growing  up the                                                               
federal government ran all of  Alaska because it was a territory.                                                               
After  becoming  a  state  the   state  took  over  most  of  the                                                               
responsibilities to  govern itself.   When he was growing  up the                                                               
resources  available  for  funding   the  state  were  fisheries,                                                               
logging,  and mining.    Then,  when oil  was  discovered in  the                                                               
1960's, state  government became oil  and gas  taxes.  As  a one-                                                               
resource state Alaska must find  ways to use its other resources.                                                               
For example, a road is needed to  his house so the state can take                                                               
advantage of those resources.                                                                                                   
1:20:25 PM                                                                                                                    
REPRESENTATIVE  HAWKER requested  Mr. Mayer  to state  who he  is                                                               
working for while he is before the committee today.                                                                             
MR.  MAYER  stated that  enalytica  and  he  as an  employee  and                                                               
officer  of  enalytica  are  employed   for  the  legislature  as                                                               
consultants  by the  Legislative  Budget and  Audit Committee  to                                                               
give dispassionate advice to the entire legislature.                                                                            
REPRESENTATIVE HAWKER  inquired whether it  would be fair  to say                                                               
that, as chair of the  Legislative Budget and Audit Committee, he                                                               
asked enalytica  to provide a  fair analysis  to the best  of its                                                               
ability of HB  247 for the legislature to consider  in making its                                                               
MR. MAYER replied, "Absolutely yes."                                                                                            
REPRESENTATIVE HAWKER asked whether  Mr. Mayer has allegiances to                                                               
anyone else in this matter.                                                                                                     
MR. MAYER responded, "Absolutely not."                                                                                          
REPRESENTATIVE  HAWKER inquired  whether Mr.  Mayer is  providing                                                               
any testimony on behalf of the  industry or any other investor in                                                               
the state of Alaska.                                                                                                            
MR. MAYER  answered, "We  provide testimony ...  on behalf  of no                                                               
one other than  ourselves and our best  dispassionate analysis of                                                               
what  is in  the best  of the  State of  Alaska."   In doing  so,                                                               
enalytica tries to  think through what a  particular change looks                                                               
like from  an investor perspective,  what might  the consequences                                                               
of that  be, and therefore  whether the  policy does or  does not                                                               
meet that test of the best interest of the State of Alaska.                                                                     
REPRESENTATIVE HAWKER asked  whether Mr. Mayer is  an expert here                                                               
to  testify on  the state's  budget issues  and the  state's cash                                                               
flow requirements and needs.                                                                                                    
MR. MAYER replied  that enalytica's focus is on  questions of oil                                                               
and gas fiscal systems and  commercialization of oil and gas more                                                               
broadly.   There is  some degree of  overlap between  good fiscal                                                               
system design  and what  that provides  the state  in terms  of a                                                               
solid financial  position in terms of  cash flow over a  range of                                                               
price decks.  But, beyond that,  enalytica is not here to provide                                                               
advice on how the state manages its budget.                                                                                     
REPRESENTATIVE HAWKER thanked Mr. Mayer for the clarity.                                                                        
1:22:59 PM                                                                                                                    
MR. MAYER  moved to slide  3, "REFUNDED CREDITS REACHED  NEW HIGH                                                               
IN  FY 2015."   He  said  one large  key  to this  debate in  the                                                               
difficult fiscal  circumstances that  the state finds  itself in,                                                               
is the  question of  the role  of tax credits  in general  and in                                                               
particular refunded credits  that the state pays  out through the                                                               
tax system.   This is about  what the state pays  out as refunded                                                               
credits  to individual  companies, particular  to companies  that                                                               
meet  the  threshold of  being  below  50,000  barrels a  day  in                                                               
production.  Then,  there is the question of  gross minimum floor                                                               
and credits that  can take a company below that  floor.  But core                                                               
to all  of this  is this  question of credits.   At  $628 million                                                               
this  last  fiscal year,  refunded  credits  reached the  highest                                                               
point ever.   Not only  has the  amount of refunded  credits been                                                               
growing for the last many years,  most striking about this is how                                                               
the balance has clearly shifted.   In 2014 and 2015, however, the                                                               
majority  of credit  refunds were  spent in  Cook Inlet,  not the                                                               
North  Slope.    According  to forecasts  by  the  Department  of                                                               
Revenue (DOR), refunded credits will  exceed $1 billion in fiscal                                                               
years 2016  and 2017.   Part  of that  may be  self-correcting in                                                               
that investment may  not be what was hoped in  an extended period                                                               
of low  prices.  When one  considers the impact of  low prices on                                                               
the state's  revenues, anyone  should look  at those  numbers and                                                               
conclude  that serious  thought needs  to  be given  to what  the                                                               
impact of this is and how sustainable this is.                                                                                  
1:25:41 PM                                                                                                                    
MR.  MAYER drew  attention to  slide 4,  "BIG DIFFERENCE  BETWEEN                                                               
NORTH SLOPE  AND COOK INLET,"  and explained that the  graph uses                                                               
actual 2015 numbers  for revenue and credits.  He  said the split                                                               
between the North  Slope mostly relies on actual  DOR numbers and                                                               
the  royalty  is  an  estimate  by  enalytica  rather  than  hard                                                               
numbers,  but the  totals on  the graph  are hard  numbers.   The                                                               
fiscal system  overall still  generates more  than $2  billion in                                                               
revenue.   Relatively  speaking  much, much,  much  less of  that                                                               
comes from production tax than from  royalty.  Two years ago that                                                               
was a very different situation and  that is because the idea of a                                                               
Net Production  Tax is to tax  profit, to tax value.   When there                                                               
is very little  profit to tax, that number is  always going to be                                                               
very small and  that is an intentional design of  the system.  As                                                               
a  whole the  system  still  generates more  than  $2 billion  of                                                               
revenue,  he reiterated,  and that  is true  just looking  at the                                                               
North  Slope  in isolation.    Compared  to  that $2  billion  in                                                               
revenue, the system  overall spent a little over  $200 million on                                                               
credits this  last year.   However, he continued, the  Cook Inlet                                                               
is  a very  different  scenario.   [The year  2015]  is just  one                                                               
snapshot in time  and does not take into account  the question of                                                               
what future revenues those credits may  or may not generate.  The                                                               
Cook  Inlet  is  much,  much less  revenue  for  relatively  much                                                               
greater credits.   This is  an important distinction to  draw and                                                               
understand, he said, and is  why enalytica is reviewing the North                                                               
Slope and the Cook Inlet on two different days.                                                                                 
1:27:52 PM                                                                                                                    
REPRESENTATIVE  HAWKER understood  that the  real imbalance  with                                                               
regard to Cook Inlet is  because these credits are refundable and                                                               
are not  required to  be used by  the person  actually generating                                                               
them, and this  is why there is a significant  amount of negative                                                               
cash flow for Cook Inlet.                                                                                                       
MR.  MAYER confirmed  the aforementioned  and further  noted that                                                               
Cook Inlet has no production tax on  oil and only has a low fixed                                                               
[production tax] on  gas of $0.17 per thousand  cubic feet (MCF).                                                               
Another big driver  of that imbalance is that the  Cook Inlet has                                                               
all of  the credits that  the Alaska's Clear and  Equitable Share                                                               
(ACES)  [House Bill  2001, passed  in  2007, Twenty-Fifth  Alaska                                                               
State Legislature] system applied to  the North Slope, as well as                                                               
some additional credits on top of that.                                                                                         
1:28:42 PM                                                                                                                    
REPRESENTATIVE SEATON  inquired whether local property  tax share                                                               
is included in that or whether  it is actually the share of money                                                               
from the  North Slope or Cook  Inlet that comes to  the state and                                                               
that the state has available to pay those credits.                                                                              
MR. MAYER responded that these  high level numbers are statewide,                                                               
so  they  do  include  money  from  property  tax  that  goes  to                                                               
municipalities and  to the state.   The graph  shows unrestricted                                                               
royalty revenue  to the  state in  yellow and  restricted royalty                                                               
[in orange].  Responding further,  Mr. Mayer noted that the total                                                               
amount of  restricted royalty revenue  is $670.5 million  and the                                                               
total  amount of  unrestricted royalty  revenue is  just over  $1                                                               
REPRESENTATIVE SEATON requested Mr.  Mayer to distinguish between                                                               
how  much revenue  goes to  the state  and how  much goes  to the                                                               
municipalities as he proceeds in the presentation.                                                                              
1:30:49 PM                                                                                                                    
MR. MAYER  moved to slide  5, "ALASKA'S  HYBRID SYSTEM:   LOTS OF                                                               
BIRDS, FEW STONES," to discuss  the fiscal regime that applies on                                                               
the North Slope.  He pointed  out that Alaska has a hybrid system                                                               
of both  gross and net  taxes, which enalytica  is lightheartedly                                                               
describing as  "lots of birds, few  stones" in the context  of an                                                               
ideal world  where one likes  to kill  as many birds  as possible                                                               
with a  single stone.  It  is an effective metaphor  because that                                                               
is  difficult if  not  impossible to  do.   The  analogy is  that                                                               
Alaska has  many aims that  it wants  to achieve from  its fiscal                                                               
system - it would like to take  as much of the profit as possible                                                               
when times are good, but would  like to protect itself on the low                                                               
end when times  are bad.  There  is some extent to  which one can                                                               
do both of those things, but  it is limited, there is a trade-off                                                               
to be made here.   It is hard to be both  Norway and North Dakota                                                               
at the  same time.   North  Dakota has  a very  regressive fiscal                                                               
regime that is  very punishing when prices are low,  but is still                                                               
an  attractive place  for investment  across the  commodity cycle                                                               
because it  also gives away  a lot when  times are good.   Norway                                                               
has a net profit based system  that has very high government take                                                               
at high prices,  but because it is  a pure net system  it is also                                                               
relatively more attractive when prices are lower.                                                                               
MR. MAYER  elaborated that the idea  and benefit of a  net system                                                               
is to aim to minimize  distortion and maximize returns across the                                                               
commodity cycle.  However, a net  system can be quite volatile in                                                               
the way it  generates revenue.  For that reason,  net systems are                                                               
particularly well suited to large  diversified economies that can                                                               
manage revenue  well, or  to economies that  take as  prudent and                                                               
thoughtful an approach to managing  their revenues as possible in                                                               
terms of  things like sovereign  wealth funds and, to  the extent                                                               
that one is a highly resource  dependent state, that tries to run                                                               
off  its  source of  endowment  rather  than off  the  government                                                               
revenue  that it  generates  from  taxes.   States  that run  off                                                               
government  revenue  that is  generated  off  taxes struggle  the                                                               
hardest  in some  ways with  net profit  tax systems  because net                                                               
profit systems amplify that volatility.                                                                                         
1:33:37 PM                                                                                                                    
MR.  MAYER noted  that royalties  and gross  taxes minimize  that                                                               
volatility  because  they  take  the  greatest  share  of  value,                                                               
including all  or more of  the value,  when times are  the worst,                                                               
when costs  are high, or when  prices are low, and  they take the                                                               
least when  times are fat.   For that  reason, there are  lots of                                                               
circumstances under which gross  systems can be quite distorting,                                                               
quite prohibitive,  of certain  types of  investment.   High cost                                                               
investment becomes very  difficult in certain gross  systems.  It                                                               
becomes very  difficult to invest  in gross systems  in prolonged                                                               
periods of  low prices,  but the great  benefit they  provide the                                                               
sovereign is  relative stability  over the  revenues over  a long                                                               
period of time because they are fundamentally regressive.                                                                       
MR.  MAYER pointed  out that  it gets  very difficult  to balance                                                               
these two  competing priorities.  In  lots of cases there  is one                                                               
system  or the  other.   Alaska, partly  because of  its resource                                                               
dependence and  partly because of the  historical circumstance of                                                               
having come from a long tax  royalty tradition, has a mix of both                                                               
gross and  net taxes.   That  has many  strengths.   However, the                                                               
danger is  that when times are  good, the focus and  the emphasis                                                               
is always on  "times are really good and we  have this net profit                                                               
tax, shouldn't  we maybe  be getting  a little  bit more  for the                                                               
money  now that  there is  so much  coming in  and are  we really                                                               
getting the fair share?"  And when  times are bad the focus is on                                                               
"times are  really bad,  wouldn't it  be good  if we  were better                                                               
protected at  the low end?"   He said he thinks  that dynamic has                                                               
been played out  in public debate and in  politics and discussion                                                               
on  this issue  over  many years  and ultimately  one  can, to  a                                                               
limited extent, address both of  those competing priories but the                                                               
ability to do that is very limited.                                                                                             
MR. MAYER advised that a  competitive fiscal regime balances risk                                                               
and reward.  A lot of certainty can  be had at the low end if one                                                               
is willing to give away a lot at  the high end.  Or, one can take                                                               
a lot of the  high end if one is willing to  distort as little as                                                               
possible and be as generous as possible  at the low end.  But one                                                               
cannot always do both - too many birds, not enough stones.                                                                      
1:35:58 PM                                                                                                                    
MR.  MAYER turned  to slide  6,  "GROSS VS.  NET TAX:   TWO  VERY                                                               
DIFFERENT  APPROACHES,"  to  review the  aforementioned  in  more                                                               
detail.  He stressed that it  is important to understand the math                                                               
of gross  taxes versus  net taxes  and how they  work.   Having a                                                               
true understanding  of that becomes  very important  when getting                                                               
into  questions such  as the  gross  minimum floor  and how  that                                                               
works.   Gross  taxes and  net taxes  look very  different across                                                               
different  prices  and  different   spending  environments.    He                                                               
reiterated that  gross taxes are  less volatile, they  shift risk                                                               
to  the  private  sector,  and   they  are  simple  and  easy  to                                                               
administer because the only two things  that need to be known are                                                               
how much  oil came  out of the  well and the  price it  sold for.                                                               
Gross tax has  a very high government take at  low prices and low                                                               
government take at high prices.                                                                                                 
MR. MAYER addressed  the gross tax example in the  left column of                                                               
slide 6  and noted that  it is essentially the  simplest possible                                                               
fiscal  system -  nothing other  than a  single 10  percent gross                                                               
tax.   He explained that the  gross and net examples  depicted on                                                               
the slide  include three columns  for three different  oil prices                                                               
(shown in  blue) and  three columns  for three  different capital                                                               
expenditures ("capex") (shown  in blue).  The  constant number of                                                               
$10  [for transportation  cost] is  subtracted from  each of  the                                                               
different prices  to arrive at  the Gross  Value at the  Point of                                                               
Production  (GVPP).   Operating expenditures  ("opex") and  capex                                                               
are  then subtracted  and, in  this example,  they are  each $18.                                                               
These calculations  arrive at  the net  value, which  in Alaska's                                                               
system is called  the Production Tax Value (PTV) per  barrel.  At                                                               
a price  of $90 there is  Production Tax Value of  $44, the value                                                               
that is there  to be taxed after  deducting all the costs.   At a                                                               
price of $60 the Production Tax Value  is $14.  At a price of $30                                                               
the  Production Tax  Value is  minus $16,  assuming a  tax system                                                               
that  recognizes a  negative  value.   Alaska's  tax system  does                                                               
effectively  allow  negative value  by  saying  that that  number                                                               
cannot go  below zero but  there is a net  operating loss.   A 10                                                               
percent gross tax on  the GVPP is a tax of $2 at  a price of $30,                                                               
a tax of $5 at a price of $60, and  a tax of $8 at a price of $90                                                               
(GVPP values of  $20, $50, and $80, respectively).   When looking                                                               
at what the $8,  $5, and $2 represent as a  proportion of the net                                                               
value, the $8 tax at a price  of $90 represents 18 percent of the                                                               
net, the $5  tax at a price  of $60 represents 36  percent of the                                                               
net, and  for the $2  tax at a  price of  $30 there is  no number                                                               
applicable for the  percent of net because there was  no value in                                                               
the first place.                                                                                                                
1:40:08 PM                                                                                                                    
MR. MAYER continued addressing the  gross tax example on slide 6,                                                               
explaining that  as prices go  higher and higher, the  percent of                                                               
the net becomes a lower and lower  share.  As prices go lower and                                                               
lower, the percent of the net  becomes a higher and higher share;                                                               
it looks  like a  "hockey stick"  as an infinite  rate of  tax is                                                               
approached at the lowest prices.   He said this same variation is                                                               
true when  looking at  different spending levels.   If  the price                                                               
remains constant at $60, but  the capex spending varies at levels                                                               
of $30,  $20, and  $10 (shown in  blue), the  same aforementioned                                                               
effect occurs.   A 10 percent gross  tax is a much  lower net tax                                                               
rate (23 percent)  for the lowest cost of  production ($10 capex)                                                               
and a  much higher  net tax  rate (250  percent) for  the highest                                                               
cost of production  ($30 capex).  This is an  example for when it                                                               
is said that there is high  government take at low prices and low                                                               
government take at high prices  and, similarly, higher government                                                               
take on  the most expensive  production and the  least government                                                               
take on  the cheapest production.   However, the  overall numbers                                                               
in a  gross tax system  change relatively  little.  In  the worst                                                               
case, the  government gets $2  a barrel  and in the  highest case                                                               
the government  gets $8  a barrel.   That compares  in a  net tax                                                               
system to  maybe getting as much  as $11 a barrel  in the highest                                                               
case, but possibly a negative value  when times are bad and a net                                                               
loss is being  generated.  So, this is  that fundamental question                                                               
of  revenue volatility  and the  difference  between very  stable                                                               
revenues, relatively,  under the  gross system and  very volatile                                                               
revenues under the net system.                                                                                                  
MR. MAYER then  reviewed the net tax example in  the right column                                                               
on slide 6.   He explained that the tax is  a constant 25 percent                                                               
of the  net value, the production  tax per barrel, and  is always                                                               
the same  at all  the different  costs and  at all  the different                                                               
prices.   The  idea behind  net tax  is that  it is  as minimally                                                               
distorting on investment  as possible.  Whether  an investment is                                                               
very cheap  or very expensive,  if it makes  sense in and  of its                                                               
own terms  it is  wanted for  the imposition of  this tax  to not                                                               
change that.  Whereas under a  gross regime an investor might not                                                               
proceed with a high cost investment  because of how the gross tax                                                               
fundamentally  alters  things.   The  idea  behind the  best  net                                                               
profits  taxes  is to  be  as  close  as  possible to  an  equity                                                               
investor:  when  times are bad and an investor  is cash negative,                                                               
the government  is also  cash negative; when  times are  good and                                                               
the  investor is  taking lots  of  cash, the  government is  also                                                               
taking  lots of  cash.   In the  best of  these systems  there is                                                               
almost no  difference between  - from a  cash flow  perspective -                                                               
what that looks  like versus what an equity  investor looks like.                                                               
Over the  course of  commodity cycle, one  can, in  general, take                                                               
more of the  overall profits over the entire cycle  because it is                                                               
non-distorting.   If an  investor takes  that long-term  view the                                                               
investor  can  do  substantially  better through  a  net  system.                                                               
Also,  more  investment is  encouraged  because  those high  cost                                                               
projects  that  might not  have  been  possible under  the  gross                                                               
system are possible  under the net system;  but, the jurisdiction                                                               
ends up with  these more volatile revenues that it  needs to find                                                               
a way to manage.                                                                                                                
1:43:13 PM                                                                                                                    
MR. MAYER  moved to  slide 7, "CASHFLOW  TAXES:   MORE EFFICIENT,                                                               
MORE VOLATILE," to discuss the  distinction between taxes on cash                                                               
flow versus  taxes on income.   In the  pure world of  net taxes,                                                               
one  can tax  either of  these, he  explained.   In the  world of                                                               
resource  taxation,  one  frequently   tends  to  see  net  taxes                                                               
structured as taxes on cash flow.   This is because, when wanting                                                               
to minimize the distorting impact  on investment, the best way to                                                               
do that  is to make the  state's receipts from the  tax system as                                                               
close as  possible to those of  an equity investor in  a project.                                                               
The idea behind a cash flow tax  is that in the years an investor                                                               
makes an investment,  that investor is cash flow  negative and so                                                               
is the  state through the  tax and credit  system.  In  the years                                                               
when that investment is paying off  and generating a lot of cash,                                                               
the state  is cash  flow positive  and generating  a lot  of cash                                                               
through the  system.  The  distinction in that sense  between the                                                               
cash flow  tax versus the  income tax is  that the cash  flow tax                                                               
treats costs  as happening  in the  year they  actually occurred,                                                               
whereas  an income  tax does  not  think about  that and  instead                                                               
capitalizes and  depreciates assets  over time and  that provides                                                               
this measure of stability.                                                                                                      
MR. MAYER brought  attention to the example on slide  7 of highly                                                               
simplified cash flow and income.   In the early years there is no                                                               
revenue, he explained,  because there is not  yet any production.                                                               
The capex  gives a negative cash  flow [shown in red  and labeled                                                               
"Pre-Tax Cashflow"].   At a  pure 25  percent rate, which  in the                                                               
context  of  Alaska  can  be  thought of  as  a  25  percent  Net                                                               
Operation Loss Credit,  a company gets that money  back as either                                                               
a refund  from the treasury or  as a write-off against  its other                                                               
tax  liabilities.   In an  income tax  world, that  negative cash                                                               
outflow  is not  recognized  because instead  of subtracting  the                                                               
opex  and capex  and ending  up with  a tax  value that  asset is                                                               
capitalized at  the point that  it enters production and  is then                                                               
depreciated over  time (labeled in  the chart as asset  value and                                                               
depreciation).  Referring  to the red line  labeled "Net Income",                                                               
Mr. Mayer  explained that  if, after  calculating the  cash flow,                                                               
the  capex is  added  back  in and  the  depreciation is  instead                                                               
subtracted,  the result  is something  roughly approximating  net                                                               
income; it  is always  positive, it never  goes negative  the way                                                               
the cash  flow did.   When  the income is  taxed rather  than the                                                               
cash flow,  there is not as  much revenue in the  later years and                                                               
there are no negative outflows  when the investment is happening.                                                               
The  reason Alaska  has a  cash flow  focused system  and not  an                                                               
income  focused system  is  because it  aims to  be  as close  as                                                               
possible to  an equity investor in  a project in its  impact over                                                               
time,  which  is to  say  to  have  the least  distorting  impact                                                               
possible.  These distinctions are  very important to bear in mind                                                               
at times  like this  when a  number of  companies have  said that                                                               
their  Alaska  operations  are  cash flow  negative.    That  may                                                               
particularly  be  the  case  when,   for  booking  purposes,  the                                                               
companies post  a profit  for certain  months of  the year.   The                                                               
profit that they are posting is  a profit on an income basis, not                                                               
taking  into account  what they  are actually  spending, but  the                                                               
depreciated asset at their values over  time.  It is important to                                                               
understand  the  distinction  between  those  things  and  how  a                                                               
company can post  a small profit for parts of  the year but still                                                               
be cash  flow negative  when prices  are low  and the  company is                                                               
spending a lot of money.                                                                                                        
1:47:29 PM                                                                                                                    
MR. MAYER turned  to slide 8, "ALASKA'S PRODUCTION  TAX:  ORIGINS                                                               
IN 2006 PROPOSAL," to address  the way Alaska's tax regime works.                                                               
He explained  that it is useful  to first think about  the system                                                               
that was  proposed [in 2006] by  Dr. Pedro van Meurs,  a previous                                                               
administration's  consultant who  worked on  what a  profit based                                                               
tax might  look like.   It remains  the heart of  Alaska's fiscal                                                               
system  today even  though  it  has changed  over  time with  the                                                               
production profits  tax (PPT) and  ACES systems.  Dr.  van Meurs'                                                               
proposal  included a  25  percent flat  tax on  cash  flow; a  25                                                               
percent  credit  for Net  Operating  Losses  (NOLs), meaning  the                                                               
value  can go  negative  and  when it  does  the  state pays  out                                                               
instead  of  receives;  and  a  20  percent  credit  for  capital                                                               
spending.  So overall there could  be up to 45 percent government                                                               
support for spending  for [both new and incumbent  players].  For                                                               
example,  a small  company that  is newly  developing a  resource                                                               
with no other tax liability is  cash flow negative in those early                                                               
years when it  is spending money but not receiving  any.  That 25                                                               
percent  credit  would be  paid  out  to  the company,  which  is                                                               
exactly  the  way  an  equity   investor  in  the  project  would                                                               
contribute 25  percent of  the upfront capital,  and then  in the                                                               
later years the company pays 25  percent of the cash flow through                                                               
the tax system.   The additional 20 percent  capital credit could                                                               
also be received  regardless of whether a company  was large with                                                               
a tax  liability and able to  write down 25 percent  of the value                                                               
of its spending  on its tax liability or whether  a company was a                                                               
small producer claiming that Net Operation Loss Credit.                                                                         
MR. MAYER remarked that in  today's environment it is interesting                                                               
to go back and read Dr.  van Meurs' paper written [10 years] ago.                                                               
Dr.  van Meurs  looked at  gross floors  and recommended  against                                                               
them  because of  the idea  that they  distort investment,  among                                                               
other things.   But, Dr. van Meurs  did say that one  of the aims                                                               
should be  to have  a statewide  floor of zero  on the  tax base,                                                               
which is to say that a  responsible sovereign needs to manage its                                                               
revenues and should not, in net, be  paying out.  The idea in Dr.                                                               
van Meurs' model was that  credits would be tradeable rather than                                                               
actually  paid out  by  the treasury.   A  small  company with  a                                                               
negative liability  could take  the credits that  it is  owed and                                                               
sell them  to a company that  does have a tax  liability and that                                                               
could then  use the credits  to reduce  that liability.   But, in                                                               
net, that system  could not go below zero.   In subsequent years,                                                               
Mr. Mayer  said, that turned  into a system of  reimbursement for                                                               
reasons related to  what the value of the credits  were when they                                                               
were traded.   Probably having  a system of  reimbursable credits                                                               
has  made  all  sorts  of  things  happen  that  might  not  have                                                               
otherwise happened,  but they also  mean that there is  no longer                                                               
that statewide  floor of zero  that having solely  traded, rather                                                               
than reimbursable, credits creates.                                                                                             
1:51:15 PM                                                                                                                    
REPRESENTATIVE  HAWKER  requested  Mr.  Mayer to  explain  why  a                                                               
reimbursable  credit  can  take  the  state  below  zero,  but  a                                                               
tradeable credit would not.                                                                                                     
MR. MAYER replied  that a new company developing a  new asset and                                                               
not yet making any money would  have a new cash outflow; it would                                                               
under such system effectively have  a negative liability which it                                                               
can take  as a  credit.   The impact is  very different  when the                                                               
company cannot take that credit to  the state for payment in cash                                                               
but must  instead do something  else with  the credit.   The only                                                               
place this  new company  can go  with that credit  is to  a large                                                               
company that  does have a  liability and  can use that  credit to                                                               
reduce its  liability by the value  of the credit.   In net, this                                                               
system can only  pay out down to  zero because when no  one has a                                                               
liability then  there will be no  one who wants to  buy a credit.                                                               
The only  remaining source  of potential  funds into  this system                                                               
would be  the state itself  and the state  has said that  it does                                                               
not purchase these  credits, it only issues them  and allows them                                                               
to be traded.                                                                                                                   
1:52:48 PM                                                                                                                    
MR. MAYER  returned to slide  8 and  reviewed the example  on the                                                               
lower half  of the slide.   He said working through  this example                                                               
will help  in remembering the  starting core as  the calculations                                                               
become more complex  in forthcoming examples.  He  began with the                                                               
scenario of an oil price of  $60 from which a transportation cost                                                               
of $10 is subtracted  to arrive at a Gross Value  at the Point of                                                               
Production (GVPP) of $50.  He  then subtracted [opex and capex at                                                               
$18 each] to  arrive at a net  value of $14.  A  25 percent [net]                                                               
tax on the $14  is $3.50 per barrel.  He added  in the 20 percent                                                               
capital spending  credit of $3.60  to arrive at  an after-credits                                                               
loss [of  $0.10].   The percent  gross would  then be  0 percent.                                                               
The percent  net would be  a negative [1  percent] tax rate  on a                                                               
loss;  what  was a  25  percent  tax  before the  capital  credit                                                               
becomes  effectively negative  after the  application of  the tax                                                               
credit.  Mr. Mayer related that  in the context of Senate Bill 21                                                               
[passed  in  2013,  Twenty-Eighth Alaska  State  Legislature]  he                                                               
often hears that it  is a 35 percent tax rate,  but is really not                                                               
a 35 percent tax rate because  there is a fixed dollar per barrel                                                               
credit that  takes it down  below.   That is absolutely  true, he                                                               
said, and it was true of  the original system proposed by Dr. van                                                               
Meurs and  of ACES.   In  this case, the  feature that  made that                                                               
happen was the 20 percent capital  credit.  In this case, capital                                                               
spending is independent  of the oil price, at least  in the short                                                               
run.   It is  a fixed  amount versus  the oil  price and  the oil                                                               
revenue which go up  and down.  Because it is  a fixed portion it                                                               
represents a much  bigger portion when prices are low  and a much                                                               
smaller portion when  prices are high.  It is  by itself, without                                                               
any of the  ACES progressivity, a progressive tax rate.   It will                                                               
go up and  approach 25 percent at the highest  prices but it will                                                               
approach it  asymptotically, meaning  it will never  actually get                                                               
there, and it will come down or  come to zero or even go negative                                                               
because at certain prices the  capital credit by itself is enough                                                               
to take it there.  It  is important to understand that that basic                                                               
dynamic has  been in the tax  system since the word  go, and even                                                               
before  the word  go, which  is the  intellectual genesis  of the                                                               
idea behind  the tax system rather  than the system itself.   Any                                                               
net  tax system  with  some  sort of  fixed  credit component  is                                                               
inherently progressive.  One reason  for that is because there is                                                               
a highly  regressive component,  the royalty, and  the aim  is in                                                               
part to  balance these  two things against  each other  to create                                                               
something that is overall a little more neutral.                                                                                
1:56:07 PM                                                                                                                    
MR. MAYER  addressed slide 9,  "ACES:  STEEP  PROGRESSIVITY, HIGH                                                               
SPENDING  SUPPORT," to  look at  how some  of the  aforementioned                                                               
basic ideas morphed  into the system known as ACES.   In ACES, he                                                               
explained,  the  25 percent  fixed  tax  rate  was changed  to  a                                                               
sliding system  that could go from  25 percent up to  75 percent,                                                               
varying with  Production Tax  Value per barrel.   The  20 percent                                                               
capital  credit remained,  a 40  percent  exploration credit  was                                                               
added, and  the 25  percent Net  Operation Loss  Credit remained.                                                               
That high progressivity  where it could go from 25  to 75 percent                                                               
meant there were very high marginal  tax rates, up to 86 percent,                                                               
meaning  that through  a  $1 increase  in the  price  of oil,  86                                                               
percent of  that increase went to  the state and only  14 percent                                                               
went to the  company.  Similarly, a $1 increase  in spending by a                                                               
company could  see $0.86 of  that dollar effectively  written off                                                               
against taxes.   From a  producer's perspective, that  meant that                                                               
the  period of  very high  oil prices,  particularly above  $100,                                                               
never really happened in Alaska  because the vast majority of the                                                               
cash that  would have resulted went  to the state rather  than to                                                               
the companies.   So, the  corresponding incentive to get  out and                                                               
build new  developments while prices  are high and  crazy profits                                                               
are to be made never happened in  quite the same way in Alaska as                                                               
it did  in some of  the regressive  regimes in other  states that                                                               
saw a big  investment boom during that time.   It also meant that                                                               
a company  could have  potentially very  high state  support from                                                               
the spending.   A new  producer with  no tax liability  could get                                                               
the 25  percent loss  credit and  could get  a 20  percent credit                                                               
stacked on top of that for  pure capital spending, for a total of                                                               
45  percent  government  support  for  the  spending.    A  large                                                               
producer at the  highest prices could potentially write  up to 80                                                               
percent or  more against  its taxes  and also  have a  20 percent                                                               
credit.   In certain circumstances  that could be the  full value                                                               
of the spending  or maybe even slightly more.   The value of that                                                               
benefit varied wildly with volatility in  oil prices.  So, on one                                                               
level it might be  a real benefit, but on the other  hand it is a                                                               
benefit that  is very hard to  model when running economics  on a                                                               
project because  what that looks  like can vary  so significantly                                                               
day by day with the oil price.                                                                                                  
1:58:57 PM                                                                                                                    
MR.  MAYER noted  that overall  the ACES  system meant  that when                                                               
prices were high  and spending low, massive amounts  of cash were                                                               
brought into Alaska's  treasury.  This is very  clearly seen when                                                               
looking back at  the last several years of  the state's finances.                                                               
It also meant that there was  a huge potential liability from the                                                               
system  if  prices were  ever  low  and  spending was  ever  high                                                               
because  it is  a system  with very  high government  support for                                                               
spending.  Bringing  attention to the table  for different prices                                                               
on slide  9, he pointed out  that the first several  lines on the                                                               
table at an oil  price of $60 look exactly the  same as the table                                                               
on slide 8:   transport, opex, and capex are  subtracted from the                                                               
Gross Value  at the Point of  Production (GVPP) to arrive  at the                                                               
Production Tax  Value (PTV)  per barrel [of  $14.00] to  which is                                                               
applied a  25 percent  net tax rate  for a net  tax of  $3.50 per                                                               
barrel.   If a 4  percent gross tax is  applied instead of  a net                                                               
tax, the tax is $2.00; that $2.00  is less than $3.50, so the tax                                                               
rate is $3.50.   At an oil price of $30 a  barrel, the 25 percent                                                               
tax would yield  the state nothing while a 4  percent gross would                                                               
yield the  state $0.80  so the  tax rate is  $0.80, which  is the                                                               
basic idea of  how that gross floor works.   However, in the ACES                                                               
system, that gross  floor was not actually  binding because there                                                               
was still the question of  capital credits and these credits were                                                               
applied  after that  calculation was  done.   Adding the  Capital                                                               
Credit and the Net Operating Loss  Credit to the $0.80 results in                                                               
a  tax after  credits of  negative [$6.80].   Even  if a  company                                                               
could not take a reimbursed  Net Operating Loss Credit because it                                                               
was below  the production  threshold that enabled  it to  do that                                                               
even if the  company could not be negative at  all, this negative                                                               
amount may  be something that  is accrued through the  tax system                                                               
as a future loss rather than taken  out in cash.  The ACES system                                                               
either paid  some part of  this out in  large amounts of  cash at                                                               
low  prices or  accrued  that  as a  loss  against future  years'                                                               
income.   So,  notionally, there  was a  4 percent  gross minimum                                                               
floor, but  in practice as  long as  there was any  spending that                                                               
occurred,  it  never  actually  existed  and  therefore  a  large                                                               
producer  could  go down  to  zero  and  a small  producer  could                                                               
receive net cash from the state.                                                                                                
2:01:41 PM                                                                                                                    
REPRESENTATIVE SEATON understood that  in the aforementioned ACES                                                               
example, Mr. Mayer was calculating  and showing the net cash even                                                               
though it might be a carry forward.                                                                                             
MR. MAYER  replied that for  the larger companies it  was carried                                                               
forward as  a liability.   For producers  that were  eligible for                                                               
that reimbursement, it was actually  a net negative cash outflow.                                                               
This was  because at  various stages in  the process  between PPT                                                               
and ACES  came the  ability to have  credits reimbursed  from the                                                               
2:02:20 PM                                                                                                                    
MR. MAYER moved  to slide 10, "[SENATE BILL] 21:   PROTECT ON THE                                                               
LOW END,  GIVE BACK AT  THE HIGH,"  and reviewed the  basic ideas                                                               
that were behind the bill.  He  said a big motivator was that the                                                               
ACES system  took a  lot when  prices were high  due to  the very                                                               
high marginal  rates.  The  idea was to try  to have a  more even                                                               
distribution  over the  range of  prices between  what the  state                                                               
receives  and what  the company  receives in  order to  create an                                                               
overall  more attractive  environment  for investment.   But,  in                                                               
return  for  doing  that,  the  state  should  have  some  better                                                               
protection on  the low  end.   For the  production making  up the                                                               
vast bulk  of Alaska's revenue  base, there is  the sliding-scale                                                               
Per-Barrel Credit that effectively  reduces the tax rate steadily                                                               
as  prices go  down, but  eventually a  hard 4  percent floor  is                                                               
reached and that  floor is binding in a way  that it wasn't under                                                               
ACES.    On  the  revenue  generated  from  legacy  fields,  that                                                               
substantially increases the  amount of revenue brought  in in the                                                               
lowest prices.   At an  oil price of $90  the Gross Value  at the                                                               
Point  of  Production (GVPP)  is  $80  after subtracting  $10  in                                                               
transport  cost, and  after subtracting  the opex  and capex  the                                                               
Production  Tax Value  (PTV) is  [$45].   Applying  a 35  percent                                                               
[net] tax  rate gets  a notional  tax liability  of $15.40.   The                                                               
sliding-scale Per-Barrel Credit is  $7.00.  Subtracting the $7.00                                                               
of credit  arrives at a  net tax  liability of $8.40  rather than                                                               
$15.40.  A  4 percent gross floor  is $3.20 and since  the net of                                                               
$8.40 is higher than the gross, the  net tax rate is $8.40.  As a                                                               
proportion  of the  actual net  value  that is  effectively a  19                                                               
percent tax rate  after taking out the $7.00 sliding  credit.  At                                                               
a price of $150 it would be  a full 35 percent [tax rate] because                                                               
at that point the sliding tax credit  is zero.  At a price of $60                                                               
the net  tax rate  is 14 percent.   As prices  go down  this rate                                                               
steadily  decreases, except  it decreases  down to  somewhere not                                                               
much below that  and then it starts  to go up again.   The reason                                                               
it  starts to  go  up again,  and  it goes  up  very steeply,  is                                                               
because the gross floor is hit.                                                                                                 
2:05:23 PM                                                                                                                    
MR. MAYER  demonstrated how  the gross  floor works  under Senate                                                               
Bill  21 by  reviewing the  price scenarios  on slide  10.   At a                                                               
price of $90  the tax rate would  be 19 percent, he noted.   At a                                                               
price  of $60  the tax  rate  would go  down to  10 percent,  but                                                               
because of the gross floor a  tax of $2.00 is applied rather than                                                               
a negative tax value [of $3.10], making  the tax rate go up to 14                                                               
percent.    Senate  Bill  21  provides,  however,  that  the  Net                                                               
Operating Loss  Credit can penetrate  that floor, the  idea being                                                               
that if industry is losing money  barrel by barrel on a cash flow                                                               
basis, the state will lower the  tax rate to zero but no further.                                                               
For example, at a price of $30  a barrel the tax after credits is                                                               
negative $4.80, but for a large  producer the tax would be capped                                                               
at zero and be carried forward  as a future liability rather than                                                               
being paid  out.  He explained  this sets the stage  for what the                                                               
committee is thinking  about in terms of the net  tax system, the                                                               
gross floor, how some of  these things interact with the sliding-                                                               
scale Per-Barrel  Credit and stepping  through how  that actually                                                               
works.   Where  the ACES  system had  a widely  varying level  of                                                               
support  for  government spending,  from  45  percent up  to  100                                                               
percent, the  idea in  Senate Bill  21 was that  it should  be 35                                                               
percent support  for everyone.   It was  to ensure that  even for                                                               
smaller companies that  are actually receiving net  cash from the                                                               
state  it should  never be  more than  35 percent.   There  was a                                                               
transitional period  where it was  45 percent and it  was brought                                                               
down this year to 35 percent.  A  big part of this impetus was to                                                               
acknowledge being  painfully aware  of the  potential liabilities                                                               
to the  state from some  of these things  in the lower  oil price                                                               
environments.  So, while the state  is taking less on the upside,                                                               
it is  limiting the potential liability  on the lower side.   All                                                               
those things  were key  to some  of the  provision that  were put                                                               
into Senate Bill 21.                                                                                                            
2:08:07 PM                                                                                                                    
REPRESENTATIVE TARR  agreed with the aforementioned,  but pointed                                                               
out that  regarding the Net  Operating Loss Credit  the committee                                                               
never looked at an oil price  of $30 [during its consideration of                                                               
Senate Bill  21] and therefore  she does not think  the committee                                                               
fully considered a  scenario where the big  three producers would                                                               
have had a  year of operating loss.  Thus,  she added, the column                                                               
on slide 10  for a price of $30 helps  answer questions about the                                                               
unintended consequence of that low price scenario.                                                                              
MR. MAYER allowed  that in the oil price environment  of a couple                                                               
years ago not  many people thought about a scenario  in which the                                                               
major companies  might be in a  position to have a  net operating                                                               
loss.  It is  a difficult question to ask as  to what the correct                                                               
policy in that  environment should be, he said.   On the one hand                                                               
the  state wants  to protect  itself and  its revenues.   On  the                                                               
other hand  the difficulty  with a  gross floor,  particularly in                                                               
times  where  there  is  actually  a  net  operating  loss  being                                                               
generated, is that it is just  extracting money and is not taxing                                                               
value because there is  no value left to tax.   It is just asking                                                               
for  money  because "we're  the  state  and  we want  to  protect                                                               
ourselves," he continued.   That is a benefit of  a gross system,                                                               
but,  again, it  is about  that balance  between the  protections                                                               
that a gross system offers the  state and the benefits that a net                                                               
system gives the state and how to judge that balance.                                                                           
2:09:52 PM                                                                                                                    
REPRESENTATIVE HERRON asked whether there  is any tax regime that                                                               
did predict the oil price environment of today.                                                                                 
MR. MAYER  replied that, in  general, any pure gross  tax system,                                                               
whether in  the heavily royalty  based systems of the  world such                                                               
as some of  the Lower 48 resource plays, is  not necessarily that                                                               
they predicted  that or  that those  tax systems  exist primarily                                                               
for  that purpose.   In  many cases  those systems  exist because                                                               
they are simple  to administer since the  royalties are collected                                                               
by landholders  rather than by  sovereigns.  But their  effect is                                                               
to provide  very good protection at  the low end and,  in return,                                                               
they give away a lot at the high end.                                                                                           
2:10:50 PM                                                                                                                    
REPRESENTATIVE  HAWKER  noted  that  Alaska  crude  was  recently                                                               
trading  at  $26  a  barrel  and agreed  that  this  was  not  an                                                               
anticipated circumstance.   He inquired at to  what the worldwide                                                               
consequences  might  be upon  the  industry  and its  ability  to                                                               
survive should this cycle of $25-$30 per barrel be prolonged.                                                                   
MR. MAYER  answered that in  any sustained low  price environment                                                               
the  costs   involved  in   the  industry   have  to   come  down                                                               
substantially.   Costs  have risen  very  substantially over  the                                                               
last decade.  A  decade and a half ago a price  of $30 would have                                                               
seemed  like a  really  great price.   It  seems  so painful  now                                                               
because  the costs  involved in  producing a  barrel of  oil have                                                               
skyrocketed.  Part of that increase  in cost was that high prices                                                               
enabled more  and more difficult,  less economic resources  to be                                                               
tapped.  That  is the natural flow and effect  of high prices and                                                               
what high  prices are supposed  to do.   The boom  for investment                                                               
that  created different  projects competing  for capital,  steel,                                                               
and labor  drove a steady  escalation in costs across  the entire                                                               
industry.  In  any prolonged period of low prices  a lot of those                                                               
costs have to  come down.  That can be  seen happening across the                                                               
Lower 48 as  companies get incredibly squeezed by  this price and                                                               
have to become much more efficient  at what they do, and only the                                                               
most efficient  will survive.   Looking at  the last  year across                                                               
the world, no one is  sanctioning anything that breaks even above                                                               
$50 a barrel,  and in the last couple months  probably no one has                                                               
sanctioned  anything.   Commodities  are cyclical,  he said,  and                                                               
part  of  why they  are  cyclical  is  the dynamic  he  described                                                               
earlier.  When  prices are high, everyone wants to  pile in and a                                                               
bunch of new  resource is developed.  Because of  the lags in all                                                               
of these  things the  tendency is to  overshoot and  develop more                                                               
resource than  the market can  actually handle.  When  prices are                                                               
low  everyone  cuts backs  and  because  everyone cuts  back  the                                                               
resource becomes underdeveloped  for what the market  is going to                                                               
need  in the  future.   The longer  the period  of depressed  oil                                                               
prices,  the  more   will  be  cut  back.     That  has  dramatic                                                               
implications for  the industry as  a whole across the  globe, and                                                               
also  increases  the  possibility  of the  subsequent  boom  that                                                               
eventually happens when all that shakes out.                                                                                    
2:14:17 PM                                                                                                                    
REPRESENTATIVE HAWKER drew attention to  the statement on slide 7                                                               
that the philosophy  behind the net cash flow tax  system is that                                                               
it makes the state's cost and  benefit as close as possible to an                                                               
equity investor,  it is  sharing the  equity in  a project.   The                                                               
fact that the state can tax more  money out of an entity does not                                                               
mean the  state is increasing its  economic pie, he opined.   The                                                               
state is not  increasing the value available to  be taxed, rather                                                               
it seems like the state as  an equity investor is overdrawing the                                                               
equity from the relationship between  the investor and the state,                                                               
leaving  a weakened  investor and  unsustainable growth  in state                                                               
government.   This tax structure  was designed to make  the state                                                               
in parity  as an equity  investor.   Industry is scaling  back to                                                               
reduce costs  and this  ought to be  the state's  reaction rather                                                               
than trying to  extract more money from a  shrinking economic pie                                                               
that even further weakens the state's investors.                                                                                
MR. MAYER replied  that in an ideal world he  would agree.  There                                                               
are very  difficult tradeoffs and  choices that come  with having                                                               
to make  these decisions in  these sorts of time  without wanting                                                               
to  pay for  all of  the essential  services that  the government                                                               
provides.  In  a resource state it  is easy to turn  to the goose                                                               
that lays the  golden egg.  It is important  to remember that the                                                               
goose that  lays the golden egg  does so because it  can generate                                                               
returns  across a  wide range  of prices  and across  a commodity                                                               
cycle.  The more one turns to that  as a sole source of cash when                                                               
times are  hard, even  if there is  no value to  turn to  for tax                                                               
purposes, the more unstable the system  is over time and the less                                                               
attractive that is as an investment proposition in the future.                                                                  
2:16:41 PM                                                                                                                    
REPRESENTATIVE SEATON  stated he likes  the idea of  mimicking an                                                               
equity investor  as being put  forth by  Mr. Mayer.   However, he                                                               
continued, he  does not  recall legislators  as having  looked at                                                               
the system  they were  designing as [the  state] being  an equity                                                               
investor  and  the ramifications.    He  recalled there  being  a                                                               
discussion that  maybe [the state]  should be an  equity investor                                                               
with  a production  sharing agreement  or something,  but it  was                                                               
discounted as being  too radical from the current system.   If in                                                               
retrospect  [the state]  is considering  itself  as mimicking  an                                                               
equity investor,  then [the state's]  response would be  to limit                                                               
the credits or cash that it  is investing during this time of low                                                               
prices,  he   proffered,  just  like   projects  are   not  being                                                               
sanctioned.  [The  state] cannot be the only  investor and trying                                                               
to take a  bigger and bigger share of the  equity investment.  He                                                               
asked whether he is wrong in  this analysis of talking about [the                                                               
state] as being an equity investor.                                                                                             
2:18:13 PM                                                                                                                    
MR. MAYER  allowed the aforementioned  are excellent  points, but                                                               
answered the  question by  describing Australia's  fiscal regime,                                                               
which he  said looks more  like a pure  profit tax.   In general,                                                               
Australia does not have the  protection of the gross royalty that                                                               
makes that relationship very different,  he said, so in many ways                                                               
Australia's  system is  designed to  look much  more like  a pure                                                               
equity investment.  In previous  tax reform periods in Australia,                                                               
efforts have  been made to  take that  one step further  to being                                                               
more like  an equity  investor by  paying out  what would  be the                                                               
equivalent of Alaska's  credits in times of  bankruptcy and other                                                               
things;  that is  a way  where Australia  really is  not like  an                                                               
equity investor  in that  when an  investment fails  Australia is                                                               
not on the hook.  A way to  look at a regime like that is that it                                                               
tries to be as much like an  equity investor as possible.  From a                                                               
company's  perspective,  the  cash  flows  look  like  an  equity                                                               
investor  but the  state is  not  really a  very reliable  equity                                                               
partner.  This is because, while  the state may have actually put                                                               
up  all the  cash  and may  provide more  cash  further down  the                                                               
track, unlike a  real equity investor the company  cannot rely on                                                               
the state  for a capital  pool.  The other  side of that  is that                                                               
the  state sort  of  has  cash flows  that  look  like an  equity                                                               
investor but the state does not  have the control that goes to an                                                               
equity  investor; the  state  is not  around  the table  thinking                                                               
about whether or  not it can afford the investment  and be on the                                                               
hook if  the investment goes  ahead.  The Australian  system does                                                               
not have  traded credits of  the sort originally proposed  and in                                                               
part  enacted when  this system  was first  developed in  Alaska.                                                               
All  of Australia's  credits are  carried forward  at essentially                                                               
the government  bond rate, or,  in most  cases, at a  rate higher                                                               
than that, which  is to say that they maintain  their net present                                                               
value  rather than  there being  a steady  reduction in  the time                                                               
value  of  money.     So,  already  from   an  equity  investor's                                                               
perspective,  the   state  is  much  better   protected  in  that                                                               
environment.   However, from  a company's  perspective notionally                                                               
in  academic  terms,  the  net   present  value  of  the  state's                                                               
contribution and eventual  take out from this project  may be the                                                               
same as an  equity investor but it is the  company putting up all                                                               
the  capital, and  that looks  very different.   It  is a  really                                                               
difficult  balance, particularly  given the  state does  not have                                                               
control in  seeking to mimic  the behavior of an  equity investor                                                               
through  the  tax system.    Absolutely,  he advised,  there  are                                                               
sensible things the state should  do to protect itself, but where                                                               
to draw the best line can vary.                                                                                                 
2:21:40 PM                                                                                                                    
MR. MAYER  continued answering Representative  Seaton's question,                                                               
pointing  out that  the  final  thing to  layer  into the  Alaska                                                               
example is  that Alaska has  a 12.5 percent royalty.   Therefore,                                                               
as an equity investor Alaska  is already much better protected on                                                               
the downside than is a pure  equity investor or would be the case                                                               
in a pure net tax system.   There are numerous ways to protect on                                                               
the  downside, he  said,  and one  of them  would  have been  the                                                               
original system  that was proposed  of traded credits and  a hard                                                               
floor of  zero across the  state.  When  one does not  have that,                                                               
the present scenario and the  present outflow of credits are less                                                               
concerning  than a  scenario in  which  a major  new resource  is                                                               
discovered and  goes into development,  he warned.   Prices would                                                               
presumably need to  be substantially higher than they  are at the                                                               
moment for  that to occur,  but it  could happen that  prices are                                                               
not  high enough  that that  is  not a  billion or  multi-billion                                                               
liability for  the state.   It is  therefore quite  reasonable to                                                               
look at that scenario and think  about what the state could be on                                                               
the hook  for in a range  of prices and potential  future capital                                                               
environments;  those are  all really  important  questions to  be                                                               
asking.  However, while there are  a number of things in the bill                                                               
that are  important questions  to be  asking and  thinking about,                                                               
his worry  is about some  of the  specific solutions and  some of                                                               
the incremental nature of what is proposed.                                                                                     
2:23:20 PM                                                                                                                    
REPRESENTATIVE  SEATON opined  that  an investor  would have  the                                                               
same response of cutting back  its investments and capitalization                                                               
as would  a company  during times  of very low  oil prices.   The                                                               
refundable tax credits and their  usage are talked about as being                                                               
an investor,  and the response of  an investor is to  cut back on                                                               
its costs in times of low oil  prices.  He requested Mr. Mayer to                                                               
address this.                                                                                                                   
MR. MAYER  agreed this is true,  but pointed out that  any large,                                                               
well-capitalized  company  in  this price  environment  is  still                                                               
making  investments.   A benefit  had by  Alaska is  that it  has                                                               
small  independent  companies as  well  as  some of  the  largest                                                               
companies  in  the  world  with large  balance  sheets  that  can                                                               
maintain  investments  across  a  broad range  of  the  commodity                                                               
cycle.  Large  companies make those investments  not because they                                                               
are going to pay  off in the next one to  five years, but because                                                               
they are multi-decade  investments that must continue  to be made                                                               
despite the tough times and cuts  in operating costs in order for                                                               
the company  to have  the ongoing cash  for future  operations in                                                               
five or ten  years' time.  That same analogy  also holds true for                                                               
the State of  Alaska as far as it being  a particularly hard time                                                               
right  now and  as  far  as having  had  a  remarkable degree  of                                                               
success in sanctioning  new projects.  Even with  low prices last                                                               
November,  major   capital  spending  on  the   North  Slope  was                                                               
sanctioned.   That  implies cost  write-downs against  production                                                               
tax, or  potential Net  Operating Loss  Credits, or  other things                                                               
that are very  difficult on the state's current tax  base.  Those                                                               
investments are  very, very difficult  for those companies  to be                                                               
making in this time.  It is also  really good that they are - for                                                               
their financial  futures and the state's.   It is really  hard to                                                               
reinvest when  times are tough,  but it is also  really important                                                               
to continue to do it.                                                                                                           
2:26:27 PM                                                                                                                    
REPRESENTATIVE JOHNSON  commented that the balance  the committee                                                               
needs  to strike  is that  decision point  of continuing  to make                                                               
those investments  and not  doing anything in  HB 247  that would                                                               
tip the scale  because the companies could decide  that there are                                                               
other places  where they could invest  more.  "I just  want to be                                                               
keenly aware that  we are on a teeter totter  here," he said, "we                                                               
can go down just as easily as we could go up."                                                                                  
2:27:05 PM                                                                                                                    
REPRESENTATIVE  OLSON   inquired  whether  any   other  sovereign                                                               
nations or  states are using  a taxing mechanism similar  to that                                                               
proposed in HB 247.                                                                                                             
MR. MAYER replied  he is unsure whether it  is particular aspects                                                               
of HB  247 that Representative  Olson is thinking about  in terms                                                               
of  the  changes  that  would  be made.    He  said  his  overall                                                               
impression of HB  247 is that it does not  change the fundamental                                                               
tax system or  tax structure that exists, but it  does raise some                                                               
important questions about things like  the gross floor and limits                                                               
on tax credits that need to  be debated.  However, there needs to                                                               
be caution  on the impacts  of those things.   In other  areas HB
247 is a sort of series  of incremental tax increases that can be                                                               
done without  fundamentally changing the tax  structure and which                                                               
are the things that give him  the greatest pause for concern.  In                                                               
and of itself, HB 247 is not  a tax structure as far as comparing                                                               
it to other regimes around the world.                                                                                           
REPRESENTATIVE  OLSON asked  whether what  is being  done now  is                                                               
closer to Mexico,  Venezuela, and some of  the emerging countries                                                               
in how  they handle this issue,  or whether it is  similar to the                                                               
Lower 48  in broad terms of  protecting the state on  the top and                                                               
bottom.   Noting  that Alaska's  structure changes  every two  or                                                               
three  years, he  further  asked whether  the  game changes  that                                                               
often anywhere else around the world.                                                                                           
MR. MAYER  responded he cannot  think of many places  that debate                                                               
oil and  gas taxes,  and oil  and gas fiscal  systems, on  such a                                                               
regular basis as does Alaska.                                                                                                   
2:29:10 PM                                                                                                                    
REPRESENTATIVE TARR noted that HB  247 proposes to change some of                                                               
what is  refundable to being  carried forward for a  future year.                                                               
She requested Mr. Mayer to comment  as to the relative value from                                                               
an investor's perspective of using  each of these two methods for                                                               
a net operating loss.                                                                                                           
MR. MAYER said he will be dealing with this in future slides.                                                                   
REPRESENTATIVE  TARR  recalled  Mr. Mayer's  statement  that  any                                                               
large company  will still be  making investments even  in today's                                                               
low price environment because the  company is looking five to ten                                                               
years ahead and wanting to  ensure volume and profit during those                                                               
time  periods.   A challenge  in understanding  what the  impacts                                                               
would  be relative  to the  proposals  in HB  247 is  that it  is                                                               
simultaneously being heard that there  is a long planning time of                                                               
five  to ten  years ahead  while  also hearing  that these  small                                                               
modifications will  have immediate changes.   For example, during                                                               
consideration of  Senate Bill  21 it was  heard that  the changes                                                               
were  going to  lead to  increased investment  fairly immediately                                                               
after the new tax  regime was put in place and in  the case of HB
247 people are talking about  immediate reactions to the proposed                                                               
changes.   She said  she is  having difficulty  reconciling these                                                               
two things from the perspective of the company.                                                                                 
MR.  MAYER  specified  that  long  term  and  short  term  varies                                                               
dramatically depending  on where geographically in  the world the                                                               
nature of the resource is being  talked about.  For example, some                                                               
of  the resource  places in  the Lower  48 can  change levels  of                                                               
investment  and production  very quickly  based on  price signals                                                               
and  other things  because there  are operations  that are  quite                                                               
variable, such  as whether  to engage  a rig  next month  or next                                                               
quarter or  how many  wells will  be drilled.   There is  some of                                                               
that work on the North Slope,  such as within the existing mature                                                               
producing fields about  what level of activity  the company wants                                                               
to invest in.   For example, there may be a  rig that the company                                                               
does not own  and that would be an investor  variable rather than                                                               
fixed cost as  far as whether the company wants  to be paying for                                                               
that rig to  be drilling infill wells.  In  places like the North                                                               
Slope,  however, most  of the  activity is  very, very  long lead                                                               
time, high dollar,  investment activity, even when  coming to the                                                               
question of Senate  Bill 21 and its impacts.   He reiterated that                                                               
even in  this low price  environment there has been  a surprising                                                               
amount of  new projects  being sanctioned, which  can be  seen by                                                               
looking at the  data showing drilling numbers in  recent times as                                                               
well as  the hiring activity.   Some of  that impact in  terms of                                                               
production  is still  in  the forecast  as far  as  how long  the                                                               
decline can  be flattened.   Passage  of Senate  Bill 21  did not                                                               
suddenly fire  new production because  that is not the  nature of                                                               
the oil and gas investment  cycle in general and particularly not                                                               
in  a  place  as  capital  intensive as  the  North  Slope  where                                                               
projects are big capital investments that have long times.                                                                      
2:34:04 PM                                                                                                                    
MR.  MAYER drew  the committee's  attention back  to slide  10 to                                                               
resume his  presentation.  He said  [key aims of Senate  Bill 21]                                                               
were  to  provide 35  percent  government  support for  both  new                                                               
entrants  and incumbents  with a  substantial  tax liability,  as                                                               
well as a hardening of the floor as compared to ACES.                                                                           
MR. MAYER  then moved to  slide 11,  "[SENATE BILL 21]:   SPECIAL                                                               
INCENTIVES FOR  'NEW OIL.'"   He explained  that new  oil reduces                                                               
the Gross Value  at the Point of Production (GVPP)  in general by                                                               
20 percent  and for  certain units  by 10  percent.   The purpose                                                               
behind the GVPP  is to provide an effective reduction  in the tax                                                               
rate on new oil  versus old oil.  Previous bills  had tried to do                                                               
that directly by  proposing a specific different tax  rate on new                                                               
production.   But a  problem with  that is a  key feature  of the                                                               
fiscal regime that  has always existed on the  North Slope, which                                                               
is that nothing is ring fenced  - costs incurred in one place and                                                               
costs  incurred in  another  place are  all the  same  thing.   A                                                               
company's  production,  total  revenues,   and  total  costs  are                                                               
deducted  against   each  other  slope-wide  to   arrive  at  the                                                               
company's total tax  liability.  Ring fencing  would instead look                                                               
project by project  and allocate costs to each  project, and that                                                               
gets  very  difficult and  very  complicated  very quickly.    In                                                               
general, net  systems, whether they  are net taxes,  whether they                                                               
are production-sharing  contracts, are  much more  complicated to                                                               
administer  than  gross regimes  because  the  costs have  to  be                                                               
actually assessed  and there  must be the  ability to  audit them                                                               
and all  the rest.  That  gets even more complicated  when trying                                                               
to establish  a legitimate cost,  exactly where it  was incurred,                                                               
and to which  project it should be attributed.   So, when wanting                                                               
to  differentiate tax  regimes  between  mature producing  assets                                                               
versus new investments, and trying  to split those two things out                                                               
and allocate cost  between them, the idea is to  instead focus on                                                               
the easy to distinguish amount  of production and the gross value                                                               
of that  production.   With gross  systems all  that needs  to be                                                               
known is what came out of the well  and the price at which it was                                                               
sold.   The idea  behind the  Gross Value  Reduction (GVR)  is to                                                               
reduce and  hypothetically imagine the  Gross Value at  the Point                                                               
of  Production.     For  example,  at  a  price  of   $90  and  a                                                               
transportation cost of $10, the  net of $80 is instead considered                                                               
to  be 20  percent  less [$64]  and the  production  tax is  then                                                               
calculated  on that  basis to  arrive at  a lower  production tax                                                               
rate.  The  aim of the system  is to lower the  rate further than                                                               
the  35 percent  or what  would have  been even  lower after  the                                                               
application of  the credit, and  thereby provide  an incentivized                                                               
rate  for the  new  oil  without having  to  get  into the  messy                                                               
business of attributing costs to one place or the other.                                                                        
2:38:26 PM                                                                                                                    
MR. MAYER further explained that  [during consideration of Senate                                                               
Bill 21],  the 20 percent  reduction was  seen as an  already big                                                               
incentive and therefore  the GVR-production-eligible fields would                                                               
not receive  the sliding  Per-Barrel Credit  of $0-$8  because in                                                               
many scenarios it would  take it down to $0 or  below.  So, there                                                               
was  deliberate  discussion  to  say that  the  floor  was  being                                                               
hardened on  the base  production because that  was fair  game in                                                               
terms of protecting the state on  the low side.  That the purpose                                                               
of net taxation  was to be as minimally  distorting of investment                                                               
as possible and for that reason  on new production the hard floor                                                               
could go  down to $0 when  there was no  value to tax, but  to at                                                               
least  ensure a  more  gradual  decline by  having  the fixed  $5                                                               
credit rather than the varying $0-$8.                                                                                           
MR. MAYER  demonstrated how  the calculation  would work  for new                                                               
oil by  using the $90  price scenario  on slide 11.   Subtracting                                                               
the $10  transportation cost arrives at  a gross value of  $80 at                                                               
the  point of  production  before applying  the  20 percent  GVR.                                                               
Twenty percent of  $80 is $16 and subtracting the  $16 arrives at                                                               
$64 in  Gross Value at  the Point of  Production after GVR.   For                                                               
purposes of the  tax system for new oil, the  gross value is then                                                               
assessed at  $64 rather than  $80.  The  opex and capex  are then                                                               
subtracted from  the $64 to arrive  at a Production Tax  Value of                                                               
$28.  Multiplying the $28 by  the 35 percent net tax rate arrives                                                               
at a net  tax of $9.80.   Because the $9.80 is higher  than the 4                                                               
percent gross  floor tax of $2.60,  the $9.80 is the  tax that is                                                               
charged.  The  $5 Per-Barrel Credit is subtracted  from the $9.80                                                               
to arrive at a tax of  $4.80 before subtracting the Net Operating                                                               
Loss (NOL)  Credit, but because a  profit is being made,  the NOL                                                               
Credit is $0.  Thus, the tax  after the GVR and credits is $4.80,                                                               
which is  a tax  rate of  effectively 11 percent.   At  the lower                                                               
prices of  $60 and $30,  the tax after  applying the GVR  and the                                                               
two credits  is a negative  number, so the company  would receive                                                               
money from the state for its net operating loss.                                                                                
2:41:47 PM                                                                                                                    
REPRESENTATIVE SEATON  observed that every scenario  on slide 11,                                                               
except the one  at a price of $90, arrives  at negative gross and                                                               
net tax rates.   He proffered that as time goes  by, new oil will                                                               
become  a  larger   and  larger  percentage  of   the  total  oil                                                               
production and therefore  it will be a  negative situation unless                                                               
prices are high.  He requested  Mr. Mayer to give his perspective                                                               
on this relationship.                                                                                                           
MR. MAYER answered the question  by turning to slide 18, "CHANGES                                                               
MAKE REGRESSIVE SYSTEM EVEN MORE SO."   He explained that the two                                                               
graphs represent  the output  of a  lifecycle economic  model and                                                               
what  the different  components of  government take  would be  on                                                               
GVR-eligible oil  (new projects)  at different prices  [the graph                                                               
on  left being  for Senate  Bill 21  and the  graph on  the right                                                               
being for HB 247].  The hypothetical  model is for a new field of                                                               
1  million  barrels producing  20,000  barrels  a  day by  a  new                                                               
producer able  to claim the  GVR, the Net Operating  Loss Credit,                                                               
and all the  rest.  A big  part of the design  of Alaska's system                                                               
was to  say that across the  widest range of prices  possible, as                                                               
neutral a  system as  possible is wanted,  and that  Alaska would                                                               
like  to  be  relatively  speaking   at  the  lower  end  of  the                                                               
government take  threshold compared to  where the state  has been                                                               
historically and  more in  the realm of  the places  elsewhere in                                                               
the world that Alaska is competing  against.  That aim was around                                                               
62  percent  government  take,  which  is not  one  of  the  most                                                               
generous fiscal regimes around, but  is a highly competitive one.                                                               
As seen  on the graphs,  that net result  is indeed very  flat at                                                               
that level [of 62 percent] across a really wide range of prices.                                                                
MR. MAYER  continued, pointing  out that  the production  tax (in                                                               
green  on the  graphs) is  a substantial  amount at  high prices,                                                               
tapering down  as prices go  down until  at prices below  $70 the                                                               
production tax  is no  longer a  feature in the  tax system.   He                                                               
explained that the  graphs depict what the  contribution would be                                                               
over  time of  each of  the elements  of the  fiscal system  when                                                               
using the assumption that a  new project developed today goes for                                                               
20 years  and the  price is applied  consistently for  the entire                                                               
20-year  period.   He noted  that  under the  former ACES  system                                                               
there would  have been a  much higher take  at prices of  $70 and                                                               
upward, but  below $70 the  take would have been  pretty similar.                                                               
Part of  that is by design:   underneath the production  tax is a                                                               
big regressive royalty  that takes up more and more  of the value                                                               
of the  barrel as  prices decline.   The purpose  of the  net tax                                                               
that is  put on  top is not  to increase the  burden of  that net                                                               
royalty when prices are lowest.   [As prices go down from $150 to                                                               
$40  a  barrel, the  royalty  goes  from  being  a low  level  of                                                               
government  take to  being more  than 100  percent in  government                                                               
take.]   Rather, the  idea is  that a profits  tax only  kicks in                                                               
when,  after the  royalty  and  all the  other  things have  been                                                               
calculated, there is  actual value to tax.  What  is trying to be                                                               
created  is something  that is  as neutral  as possible  across a                                                               
wide range  of price environments.   Mr. Mayer drew  attention to                                                               
how the production tax goes  negative at the lowest prices, which                                                               
is essentially  saying that on the  one hand across the  cycle of                                                               
the  investment there  were credits  put in  up front,  there was                                                               
production  tax  in  the  tail,  and at  the  lowest  prices  the                                                               
production  tax in  the  tail  is nowhere  near  as  much as  the                                                               
credits that went in  up front.  But, when put  in the context of                                                               
the  overall fiscal  system, this  is still  not a  fiscal system                                                               
that is  doing anything  but generating  a proportional  share of                                                               
value from  the project,  it is  never going  down below  that 62                                                               
percent level, and it is  still actually regressive at the lowest                                                               
prices because of the element of the royalty.                                                                                   
2:47:17 PM                                                                                                                    
REPRESENTATIVE SEATON  observed on  slide 11 that  the percentage                                                               
of the gross  is always negative except in the  price scenario of                                                               
$90.   He  opined that  new oil  will account  for a  greater and                                                               
greater percentage  of production under this  fiscal system, that                                                               
there is a  negative percent of the gross [at  prices below $90],                                                               
and that  the system is  only barely  positive on the  percent of                                                               
the gross  at a  price of  $90.   He asked  how that  will create                                                               
long-term stability for any fiscal system for the state.                                                                        
2:48:19 PM                                                                                                                    
MR. MAYER  replied by  again drawing attention  to the  charts on                                                               
slide 18  and saying they are  more useful than slide  11 because                                                               
the price  scenarios are shown  in increments of $10  rather than                                                               
$30,  and the  charts look  at the  actual cash  flow across  the                                                               
cycle of an actual investment.   There are times when there is an                                                               
outflow from the  credits and times when there is  an inflow from                                                               
the tax, and the  net result of those two things is  seen.  It is                                                               
a net  positive down  to a  price of  about $70;  a price  of $60                                                               
starts to  be a  net negative;  and prices of  $50 and  below are                                                               
substantially  negative.   That is  happening precisely  at those                                                               
levels  that  the  royalty,  as the  regressive  element  of  the                                                               
regime, is  taking off in  terms of overall government  take, and                                                               
it is partially compensating for  that but not fully compensating                                                               
for that.   If Alaska  had nothing  but a completely  neutral net                                                               
profits tax, the state would still  be taking more at the low end                                                               
than it  would be  if it  had an  Australian, United  Kingdom, or                                                               
Norwegian model of pure net  profits tax, regardless of the level                                                               
of  government  take.    Those  completely  neutral  regimes  are                                                               
neutral  across the  price  deck, [but  Alaska's  system] uses  a                                                               
tapering  and  progressive  tax  that across  the  cycle  can  go                                                               
negative because the  credits are greater than the  value that is                                                               
paid  out.    This  partially, but  not  fully,  counteracts  the                                                               
regressive nature  of the royalty,  which is why the  dashed line                                                               
depicting government  take across  the price  deck is  62 percent                                                               
across almost all the prices until  reaching a price of about $50                                                               
a barrel.   At a  price of $50  per barrel, that  government take                                                               
starts climbing until at $40  it reaches 100 percent despite that                                                               
the production tax  element is net giving out money;  the rest of                                                               
it is taking  so much when there  is no value to take  that it is                                                               
still at 100  percent government take.  Mr. Mayer  noted that for                                                               
legibility  purposes  the  chart  is  cut  off  and  the  royalty                                                               
actually goes up to about 250  percent government take at a price                                                               
of  $40 a  barrel  and net  outflow from  the  production tax  is                                                               
slightly greater  than [negative 50  percent].  The point  of the                                                               
chart, he explained, is to show  the total government take of the                                                               
overall  system as  depicted by  the dashed  black line.   It  is                                                               
important to  see there  is an  interplay between  the production                                                               
tax  and  the royalty.    Just  focusing  on the  production  tax                                                               
without thinking about  the rest of the system fails  to see that                                                               
this was not an accident in  design.  There was an intention here                                                               
to create  an overall  neutral system  for as  much of  the price                                                               
deck as possible.                                                                                                               
2:51:41 PM                                                                                                                    
REPRESENTATIVE SEATON  clarified he  is not  talking specifically                                                               
about the  production tax  as a  whole across  this.   Rather, he                                                               
does not see  the chart on slide  18 as looking at new  oil.  The                                                               
chart is not  separating out that new oil as  the new oil becomes                                                               
a greater and  greater proportion of the production  and which is                                                               
taxed at a different rate than is existing oil.                                                                                 
MR.  MAYER  responded  that  the   purpose  of  slide  18  is  an                                                               
assessment on the  actual lifecycle cash flow economics  of a new                                                               
investment to which the GVR applies.                                                                                            
2:52:36 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON offered his  understanding that slide 18                                                               
is, effectively, showing  that the industry is  suffering so much                                                               
that the state  is getting all the money because  of royalty.  He                                                               
inquired whether Mr. Mayer is  saying that, even though the state                                                               
is  impoverished,  when looked  at  vis-à-vis  the industry,  the                                                               
state is the rich one.                                                                                                          
MR. MAYER  answered "absolutely correct."   He stated that  he is                                                               
discussing  the  distinction  between  gross and  net  taxes  and                                                               
showing  what gross  taxes  do at  low oil  prices  due to  being                                                               
regressive.   The point is that  the royalty at these  low prices                                                               
quickly takes  everything and more  than everything, and  that to                                                               
achieve anything  even close to  neutrality, by  definition there                                                               
are other elements of the system that are handing back money.                                                                   
REPRESENTATIVE JOSEPHSON  related that his general  sense of what                                                               
is going on in the North  Slope is that there is development from                                                               
the  small independents  and  ConocoPhillips  is still  investing                                                               
particularly in the  western field.  However, he said,  he is not                                                               
so sure it is a time of  high investment in Alaska.  He therefore                                                               
questioned the accuracy  of the statement on slide  18, "In times                                                               
of high investment...."                                                                                                         
MR.  MAYER clarified  that the  statement is,  "In times  of high                                                               
investment  or  low  prices."   He  further  clarified  that  the                                                               
statement "as  in 2016"  refers to the  confluence of  some major                                                               
capital  spending  projects being  in  the  pipeline from  recent                                                               
years  or before,  such as  the CD5  and Point  Thomson projects.                                                               
These  are  each billion  or  multi-billion  dollar projects  and                                                               
these  costs have  been incurred  last year  or this  year.   The                                                               
dollar per  barrel cost figures  in the Revenue Sources  Book are                                                             
staggering.    The spending  that  is  happening now  for  future                                                               
production is being deducted against  the current tax base.  When                                                               
there is high spending relative  to declining production, and low                                                               
prices meaning  very low  revenue, and a  fixed gross  royalty of                                                               
12.5 or  16 percent plus a  4 percent Gross Minimum  Tax, a point                                                               
is very  quickly reached  where there  is no  value left  to tax.                                                               
Taking a fixed  portion means that 100 percent,  400 percent, and                                                               
eventually an  infinite amount are  being taken because  there is                                                               
no value left.                                                                                                                  
REPRESENTATIVE  JOSEPHSON   asked  whether   he  is   correct  in                                                               
recalling  that Mr.  Mayer earlier  stated that  HB 247  does not                                                               
change the fundamental structure of the existing system.                                                                        
MR.  MAYER replied  that  he  said HB  247  does  not change  the                                                               
fundamental  structure   or  system   that  exists,   instead  it                                                               
incrementally   takes  small   slivers   without  changing   that                                                               
fundamental  structure.   It makes  small  alterations and  small                                                               
revenue enhancements,  which, in  some ways, is  more concerning.                                                               
This is because  fundamental changes done to the  structure for a                                                               
well  thought  through and  well-reasoned  purpose,  and that  an                                                               
investor has reason to believe  will remain stable going into the                                                               
future,   is  very   different  than   thinking  that   when  the                                                               
environment gets  bad folks  are going  to come  back to  look at                                                               
where another slice can be taken.                                                                                               
2:57:45 PM                                                                                                                    
REPRESENTATIVE TARR commented that  slide 18 is interesting given                                                               
that  royalty has  not previously  been talked  about as  being a                                                               
regressive  feature of  the  overall tax  system.   She  surmised                                                               
there are  not any alternatives or  ways to fix that  because the                                                               
royalty is  always going  to be  a fixed  percentage and  will be                                                               
independent  of the  price  per  barrel.   Royalty  has not  been                                                               
discussed  as one  of  the levers  in the  system  that might  be                                                               
adjusted to make changes.  She  remarked that it is a new overlay                                                               
to think about this as being a regressive impact.                                                                               
MR.  MAYER  responded that  during  the  early days  of  debating                                                               
Senate Bill 21 he spent a lot  of time talking about this.  There                                                               
were  various  attempts at  proposing  some  sort of  progressive                                                               
production tax.   There  had to be  some degree  of progressivity                                                               
simply to  counteract the  regressive nature  of the  royalty and                                                               
this has always been part of the design.                                                                                        
2:59:04 PM                                                                                                                    
The committee took a brief at-ease.                                                                                             
2:59:36 PM                                                                                                                    
REPRESENTATIVE HAWKER remarked  that he does not want  to leave a                                                               
misinterpretation on the table.  He  drew attention to two of the                                                               
statements on  slide 2:   "HB 247  is not a  tax overhaul  but it                                                               
includes  major changes  along several  key parameters"  and "But                                                               
most companies  will see substantial  adverse effects".   He said                                                               
he wants to  avoid the semantics of coming back  later and having                                                               
it argued that Mr. Mayer said this is not a significant deal.                                                                   
MR. MAYER agreed.                                                                                                               
3:00:37 PM                                                                                                                    
MR. MAYER  resumed his  presentation.   He moved  to slide  12 to                                                               
discuss four  of the changes  proposed in  HB 247.   He qualified                                                               
that this  list is by  no means  exhaustive, but consists  of the                                                               
proposed  changes  that  enalytica  sees as  having  the  biggest                                                               
impact on  the fiscal  system overall  and on  project economics,                                                               
making them  particularly important to  focus on and  talk about.                                                               
The  first proposed  change is  the question  of the  interaction                                                               
between the  Per-Barrel Credit  and the Gross  Minimum Tax.   The                                                               
status quo is  that it is an annual tax  system, everything about                                                               
it is assessed  annually.  Tax liabilities  are assessed annually                                                               
which provides a  smoothing impact of price volatility.   This is                                                               
like a  person's federal  income tax  that is  assessed annually:                                                               
when  a whole  bunch  is earned  in  one month  but  not much  in                                                               
another, the  person does not pay  the top rate in  the month for                                                               
which a  lot was earned.   This proposed  change in HB  247 would                                                               
calculate monthly that interaction  between the Gross Minimum Tax                                                               
and  the Per-Barrel  Credit.   Had this  proposed change  been in                                                               
place in  2014, the  state would have  netted about  $100 million                                                               
more.  This  proposed change is an example of  what he meant when                                                               
he  said there  is a  series  of small  incremental changes  that                                                               
appear to be about revenue  raising rather than anything else and                                                               
that are the things that give him greatest pause for concern.                                                                   
MR. MAYER said  another change proposed by HB 247  relates to the                                                               
interaction between the  Gross Value Reduction (GVR)  and the Net                                                               
Operating Loss (NOL).   He reminded members that  the Gross Value                                                               
Reduction reduces the Production Tax  Value by changing the gross                                                               
and then  that flows through to  the net.  By  flowing through to                                                               
the net, it also flows through  to the way the Net Operating Loss                                                               
is calculated.   So,  in addition to  reducing the  effective tax                                                               
rate, the GVR has the side  effect of also increasing the size of                                                               
the Net Operating Loss Credit,  resulting in more than 35 percent                                                               
support  for government  spending.   This  proposed change  would                                                               
make it  so that  there would  always be  35 percent  support for                                                               
government spending.  This proposed  change is a legitimate point                                                               
that is worth thinking about very seriously, he advised.                                                                        
3:03:31 PM                                                                                                                    
MR. MAYER  reviewed the change in  HB 247 proposed for  the Gross                                                               
Minimum Tax.   He explained  that the status  quo is a  4 percent                                                               
floor  that  is  binding  for  legacy output  [if  net  value  is                                                               
positive], but  if net value  is negative the Net  Operating Loss                                                               
Credit can reduce a company's taxes  below that floor and down to                                                               
zero.   The  proposed change  would provide  that the  NOL cannot                                                               
take a  major producer  below the floor  and the  proposed change                                                               
would also raise the floor from 4  percent to 5 percent.  For new                                                               
producers, the  status quo is  that GVR-eligible  production with                                                               
the $5 per  barrel credit can take the new  producer down to zero                                                               
tax,  the idea  being  minimizing the  distorting  impact of  the                                                               
gross  minimum  floor when  things  are  hardest.   The  proposed                                                               
change would  provide that the  Small Producer Credit and  the $5                                                               
Per-Barrel Credit cannot  take a new producer  below the proposed                                                               
hard floor of  5 percent.  Thus, the proposed  change would raise                                                               
the  hard  floor  from  4  percent to  5  percent  for  incumbent                                                               
producers and  for new producers  it would raise the  hard floor,                                                               
as a gross floor, from 0 percent to 5 percent.                                                                                  
3:04:53 PM                                                                                                                    
MR.  MAYER examined  the proposed  change for  the Net  Operating                                                               
Loss Credit.   Under  the status quo,  he said,  reimbursement of                                                               
the Net  Operating Loss Credit  must be carried forward  by those                                                               
producers with production greater than  50,000 barrels a day, and                                                               
for  those companies  with less  than  50,000 barrels  a day  the                                                               
credit  can be  reimbursed by  the state.   This  proposed change                                                               
would  put an  annual limit  of $25  million per  company on  the                                                               
reimbursement.  It  would also require that  very large companies                                                               
with annual revenues greater than  $10 billion must carry forward                                                               
the  credit regardless  of the  amount of  their production.   He                                                               
said he  understands the  desire to  limit the  state's potential                                                               
liability through the credit system;  however, he continued, when                                                               
thinking about what a $25 million  cap per company would do, both                                                               
in general and  particularly if enforced in July  2016, a company                                                               
involved in this would be very scared.                                                                                          
REPRESENTATIVE JOSEPHSON  thanked and complimented Mr.  Mayer for                                                               
slide 12 being a fantastic slide.                                                                                               
3:06:18 PM                                                                                                                    
REPRESENTATIVE HAWKER stated  that slide 12 could  be made better                                                               
by including Section 31 that  proposes to disallow wellhead value                                                               
from  going below  zero.   He  requested Mr.  Mayer  to add  this                                                               
change to the slide along with the impacts it would have.                                                                       
MR. MAYER agreed this change should  have been included.  He said                                                               
this issue  is one of  the incremental  pieces in that  the Gross                                                               
Value at  the Point of Production  would not be able  to go below                                                               
zero.  He  reiterated that it is not a  ring fenced system, taxes                                                               
are  assessed company-wide  across the  North Slope,  which means                                                               
all of a  company's production and costs across  the North Slope.                                                               
Because of how the calculation works  and the language in HB 247,                                                               
this  change would  mean  that if  Gross Value  at  the Point  of                                                               
Production  cannot go  below zero  for some  particular piece  of                                                               
production, it would mean that  the costs that a company actually                                                               
incurred  at  that  place  could  not  be  written  down  against                                                               
production  that the  company had  in other  places.   That would                                                               
actually be  a substantial  change to the  tax system  because at                                                               
the moment it  is Slope-wide costs and Slope-wide  production.  A                                                               
company  that  has  gone ahead  with  an  expensive,  loss-making                                                               
investment for reasons that it wants  to see a field developed in                                                               
the future,  did so under  the belief  that it could  write those                                                               
costs off against  all of its production, not  simply against the                                                               
production that came from that one project.                                                                                     
REPRESENTATIVE TARR  asked whether  now would be  the appropriate                                                               
time for  her to ask  about her point of  changing it to  a carry                                                               
forward for the majors.                                                                                                         
MR. MAYER replied he will be coming to that in about two slides.                                                                
3:08:46 PM                                                                                                                    
MR.  MAYER resumed  his presentation  and began  to elaborate  on                                                               
what  the  impacts  would  be  for  each  of  the  aforementioned                                                               
proposed changes.  Drawing attention  to slide 13, "MONTHLY GROSS                                                               
MIN CALCULATION:  NEUTRAL OR TAX  HIKE," he noted that the impact                                                               
of this  proposed change would  be either  neutral or a  tax hike                                                               
depending on the price environment  and, in particular, depending                                                               
on volatility.   A  crude way  of expressing it  would be  to say                                                               
"heads I win,  tails it's a draw."   The reason for  that is best                                                               
understood by looking at the  price environment in 2014 where for                                                               
most of the year prices were at  or above $100 a barrel, but then                                                               
prices started  to fall in  the last  quarter.  Referring  to the                                                               
chart on  slide 13, he  pointed out  that the Alaska  North Slope                                                               
West Coast (ANS WC) average annual  price was about $98.  He said                                                               
the expenses  used in the  chart are  for the fiscal  year rather                                                               
than the  calendar year, but  are still a  decent representation.                                                               
He  calculated  that  subtracting  the average  annual  cost  for                                                               
transport,  opex,  capex, 35  percent  production  tax, and  Per-                                                               
Barrel Credit results  in a net tax of $8.71  and a Gross Minimum                                                               
Tax of  $3.49.  So, in  this case, the  net tax of $8.71  is what                                                               
applies and  therefore the gross  liability per barrel  is $8.71.                                                               
However, if  these calculations are  done on a monthly  basis for                                                               
2014,  the net  tax would  be applied  for each  of the  first 10                                                               
months and the Gross Minimum Tax  would be applied to each of the                                                               
last 2 months.   In the last two months, the  gross tax amount is                                                               
actually higher  than the  net tax amount.   When  the production                                                               
tax  for each  of the  12 months  is then  averaged, the  average                                                               
production tax  is $9.31  per barrel and  when multiplied  by the                                                               
number of taxable  barrels on the North Slope it  is roughly $100                                                               
million more.   The way  that $100  million is generated  for the                                                               
state  is  simply  by  saying that  rather  than  assessing  this                                                               
annually,  the state  would  assess this  monthly  and a  company                                                               
would not  get the benefit  of that revenue smoothing  across the                                                               
year.  It  would be like being  taxed at the top tax  rate in the                                                               
months where  a company's  income is highest  even if  on average                                                               
over the year  the company's income was  substantially lower than                                                               
[HB 247 was held over.]                                                                                                         

Document Name Date/Time Subjects
HSE RES 2.25.16 enalytica Overview + North Slope February 2015.pdf HRES 2/25/2016 1:00:00 PM